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  • How to Profit from Goldman Sachs
    "I think I should have been more accurate in describing credit events rather than BK..."

    Okay, you want to broaden your original assertion to include undefined "credit events." Fine.

    "...credit events will occur in times of distress and gov intervention (i.e. Freddie, Fannie) and cause just as much harm as the BK itself to the credit environment."

    You don't think Lehman's bankruptcy was more disruptive than AIG's non-bankruptcy, or than FRE and FNM's receiverships? Really? I mean, maybe the government's treatment of FRE and FNM preferred, which was clearly a mistake, but otherwise?

    "Do you actually think GM, Chrysler, or AIG getting government infusions will not end up with a credit event for the bond holders there? Do you appreciate what that will do to the confidence in the credit market as a whole?"

    Do you actually believe the market's not already pricing in this likely bond holder "credit event"? Of course it is. And let's look at how the market's reacting to the infusions. Most GM debt is trading at a discount of no less than 75%, but it's a far cry HIGHER than it was before the government infusion. GRM is trading at 40% of face value - close to twice what it was before the bailout. The market clearly thinks it more likely than not that GM will not repay this $1B issue when it comes due in LESS THAN FIVE MONTHS. The market is much further ahead, in terms of managing the risks, than you give it credit for. Pun intended.

    "You, my most appreciated commenter, are nieve."

    You, my backhanded complimenter, need a spellchecker.

    "ME: There's not likely to be another major bankruptcy among financials. YOU: Oh really? What about the institutions that did not get TARP? What about European banks? What about Asian banks (i.e. the Citigroup South Korean subsidiary that needed a $1B infusion just weeks ago)?"

    1. Name a major financial that did not get TARP. I don't think there are any.
    2. The European banks have received very TARP-like capital infusions (with more onerous terms) from their governments.
    3. Don't you think the $1B infusion by the South Korean government indicates an unwillingness to let its banks go bankrupt?

    "What about hedge funds that are counterparties on baskets of CDS that are facing massive redemptions?"

    First off, I wouldn't call ANY hedge fund a "major financial." Secondly, what exactly do you think the big deal would be here? There's no default of the underlying, so the CDS are not payable. The fund would have to liquidate positions, might even go bankrupt. So what?

    "...credit events such as the bailout of Freddie and Fannie, AIG, Citi are just as damaging to the income security market."

    Nonsense. The bankruptcy of LEH was the tipping point for the panic of 2008. Without the defaults of LEH debt and the related CDS, the cascading runs on anything financial would not have occurred.

    "So you do not need the bankruptcy to happen, just the threat of a major institution facing problems is enough..."

    "Problems" will not cause investors to run for the hills - not anymore. Without the threat of bankruptcy, which I believe to be pretty much off the table among the major financials, there will be no panic-driven run on these securities.

    "This is where we differ on the outlook for GS. I don't look at book value for GS, that is irrelevant."

    Book value is irrelevant? How about tangible book value of $88? Irrelevant too, right? You might find it to be overstated (as I believe I indicated I do), but irrelevant? Well, that's pretty telling.

    "It is operation (sic) with leveraged positions with no access to working capital, only equity to sell."

    1. GS leverage is lower than many financials. From their latest filings, Tier 1 capital was 15.6% at GS, 11.4% at USB (both including TARP).

    2. What makes you think GS has no access to working capital? Why do you think GS can't issue debt? Do you think it unable to sell stock? Based exactly on what? This is hardly a given, and seems so crucial to your argument, it deserves some explanation.

    "It is a broker with huge counterparty risk, political risk, and directional risk that no public information can quantify."

    Then how do you know it's "huge"?

    "$40 is not a hard milestone to reach with a major blow up."

    You think a price 20% lower than the lowest-ever close, more than 50% lower than current, isn't a hard milestone to reach. Interesting. What do you think an appropriate valuation for GS is today?

    "I also want to benefit from the "white knight event". Both scenarios are from MHO very likely.

    I guess we shall see. Your puts are now right around $9, which means the stock needs to drop to 46 (just under the all-time, intraday low) for them to break even at expiration.
    Jan 07 14:39 pm |Rating: 0 0 |Link to Comment |View article
  • How to Profit from Goldman Sachs
    "Regarding the Buffet's preferred investment: If Buffett thinks that GS will continue to be able to pay the preferred, then it is logical to get on the same level of the capital structure."

    Fine! But giving a suggested buy price that's more than 30% less than the current price is close to meaningless.

    "[C]omparing the terms Buffett got with your own is irrelevant when you are looking at the security of your own investment."

    Wait a second - didn't you JUST WRITE "If Buffett thinks that GS will continue to be able to pay the preferred, then it is logical to get on the same level of the capital structure"?

    "One major BK event in the market will cause the spreads to explode again. This will be the time to buy. This is the logic in the preferred price I put forward.

    I believe your premise is flawed. There's not likely to be another major bankruptcy among financials; the feds made that pretty clear with their actions related to Citi. But let's go with it anyway - you're saying there will be a bankruptcy and GSPRA will dive as it did three times last year. Fair enough - I think you won't see that level again, but I'm just another amateur with an opinion.

    "The key for me is my belief that the markets have more credit blowups coming sooner rather than later. In which case, $9 YFTMK are cheap."

    Again, fine, I understand why you think YFTMK is cheap. But suppose you buy YFTMK at today's price of $7.65. Now, fast forward to your inevitable major credit event that drives the preferred down 33% to $9, your target buy price. What happens to YFTMK? It's likely to be back to $15 or so. Unless, of course, we've gotten meaningfully closer to expiration, in which case it won't get as high.

    So then what do you do? Would you still find the puts to be cheap, or would you hold them as a (very expensive) hedge against bankruptcy after you buy GSPRA? I would almost certainly be selling the puts, as my assessment would likely assign a very small likelihood of GS falling under $40 (consider that book value - which is probably somewhat high - is currently more than $100/share). I also, as said before, would find GS preferred at 10.4% to be a very compelling proposition.

    By the way: Long GS, USB, PGF, UYG.
    Jan 06 01:16 am |Rating: 0 0 |Link to Comment |View article
  • How to Profit from Goldman Sachs
    The more I look at this article, the sillier it gets.

    "If I were to read the tea leaves on why Warren Buffett made this investment, I would say Warren believes that despite all of the problems that Goldman Sachs has, its track record as a profit machine will attract a white knight."

    This is not why Berkshire made the investment. Perhaps this scenario played a small role in the risk assessment, but I find it fanciful to believe that Berkshire placed any significant likelihood on GS needing a "white knight."

    The reason for the investment was quite straightforward. Blankfein asked Buffett what it would take for him to invest, and Buffett described the offer he could not refuse.

    How about taking Buffett at his word, and taking the investment at face value? "Goldman Sachs is an exceptional institution," Buffett said. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of out performance."

    And the terms for the $5B investment? 10% annual dividend until GS decides to retire the issue for $5.5B, plus warrants for $5B of GS common at $115 exercisable at any time before September 2013.

    And then there's the pricing. Buy the preferred below $9? The preferred closed Friday at $13.41. It has closed below $9 for exactly 2 days - ever. There have been exactly 6 days when it traded for $9 or less. So, sure, if it ever gets to $9 (where it would be yielding better than 10.4%), it's a buy. But I wouldn't hold my breath waiting for it to lose a third of its value.

    Now, the sub-$9 put. The Jan10 55 strike put (YFTMK) skyrocketed from September to November, peaking at 22.75 on November 21, unsurprisingly on the same day the common and preferred bottomed. These puts closed the year at $9.17, so there's no reason to think they won't go a touch lower.

    But the combination of the sub-$9 preferred and the sub-$9 put? Ridiculous. Note that when the preferred has been sub-$9, the least one could have bought YFTMK for was $11.9 on September 18. More recently, when BSPRA was sub-$9 for three days in November, YFTMK traded up from the $18-range it had been in for a week to the $22 level.

    The point of pairing these two would be to reduce risk. Since there is no chance of getting these two investments at $9 simultaneously, one would have to buy one and then have it appreciate dramatically before the other would fall enough to reach the target price. If it were me, I would be selling at that point rather than buying protection.
    Jan 05 09:06 am |Rating: 0 0 |Link to Comment |View article
  • TARP Is Bad for Dividend Investors
    I couldn't disagree more. It's not the TARP that's bad news for investors, it's the current economy and credit crisis. That State Street is using the TARP as its excuse for not raising the dividend is unsurprising, as it wants to maintain this "dividend aristocrat" reputation, but can't responsibly raise its dividend currently. There's nothing in what is quoted that indicates that the TARP means the end of dividends or dividend increases.

    The first paragraph is quite similar to language seen in any preferred share prospectus; the company may not pay dividends on common stock unless it pays dividends on the preferred, and in the case of cumulative preferred unless it has paid all dividends owed to date.

    The second paragraph says the Treasury must give consent for an increase in dividends. It doesn't sound at all that Treasury is putting undue restriction on dividend payments. Rather, it's making companies justify any dividend increases. Sounds logical to me.

    I don't think any company that's successful enough in this environment to increase its dividend would face a Treasury "veto." I also don't think rational investors should expect any company to increase dividends these days. I'd rather see companies conserving cash or making smart acquisitions.
    Dec 31 10:58 am |Rating: +5 -1 |Link to Comment |View article
  • Goldman Far Outperforms Morgan Stanley in 2008 - Moody's
    "But as the WSJ graphic below shows, the firms’ credit default swap spreads reflect greater market skepticism about Morgan."

    Skepticism about Morgan in the extraordinarily thinly traded, highly speculative CDS market, that is. CDS spreads say little about performance, and much about that particular segment's opinion of the chances a particular firm will go out of business in the next five years.

    Remember what happened to the CDS spreads on Berkshire Hathaway in November? That in and of itself is sufficient to call into serious question any analysis that uses CDS spreads as an much more than a measure of fear.
    Dec 19 14:48 pm |Rating: 0 0 |Link to Comment |View article
  • GE, Goldman Bond Spreads: Unrealistic and Unsustainable
    Based on the thinking behind the article, would you expect him to be invested any other way? Are you as skeptical of somebody who's bullish and long?
    Nov 15 10:09 am |Rating: 0 -1 |Link to Comment |View article
  • GE, Goldman Bond Spreads: Unrealistic and Unsustainable
    I suggest that much of the discrepancy identified by the writer is due to a change in the overall cost structure of CDS in a world of heightened risk aversion.

    I am no expert in CDS. That said, I find it impossible to believe that the heightened risk aversion that permeates every other part of the financial economy has left this part untouched. Just as banks' appetites for risk in their loan portfolios has decreased markedly, so should that of sellers in the CDS market. In the face of the failure of AIG, the risk profile for CDS should certainly be different than it was before.

    The result of this should be greater costs to insure the debt of all companies. I would love to see a comparison of the "average" CDS rate today vs. three months ago, six months ago, and a year ago.

    Also, I advise readers to be mindful, when making investment decisions, of the markets behind the numbers. The CDS market is extraordinarily thin, with very few sellers, especially when compared to the corporate bond market. The thinner the market, the more likely pricing errors will occur. I suggest that any discrepancy not due heightened risk aversion is more likely due to a pricing error not in the bond market, but in the CDS market.
    Nov 12 07:48 am |Rating: +3 0 |Link to Comment |View article
  • TARP vs. Non-TARP: Investing with Uncle Sam at a 60% Discount
    The preferreds are indeed interesting - take a look at the PGF, the dividend of which has been impaired (dropping from about 0.125/month to .108), now yielding about 9.5% and priced about 27% lower than its August average, (when the yield was a bit more than 8%), and 37% less than its average from the first part of the year (when the yield was about 7%). Assuming the big banks' and insurers' preferred dividends survive (which they must, since losing those dividends are would crush their ability to raise additional capital), this fund should have a nice capital gain; if not it still provides a monthly income stream.

    Of course, yesterday it lagged the overall market by more than 8%.

    One quibble: don't expect 3-month LIBOR to grow at any point in the near future; expect it to shrink.
    Oct 29 08:26 am |Rating: 0 0 |Link to Comment |View article
  • Here I Go, Criticizing Warren Buffett
    Oh boy. Looks like I get to do another point-by-point.

    "It was an unfair deal HIGHLY in favor of Buffett and no one else."

    You mean, other than the shareholders of the company he heads? Isn't he SUPPOSED to make deals that favor his shareholders?

    "The $2.5 billion in additional capital GS raised from ordinary shareholders certainly didn’t come with any of these benefits."

    GS raised $5B, not $2.5B, and it was a public offering that was OVERSUBSCRIBED. Did you think somebody was twisting those folks arms to force them to buy the shares?

    Quite simply, GS saw the value of the Buffett investment to be not just the cash, but also the cache. Would GS have been able to raise as much money for as high a price per share without Buffett's investment? It's certainly reasonable to think not. Overall, the cost of the capital raise may have been less because of Buffett's investment. In which case, existing GS shareholders benefit.

    "However, what pushed the Goldman deal over the brink from “unfair” to outright improper was that Buffett was consulting with Congress over the then-proposed $700 billion Bailout almost immediately... Buffett said the plan was 'absolutely necessary, in [his] view, to really avoid going over the precipice.'...for Buffett to be consulting with Congress about the deal is a serious conflict of interest, if not insider trading."

    Who, exactly, was Buffett consulting with? A Congressman? A congressional committee? Are you sure? I believe your quote is from his CNBC interview; does that mean that everybody who goes on CNBC is "consulting with Congress"? From an ethics standpoint, as long as everybody was aware of all of the financial positions of those involved, which they were, there is no ethical problem. Would it be improper for anyone in government to speak to ANY CEO about these problems? Then it wouldn't be improper for somebody to ask Buffett for his thoughts.

    By the way, do you know what insider trading means? And does it matter to you that Bailout v1.0 FAILED TO PASS?

    "Then came the GE deal. As was the case with GS... this long list of perks was made exclusively to Buffett, NOT the poor saps who ponied up $12 BILLION for GE via the ordinary share offering it issued at that time."

    And again, would GE have been able to raise as much in the secondary at as high a price without the BRK stamp of approval? If not, then GE did right by the deal.

    "But then, Buffett goes on CNBC — a GE subsidiary —to discuss how great an investment GE is!!! Again, a serious conflict of interest AND seriously bordering on insider trading."

    First, have you never seen anybody on CNBC talking about a stock they already own in a positive way? Why are you so aghast that Buffett was doing the same thing done by the vast majority of guests on that network?

    And again, you don't seem to know what insider trading is.

    "Finally, last Friday, Buffett writes an op-ed...does Buffett really need to be on a soapbox telling people to buy stocks right after $2 trillion in retirement and pension funds has been wiped out?"

    Need? Who cares? You're offended that the man speaks his mind at the time he thinks is most opportune? Why are you complaining?

    "Especially when he knows darn well that most people don’t have his ability to ignore the stock market for a year… let alone five to ten years?"

    Do you expect every op-ed to be pertinent to the majority of people? When somebody writes about something happening in some foreign country that most Americans couldn't pick out on a map, does that offend you? The fact is that a very large number of people who have money invested can and do ignore the stock market for years at a time.

    "this latest string of deals is inappropriate to say the least. And while investors who heed Buffett’s advice to buy now will certainly make money in the long run, I guarantee Buffett won’t be writing additional pieces assuring them of the value when they’re down another 10%, 20% or even 30% in the next few months."

    My goodness but you can whine, can't you?

    Buffett made good deals for his shareholders (who, by the way, he has a fiduciary responsibility to), and you complain. He goes on CNBC to share the reasoning behind these investments, as dozens of money managers do every day, and you complain. He writes an op-ed explaining his decision to invest his non-BRK money in stocks for the first time, specifically and repeatedly stating that he doesn't know if the market will go up or down in the short run, and you complain.

    Don't you have anything better to do?
    Oct 20 15:18 pm |Rating: 0 0 |Link to Comment |View article
  • Schumer Is Way Off
    You write as if you think this capital infusion is the sum total of what's happening. Did you even listen to Neel Kashkari Monday morning?
    Oct 15 08:29 am |Rating: 0 0 |Link to Comment |View article
  • Why Is Everybody Selling as Buffett Is Loading Up?
    Because he's smarter than us.
    Oct 06 11:48 am |Rating: 0 0 |Link to Comment |View article
  • GE Dilution Questioned
    Russ - do you know how warrants work? BRK isn't putting another dollar into GE until it decides to, which is VERY likely to be within a couple of months of the expiration of the warrants.

    The deal brought $15B in, including $12B from the common offering, at an overall cost which may or may have been better than a secondary alone.
    Oct 03 08:22 am |Rating: 0 0 |Link to Comment |View article
  • Goldman Says "Trust Us"
    Do you really think Buffett believes that his $8B can have a significant impact on a market "on the brink of a systemic collapse"? Really?

    BRK is better equipped to handle a significant downturn than perhaps any other company you can name. These investments were made because they were fantastic opportunities. Period.

    As for GS and GE, they chose the cover of a BRK investment because of the very real possibility of a more expensive or a failed secondary offering. Could Goldman without Buffett have raised $7.5B at $110 rather than $2.5B at $125? Could GE without Buffett have raised $15B at $21 rather than $12B at $22.5? I don't know the answers.
    Oct 02 14:18 pm |Rating: 0 0 |Link to Comment |View article
  • Goldman Says "Trust Us"
    Does anybody believe that Warren Buffett wrote a $5,000,000,000 check without seeing under the GS kimono?
    Oct 02 10:17 am |Rating: 0 0 |Link to Comment |View article
  • Buffett's Big Bet: The Real Value of the Berkshire Investment in Goldman Sachs
    HLO: Why?
    Sep 29 23:35 pm |Rating: 0 0 |Link to Comment |View article

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