"I'm not going to get into what's fair. That's for individual bondholders to decide," explained new GM CEO (and former CFO) Fritz Henderson. Fair? There's nothing fair about doing business with the government or the unions...
Few people, especially in government and big business, seem to remember one of the founding principles of Western civilization and capitalism: private property. If you borrow someone's private property, you have to pay it back. It's not optional. GM has borrowed $27 billion from its bondholders – and Fritz Henderson was the person who arranged nearly all of these loans while he was CFO. Fritz promised lenders they would be repaid. If GM cannot repay these debts on time with interest, then according to all the laws of this country and 1,000 years of common-law tradition, GM's assets are legally transferred from the company's equity investors to the bondholders through bankruptcy. Them's the rules. But apparently, OBAMA! has other ideas about how things should work...
OBAMA! is demanding a 50% equity stake in the restructured GM. That's not a misprint. The government wants half of the new company. For what? Yes, the government has put $15 billion into the company – but it did so only after GM should have filed for bankruptcy. In other words, without the government's "help," the bondholders would have gotten 100% of the new company. Now, even though they're still owed $27 billion (almost twice what the government is owed), they're being asked to accept only 10% of the equity in the new GM. Where's the rest of the equity going to be "spread around"? The union expects a 39% stake. And Fritz even plans to give existing shareholders a 1% stake. Everyone, it seems, is going to get a large stake in the new GM – except for the company's legitimate creditors.
Memo to OBAMA!: Capitalism doesn't work when debts aren't repaid. Capitalism doesn't work when legitimate creditors are put last in line – behind the union. If you think the way to restart the financial system is to allow the government to steal 50% of GM's assets and give the rest to the union, you're nuts. Nobody can afford to make a loan if they're forced to figure out the odds that OBAMA! will steal their collateral.
Let me explain investment banking to you. It's real simple. You take a tiny bit of capital from suckers... er, I mean investors. Then you borrow against that capital by around 50 to 1. Then you gamble like crazy and try to earn 1% or 2% a year on the borrowed money. When you win, you pay 50% of the revenues to the employees and the managers. After all, they "made" the money. But when you lose, it's the shareholders' problem. And if you lose enough money, it's the taxpayers' problem. Sounds like a great business, doesn't it?
It boggles my mind that investors would actually choose, willingly, to invest in these companies under these terms. But like Barnum said, there's a sucker born every minute. Goldman recently raised $5 billion from suckers. Guess what it's doing with the money? Bloomberg reports the bank is ramping up its risk taking faster than any other bank on Wall Street...
Goldman Sachs's so-called value-at-risk, the amount the New York-based bank estimates it could lose from trading in a day, jumped 22 percent to $240 million in the first quarter, twice what Morgan Stanley stands to lose, company reports show. VaR climbed 2.8 percent in the same period at JPMorgan Chase & Co. and dropped 14 percent at Credit Suisse Group AG.
Guess what else Goldman is doing with the money? The bank set aside $4.7 billion for employee compensation in the first quarter. That's not a misprint. If compensation continues at that rate, Goldman employees would make an average $569,220 each this year – just beneath the bank's record pay in 2007. What could the firm be doing that's so valuable to the economy it justifies this incredibly high rate of average compensation? I guess separating fools from their money is hard work.
We're looking to buy a farm. Why? Well, we've always believed in putting our money where our mouths are. We know the U.S. dollar is going to collapse. When it does, we want to be able to eat. If you know a lot about farmland – if farming is your business – please get in touch with us. We want to talk about where we should buy a farm, how much we should pay, and where the best value in the United States is right now. You can reach us here: feedback@stansberryresearch.com.
By the way, if we're wrong about the dollar, we figure we don't have that much to lose. Real estate is pretty cheap right now in a lot of places.
The Daily Crux reported on Friday corporate insiders are selling stock at the fastest pace since October 2007 – the month the stock market peaked. Insiders took advantage of the S&P's 28% gain from its 12-year low on March 9 to dump $353 million in stock, or 8.3 times more than they bought. Of course, insiders know more about a company than anyone else, and their buying and selling can be a great indicator of a stock's direction.
This movement is clear... Insiders are saying we're in the midst of a bear-market rally. However, insiders have been purchasing hand over fist at one small beverage company... This company is more than 100 years old, has zero debt, and throws off tons of cash... And we think it's getting ready to pay out a large, special dividend. To access the full details of this company, the latest Inside Strategist pick, click here...
New highs: none.
In the mailbag... what happens when all of the government's acronyms come after you. Send your horror stories here: feedback@stansberryresearch.com.
"Porter is always advising buying gold bullion, but never seems to mention silver coins. Since gold coins are so expensive, what ratio of silver to gold would be appropriate?" – Paid-up subscriber Edmund
Porter comment: As you probably know, that's a loaded question. Historically during periods of metallic money, a 15-to-1 silver-to-gold ratio was about average. If gold is at $900, that means the price of silver ought to be much, much higher – like $60 an ounce.
But that's if you assume we're headed back to a worldwide gold standard (and I think we are... but it's going to take a while). In fact, the silver-to-gold
ratio is a good measure of confidence (or the lack of) in the U.S. dollar. When the dollar falls, the silver ratio falls. Chris Weber has written more about this than anyone else I know. I cited him extensively in my newsletter about the subject. Subscribers can check the May 2006 PSIA.
"Your quote from Ayn Rand that business is morality reminded me why I do business with my insurance agent. He bought a wholesale petroleum distribution business in the mid 70's. When interest rates went to 20 percent in the early 80's, he went broke. Took bankruptcy. He finally paid off all his debt in about 1990 even though he didn't have to. Do you think that guy would cheat me? When other agents call asking to save me money, I just tell them they can't save me enough to get me to leave this guy. He is still working at 78 because he 'lost his 401k' like the Boomers of today, only he has at least one loyal client." – Paid-up subscriber Dave Bridges
Porter comment: I have a good friend in the commercial real estate business. He's gone bust three times during his 40-year career. He never had to declare bankruptcy because his creditors knew he was a man of his word. Each time he went bust, he paid everyone back – it just took a lot longer than they were expecting.
"About a decade ago I invested in a private offshore company. It was an investment that yielded interest income and capital gains, which were fully reported here in the U.S. Nevertheless, I was accused of having an unreported offshore bank account. The IRS only need allege the possibility of fraud to circumvent all statutes of limitation. Matters unrelated to my investment were 'reviewed' and penalties purportedly relating to business matters 20 years past were assessed. Five years of IRS inquiries, demands for face-to-face audits, and verbal and written threats elapsed before I was able to put the matter to rest, without any monetary penalty.
"As you encourage your subscribers to move assets out of the U.S., it may be worthwhile to include a caveat: any movement of assets out of the country may be assumed by the IRS to be made for the sole purpose of tax avoidance or evasion. It will be the subscriber's burden to prove otherwise should the IRS come knocking. Big businesses like Citibank, N.A are allowed to operate subsidiaries in the Netherlands Antilles and anywhere else they like, solely for tax advantages. Individuals who venture into overseas financial transactions for whatever reason may find they've taken the red pill (to use the metaphor from the movie, The Matrix)." – Paid-up subscriber JL
Porter comment: That's absolutely true. When you begin taking measures to limit the state's ability to seize your assets, they assume you're breaking the law. And there's no presumption of innocence when you're dealing with the IRS.
Regards,
Porter Stansberry
Baltimore, Maryland
April 27, 2009