By Charles Payne, CEO & Principal Analyst
“Nobody does it better
Makes me feel sad for the rest
Nobody does it half as good as you
Baby, you’re the best”
-Carly Simon
Nobody on Wall Street does it half as good as Goldman Sachs (GS) and nobody would argue they have been the best. Like a sports fan marveling at the athletic feats of a Ben Johnson or a Mark McGwire I cheered and gave the benefit of the doubt. I remember once about four or five years ago saying on television that I wanted my son to grow up to be the CEO of the company. Back then Ben Stein chided me on the “Cavuto on Business” for my admiration as he felt the firm was great but had misgivings about their exorbitant pay and some business practices. Now, I’m not sure where I stand on the issue. Like my admiration for Barry Bonds as a baseball player, should I ignore all of the telltale signs and see if he’s never found guilty or should I simply capitulate to conventional wisdom and my own gut feeling that he was a cheater and stop thinking he was the best.
For now, the jury is (officially) out on both Goldman and Barry Bonds. (As for my son, if his grades don’t pick up he’d be lucky to get a job mopping up Goldman’s new headquarters.) Of course the jury will not be out forever, although in the case of Bonds one has to wonder why the government is spending millions of dollars on his case when there are more pressing issues. In the case of Goldman one thing is clear in the minds of the public; the company is guilty as charged…and it doesn’t even matter what the charges are. That makes the timing of the latest salvo against the company brilliant on the part of the Administration. The charges that Goldman withheld critical information when selling its synthetic collateralized debt obligation program known as Abacus caused an uproar in the market on Friday.
Newspaper Headlines:
“Goldman Fraud Bust!”
Double dealing in $1B toxic mortgages- NY Post
“Full of Bull”
Goldman Sachs hit with fraud charge in billion-dollar scandal- NY Daily News
If it’s proven that the company didn’t disclose the proper structure of the deal and the role Paulson & Co. played it will be like the time a sports reporter asked Mark McGwire about a small bottle of liquid standing on the shelf of his team locker. At the heart of this case is the allegation that Paulson paid Goldman $15.0 million to allow it to cobble together risky loans into a single investment package which it shorted. But, Goldman sold it to others as a viable investment. It’s sort of like the NY Mets preparing to play the NY Yankees and the Mets’ manager being allowed to pick the Yankee line up before the game and being able to choose anyone in the stadium, including fans, and an overweight person that sang the national anthem. Then the manager of the Mets gets to bet on the game. Sounds like easy money to me.
Interestingly, Paulson & Co. hasn’t been accused of any wrongdoing. (This firm has nothing to do with Hammering Hank Paulson, former Goldman CEO then Treasury Secretary that crafted the TARP plan.) Paulson & Co., started by famed hedge fund maestro (in case he’s reading my comments…throw me a bone one day) John Paulson, issued a statement saying ACA was the collateral manager and his firm played no role in initiating Abacus or marketing it to third parties. In addition, Goldman issued a second release after the close with stronger language that bumped the stock up a couple points. Like I’ve said before watching Goldman and the White House is like King Kong versus Godzilla and the little people are collateral damage. This brings me to the timing of this decision by the SEC. The economy is still extremely fragile despite what White House cheerleaders claim and it’s unlikely this latest move will inspire banks to go the extra mile needed to extend what used to be called a dead cat bounce into something more meaningful.
I’m not sure how this is going to end. Although I think that Goldman could win this case it might not matter as the die is cast. The news itself should shift the momentum back to those that want to go beyond common sense financial regulatory reform and actually rule Wall Street and the banking industry. I think that nationalization was the original game plan but the uproar was too great. President Obama has asked his Democratic colleagues to abandon the goal to snatch $50.0 billion from Wall Street for a supposed fund in case they have to wind down a big firm. Such a fund actually would encourage banks to get bigger. What about letting them simply fail? It seems clear to me that an orderly dismantling of the major banks could have been pulled off considering how quickly they returned to profitability.
Of course this means we might have to sell them to foreign entities, including Chinese banks. Since that’s where the real bailout money comes from anyway it would just cut to the chase.
By the way, if there was a $50.0 billion bank bailout account is there anyone that believes it wouldn’t be as empty as Al Capone’s vault if it was ever needed?
I think that financial regulatory reform is easy. But, then again, I thought that healthcare reform beginning with tort reform and breaking down state barriers to competition were an easy 1-2 step toward something all Americans could agree. Whatever Goldman may or may not be guilty of I hope that it’s not used as an excuse to give more power to the Executive Branch and de facto nationalize the industry. Punitive punishment and a Draconian death grip on banks do nothing for consumers or capitalism. The laws were in place, the power was in place, they were used poorly. In fact, it’s a frightening commentary that those in charge of fixing the mess were integral parts of the establishment as it was occurring.
Well, the general public will play up the mighty Goldman under scrutiny again even though this is a situation that involved very deep-pocketed, sophisticated players making different bets. The story will evolve and scuttlebutt already has is that Deutsche Bank (DB) and JP Morgan (JPM) are up next as possible targets of SEC action. In his book “The Big Short” Michael Lewis writes much about how Deutsche Bank was eager to get into the mix. “They wanted him to make money just by sitting in the middle of this new market, the way Goldman Sachs did, crossing buyers and sellers.” We’ll see how all of this goes, but watching Bob Schaefer yesterday morning and hearing him rant as if Goldman was guilty of this accusation it’s clear that the media is going to work overtime whipping the masses into a tizzy to push through the White House’s financial regulatory plan. I think that reforms in this arena should be simple to agree upon.
I just hope that a power-grab is nipped in the bud. Although, in his weekend address President Obama, said that “one way or another” his reforms are going through. With respect to Wall Street, oversight is different than control. If a bank is too big to fail then it shouldn’t become a ward of the state or wing of the Executive Branch. Plus, what’s the deal for the little people? Really, there is no doubt that this will not make more money easier to tap into by regular folks. Just as Washington long ago gave up on small-cap stocks after putting most small brokerage firms out of business through the bullying of the SEC, the current Dodd bill is going to make raising money for small businesses even more difficult!
One of the consequences of the Dodd bill would be to crush angel investing and severely hurt venture investing. According to an article in Venturebeat.com, the plan harms angel investing in three ways. Link: http://venturebeat.com/2010/03/26/angel-investing-chris-dodd/
1. Start-ups must register with the SEC and wait 120 days for review.
2. Wealth requirements for potential investors are going to change dramatically. An “accredited investor” will now have to have assets of $2.3 million, right now it is $1.0 million; or annual income of $450,000 increased from the current standard of $250,000.
3. The new bill removes federal pre-emption for angel and venture investing in the United States to adhere to federal regulations rather than deal with different rules from state to state.
As much as people may despise Wall Street, we have to make sure not to destroy ground floor opportunities. The continued public relations attacks on banks mean more government spending, by design, I think.
Don’t Believe the Hype
I canceled my subscription to Newsweek earlier this year and I’m
glad I did as it has lost complete objectivity as it has become a public relations tool for Democrats and the White House. When I saw last week’s cover, however, I thought they really took it too far. Here’s the (real) deal:
America was never gone. The nation is going through an amazing crisis that continues to linger and in fact, has gotten worse in so many ways. Big businesses are picking over the carcasses of small businesses and that’s good for the stock market, but doesn’t mean Main Street is doing great. I think that the Newsweek headline could have been more honest had the small gains we are experiencing been more market driven rather than government spending that pushed all taxpayer funds to specific industries and of course, mostly benefited non-taxpayers.
Ironically, so many low taxpayers and non-taxpayers want a route out of their circumstances and that only happens with ground floor opportunities. You know much has been made over the death of old school media like the big news magazines because of technology. There is also the issue that these periodicals are completely out of touch. There is no doubt that 2010 is going to look good compared to 2009; that would not be remarkable. I’d like to see unemployment under 7%, food stamp recipients under 30,000,000, and home prices up 20% from the low before tossing out the superlatives. This is a recovery being led by massive government spending that must be paid for at some point, so the success of the rebound has to be extraordinary to be sustained and to pay off the mountain of debt.
Eight banks bit the bullet over the weekend. All found buyers except one* but the cost to the FDIC was $984.8 million, bringing the year to date tally to 50 banks and $30.0 billion.
These bank failures are on pace to surpass 2009, and would never make the cover of news magazines but it’s the kind of thing that regular people are feeling. In fact, for those that don’t lunch at the hottest spots in midtown Manhattan or San Francisco and Los Angeles despair is increasing, not decreasing. Lost among all of the news on Friday; Goldman, Google (didn’t live up to whispers), and GE (missed top line expectations), was consumer sentiment from the University of Michigan. The expectations component was down for the third straight month and at 62.3, is significantly below the recent high water mark of 73.5 reached last September. The headline reading of 69.5 was well below consensus of 75.0.
Earnings Reports
Somewhat mixed this morning. Citigroup (C) posted earnings of $0.14 per share on $25.4 billion in revenue, beating consensus on the top and bottom lines. The stock initially indicated higher but probably will open flat or under a little pressure.
Eli Lilly (LLY) posted earnings of $1.18 per share with the Street looking for $1.10 per share. But, it warned the new healthcare law will pressure earnings for the remainder of the year, sending the share price lower.
Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.
