Financial scams and scandals are excellent learning tools for investors. For example...
This morning's American Banker contained another installment in the saga of Washington Mutual, aka WaMu, formerly the largest thrift institution in the country... now part of JPMorganChase.
One obvious lesson: Regulators are only human. They'll protect themselves, not investors. John Reich, the former director of the Office of Thrift Supervision(OTS), apologized in an e-mail to WaMu CEO Kerry Killinger for taking regulatory action against WaMu. When called out on the apology and asked if it was embarrassing, Reich said, "I make no apology for that e-mail whatsoever."
Another similar lesson: Regulators will protect their turf, not yours. The only institution the OTS got aggressive with in the WaMu affair was the FDIC. Sheila Bair, the FDIC chairman, repeatedly pressed the OTS to get tough with WaMu on lending practices. Reich wrote in an e-mail, "I can't believe the continuing audacity of this woman." Indeed. I bet Bair was one of those crossing-guard kids in grade school.
Testifying before Congress, Reich said when the FDIC gets involved, "confusion develops about who is the primary regulator." What confusion? I thought you were all just selfless public servants doing your best to rein in the excesses of a capitalist system gone wild. How do you have time to argue about turf?
But that is to be expected. It feels wrong to us humans not to protect and expand our turf. That doesn't change when you get a government paycheck.
The regulators remind me of the difference between beef and cows. Freshly grilled beef on the plate can be sublime. But before that, it was a cow. Not the brightest animal in the world. If you raise "beef," you spend much more time dealing with cows than grilling steaks. I live within walking distance from a lot of cows. There's always one with its fool head stuck in a fence. Usually, the animal was trying to reach a blade of grass on the other side of the fence... even though the grass runs as far as the eye can see on her side of the fence. Just like a government regulator.
Japanese bankers aren't interested in the benefits of more financial regulation. Masayuki Oku, head of the Japanese Bankers Association, says bankers need self-control, not more rules... Oku was responding to stringent new capital requirements proposed by the Basel Committee for Banking Supervision, an international regulatory body. Mr. Oku asked the Basel Committee who will guarantee bubbles would not occur as a result of the new rules.
The more capital you're required to keep, the less money you can make. Japanese banks don't think they should have to pay for excesses they largely avoided. They didn't drink deeply from the subprime trough. They don't think it's fair for stricter capital guidelines to reduce their profitability.
Goldman Sachs is having a spot of bother with a regulator, the SEC. The SEC says Goldman committed fraud. Goldman argues the folks it screwed were big boys, who knew the risks they were taking.
Goldman Sachs announced first-quarter earnings today. The company earned $3.96 billion, a 91% improvement over last year. The firm saw record revenue in its fixed-income department (thanks to the steep yield curve). Goldman also addressed the SEC case during its earnings call, saying it would fight the charges in court. The firm said it maintains the right to settle (which is what it would do right away if it were as smart as everyone says it is). Goldman also said the counterparties in the alleged mortgage fraud – ACA Management, a unit of bond insurer ACA Financial Guaranty Corp, and German bank IKB Deutsche Industriebank – are both sophisticated investors. And both parties should be responsible for their own bad trades. Goldman also said the particular bundle of mortgages under question was inconsequential, considering every mortgage cratered in the crash.
While the looming SEC case weighed on Goldman's stock – shares are down 2.6% despite the great earnings – the rest of the market is up.
Egan-Jones Ratings Agency reaffirmed Goldman's double-A rating today. It said the SEC suit will probably result in a manageable fine and not change things much. Egan says Goldman is "looking brilliant." Most of its major competitors have disappeared or suffered badly. It'll thrive amid a lack of competition with plenty of "attractive trading opportunities and various forms of federal government support." That makes sense to me. Goldman's tiff with the SEC is more theater than anything. The SEC has to do something every now and again. Otherwise, it would be much easier to establish Goldman is highly favored by the government and its substantial political connections put it on the right side of every trade.
Some people say this situation is unfair. Those people probably aren't as rich as Warren Buffett, who calls the political connections a competitive advantage (or a "moat") and lent Goldman Sachs $5 billion at 10% interest.
With the Greek government's finances melting down and a 30 billion-euro IMF-EU bailout in the works, Greek debt is more popular with investors than ever. A recent 1.95 billion-euro 13-week debt issue was oversubscribed nearly four times. Investors are chasing yield. In January, a similar Greek issue yielded 1.67%. The latest one paid 3.65%. The Greek finance minister is confident the country "won't be left high and dry." I wonder if Greek debt investors can say the same?
Coca-Cola, UnitedHealth, Johnson & Johnson, IBM, and Novartis all announced earnings today. All their earnings are up. The economy is still riding high on the $2.7 trillion of new money injected by the government over the past two years.
John Paulson bought 43.7 million of the 58.3 million shares American Capital Strategies (ACAS) sold in an offering yesterday. Paulson bought shares at $5.06 each (current price is $5.84). Shares jumped 5% on Monday and are up another 4% today. Paulson will be the largest shareholder with 13% of the outstanding shares.
It's an eternal truth of trafficking in the public securities markets that everyone loves yesterday's brilliant success story. Everybody worships Paulson for raking in billions on "The Greatest Trade Ever." It's herd behavior. Or maybe primitive tribal behavior, revealing a belief in superstition, magic, and gurus. "Hold the idol in your left hand, close your eyes, intone the proper incantations and turn three times while standing next to the yum-yum tree, you will become wealthy..."
Now, every time he buys a new stock, everyone rushes in behind their new guru. I don't know Paulson (and don't really care much about him), but I doubt he made his money by following a guru. It's one thing to learn from others' mistakes. It's another thing entirely to forget about the learning and just imitate the mistakes. That's something like the opposite of learning. I don't know if ACAS is a mistake or not, but neither do the guru followers who pushed the share price up once they found out Paulson owned it.
New highs: Hershey (HSY), Johnson & Johnson (JNJ), Amerigas Partners (APU), McDonald's (MCD), Longleaf Partners (LLPFX), WR Berkley (WRB), Prestige Brands (PBH), WD-40 (WDFC), Biglari Holdings (BH), Shaw Group (SHAW).
In the mailbag – lots of questions... a good posture for an investor. Send yours to feedback@stansberryresearch.com.
"From the announcement of GS it looks like the proverbial crap is rolling down hill or hitting the fan. Are there other top 10 banks that could get nailed for 'knowingly' selling CDOs that were going to go bad? Just wondering if there are a few more shoes to drop in the financial sector." – Paid-up subscriber Trevor Hansen
"One of our local op-ed writers ended her opinion with 'How are banks going to make money if they don't take some risk?'(Paraphrasing) How about the old fashioned way? Take deposits, pay a certain interest rate, and lend it at a higher rate. Bring back the '50s. Do you think the stock market is manipulated? Can you explain why it is rising in the midst of the Goldman Sachs scandal?" – Paid-up subscriber Marilyn Tuppen
Ferris comment: You can bring back the '50s all you want, but the trouble with prosperity is it never stays around forever. The stable '50s gave way to the go-go '60s, and the horrendously inflationary '70s. There are no good old days.
I don't know about the stock market being manipulated. What I want to know is how does Goldman wind up on the right side of every trade? It's uncanny. Nobody is right that often.
"I've followed you for years now and made lots of $$$$. I own only a couple of stock positions in the 'World Dominator' class and bought Gold and Silver in recent months. I'm Canadian and wonder what I should do with my U$ positions? Do I sell a couple of U$D/CAD positions as a hedge? Do I avoid buying a winter home in Scottsdale? Tough questions and THANKS. You are the BEST!" – Paid-up subscriber Joe D.
Ferris comment: I can't give you individual advice, but I recommend all my readers hold on to their World Dominators long enough to make money. Otherwise, my only currency hedge is to get out of all of them and buy gold and silver.
As for the place in Scottsdale, the two big questions are: Can you afford it, and how much do you like Scottsdale?
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
April 20, 2010