Henry Paulson is a lucky man... for now. The bonus flap at AIG has completely misdirected the public and the media from the real crime. Last October, I told my subscribers the real reason AIG had been bailed out:
AIG's largest trading partner wasn't a nameless European bank. It was Goldman Sachs. We'd wondered for years how Goldman avoided the kind of huge mortgage-related writedowns that plagued all the other investment banks. And now we know: Goldman hedged its exposure via credit default swaps with AIG. Sources inside Goldman say the company's exposure to AIG exceeded $20 billion... – PSIA, October 2008
Surprise, surprise... On Monday, AIG finally revealed where the government's bailout money went. After saying for months and months it didn't have any material exposure to AIG (essentially claiming my reporting was completely wrong), Goldman, in fact, has received more money than any other counterparty, almost $13 billion. And guess what Goldman's total exposure to AIG actually was? You'll never guess. "AIG had about $20 billion in total swaps with Goldman..." says the Wall Street Journal.
If you knew how much exposure Goldman had to AIG, you might doubt the motives and the objectivity of our Treasury Secretary at the time, Hank Paulson. Paulson was demanding an unprecedented amount of money from Congress with no strings or oversight attached. Without this money, he said, there would be an unmitigated catastrophe. Maybe. But Goldman would surely have faced a huge problem. Assuming Goldman lost all $20 billion in exposure to AIG, the collapse would have wiped out nearly half of Goldman's equity, probably sending the company into a Lehman/Bear Stearns death spiral.
Don't forget... Paulson spent his entire career at Goldman, where he was the CEO in 2005 and 2006. That's when Goldman entered into most of these swaps with AIG. He knew exactly what would happen to his old firm if AIG failed. If you want to be outraged about AIG (and you should be outraged at the entire bailout), don't worry about the bonus issue. That's small-time stuff. Be outraged your tax dollars and your government was turned into Goldman's checkbook, by no less than the company's former CEO.
You might recall a certain federal agency (the SEC) has become enamored with calling your hard-working editor a liar whose reports are "nothing more than baseless speculation and outright lies, fabricated to induce investors to pay for subscriptions..."
Hmmm. It was the SEC that permitted AIG to hide the information about Goldman's exposure from investors for months, protecting Paulson. It was the SEC that sat silently and did nothing as government official after government official (including Paulson) blatantly lied about the financial condition of Fannie and Freddie. At least in these two cases, your editor's "baseless speculations" have proven to be a lot more reliable than anything coming from Washington. (And we have dozens more examples... but I'm sure you get the drift.)
You may be interested to know that over the last several months, a few reporters contacted me about my research on AIG-Goldman. But they wouldn't quote me until AIG verified my report. Now finally, the word is getting out: CNN carried this article quoting my work. Hopefully, the questions I've raised about Paulson's motivations will lead to a subpoena. But I doubt it, don't you?
Speaking of Paulson... Maybe if we can get him to testify, we might finally get to the bottom of Goldman's accounting. I've also been writing for two years that Goldman's accounting is like Enron's – but worse. So far, nobody believes me. (Just more "outright lies," right?)
First, Goldman reported enormous profits every year from 2004 to 2007 – $11.5 billion in 2007. And yet, every year, the company lost billions in cash. (In 2007, it lost $68 billion in cash.) Like Enron, Goldman made up the difference between cash and what it claimed were profits by borrowing enormous sums – $76 billion in 2007 alone. I knew, sooner or later, the huge discrepancies between what it was claiming in profits and what it actually had lost in cash would have to be reconciled. I'd been eagerly awaiting the 2008 balance sheet. How would it paper over the losses, I wondered?
And the answer? The money just disappeared without any consequences! Look at the balance sheet Goldman recently produced for fiscal year 2008. Long-term assets – the company's largest capital category, by far – fell from $821 billion (yes, billion) to $564 billion, a $257 billion reduction. Goldman saw the value of its assets fall by more than a quarter trillion dollars... and yet... over the same period it says shareholder equity increased by 50%!
That's impossible... but that's what Goldman's accountants are claiming. Meanwhile, ask yourself this question: If Goldman's profits from 2004-2007 were real and its shareholder equity grew 50% in 2008, why did Goldman have to beg, hat in hand, for a loan from Warren Buffett? Maybe Goldman has become like a shadow Federal Reserve, where none of the normal rules of accounting apply. But I doubt it.
Two of the most admired companies in the world are now riskier bets than Vietnam and Russia, respectively. The credit default swaps (CDS) market indicates Warren Buffett's Berkshire Hathaway is more likely to default on its debt than Vietnam – not likely, considering Berkshire's $20 billion cash pile. And GE Capital, the finance arm of General Electric, is a bigger credit risk than Russia. Both companies lost their triple-A credit ratings this year. These two anomalies show how much fear is currently surrounding the corporate bond markets. There's got to be some great opportunities there...
There are lies, damn lies, and statistics... Richard Bernstein, chief economist at Bank of America Securities-Merrill Lynch, claims gold was the worst-performing asset class over the past 40 years. In a study "using various metrics that measure the likelihood of negative returns over various time periods," Bernstein found small-cap stocks – those with a market cap less than $2 billion – were the best.
"Regardless of time horizon, small stocks offered the best risk/reward potential to investors, while gold offered the worst," he said. Bernstein also cheered buy-and-hold investing, noting that the chance of loss while holding any asset class "with the exception of gold" over a 10-year period is minimal. We wonder what planet Bernstein has been living on and studying. (Here's our take on the issue.)
MG
M Mirage (MGM) announced earnings today. No surprise... they were awful. The company lost $1.15 billion, or $4.15 a share (it's a $2.60 stock). It repaid $300 million to creditors and agreed to a 100 basis-point rate increase in return for a debt extension through May 15. But there's no point... It will just need another extension come mid-May. It has almost $14 billion in debt, and it still needs to find money for its $9.2 billion City Center project in Las Vegas.
The company's auditors finally realized what we've been saying for months... MGM is going out of business. Or in accountant speak, there is "substantial doubt" MGM will be able to continue operations.
In what is possibly the most ridiculous article ever published by CNBC's website, "Senior Features Editor" Albert Bozzo urges America to "Declare a war on greed"... because "it worked on terror."
Bozzo states declaring a war on greed would allow "President Obama, our commander in chief, to order people deemed to be dangerous captured and held without trial. They can sit in Guantanamo Bay and think about it."
Finally... while you may have already seen this item on our aggregator website, The Daily Crux, I can't resist commenting on Congresswoman Corrine Brown's recent speech before Congress.
Before you watch the video, you need to know two things. First, Corrine Brown did not attend the University of Florida (my alma mater). She has a bachelor's degree and a master's degree in public speaking from Florida A&M. As you'll see when you watch the video, she's incapable of speaking English. She's also disheveled, obese, and delusional: She thought it was worth five minutes of Congress' time to congratulate a college football team.
The second thing you ought to know is, Corrine Brown is about par for the course in Congress. Trust me, I've met lots of these people. Less than one in 10 could hold a job in the private sector. And these are the folks we allow to tax us, send our children to war, and make the rules we have to endure. That's democracy.
New highs: none.
In the mailbag... Maybe we don't get everything right, but at least we can help you find some cheap eats. Send your e-mails to feedback@stansberryresearch.com.
"I have to say something about those who are complaining about your so called high prices. As a self-employed person, my income is a roller coaster and more downward today than upward. If I had the cash I would buy every product you have because they are accurate and do produce positive results... Complaining about the price isn't going to put a dime in your pocket. So if you have the cash, then pay what I consider to be very reasonable fees and get with the program." – Anonymous
"I am tired of all these expert who claim they saw it coming – including you people – spare me – where were you and the others 2 years ago?" – Anonymous
Porter comment: I'd ask our subscribers. Was there any other advisory group that got more of the big things right since mid-2007 than S&A? We nailed GM, Fannie and Freddie, Lehman, Gannett, and many others. We began warning of "signs of the top" more than two years ago.
My February 2007 issue of PSIA (more than two years ago) explicitly warned the market was going to collapse. Our early 2008 issues all warned of a coming bear market and a recession. Our trailing stop losses and our short recommendations should have protected your portfolios. Did we get everything right? Of course not. But we were certainly on the case two years ago, more than anyone else I've read.
"I hate to admit this, but the best advice I've gotten from the various finance flyers I have received from S&A was your recommendation of restaurant.com. So far we have used coupons for three great restaurants we would never have chosen, and saved a fortune. Great advice, better than stocks today. This is especially true recently where the site is offering discounts on their own coupons. $8 bought us a $100 coupon, which the restaurant gladly accepted, after we ate the most delicious dinner at a very high-class establishment, a bit off the beaten path. Thanks, Doc." – Paid-up subscriber Cal Calman
Porter comment: For more information on how to save up to 80% on your restaurant bills, please see our new publication, Retirement Millionaire.
"Just a quick note to say 'THANKS' to the Staff at S&A. My subscription has paid for itself many times over. The most important benefit I've received is the money I've SAVED, by NOT making some bad investment decisions. And, include me as a fan of the S&A Digest. It's the first thing I read when I arrive at the office. Thanks again for all the help." – Paid-up Subscriber Rick R.
"Sorry to hear you had such a poor response to the Put Strategy Report. I thought the idea was brilliant. I sold 8 puts (mainly energy and gold stocks) between October 10 and 17. 6 expired worthless for a profit of $18,655... The only one that didn't work out was BAC, but I cut the loss. Net I easily cleared $10K on the first round, and I've done several since, most recently PTEN and RDC. I think the problem was that it's a sophisticated option strategy. There are 'investors' out there who still don't understand what a short sale is. How are they going to get 'naked puts'? So probably too sophisticated and esoteric for the average trader or investor. Anyway, I appreciate the new tool in my kit and continue to use the strategy, using your ideas as well as Jeff Clark's. Maybe I will have a chance to say hello in Vegas, as I will be attending the Casey seminar." – Paid-up subscriber Nick McCully
Porter comment: Well, Nick... We'll just have to keep all of the money for ourselves then, right? Seriously, I'm glad you like the strategy. Thanks for having the foresight to try it.
Regards,
Porter Stansberry
Baltimore, Maryla
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March 18, 2009