Uncle Sam, the World’s Worst Trader
A few months ago, I did a WSJ panel with Jon Najarian in Chicago. He’s a nice guy, a canny options trader, and the founder of Option Monster.com. (He and his twin bro are regular panelists on Fast Money).
As a trader, Jon points out what a horrific deal the taxpayers got for their bailout “investments.” Warren Buffett bought into Goldman Sachs about the saame time as Uncle Sam did. The difference is in the terms and the returns: Buffett earned 120% on his money, while Hank Paulson, on behalf of the taxpayers, picked a paltry the 23%.
Here are the details:
“The federal government let the trade of the century slip through its fingers at the depths of the financial crisis. Worse, Warren Buffett had already drawn up the perfect blueprint, in steps so easy even a Treasury secretary could follow. Doesn’t that make the government a candidate for worst trader of all time?
Long before his acquisition of the Burlington Northern Santa Fe (ticker: BNI) railroad, the Oracle of Omaha agreed, on Sept. 23, 2008, to invest $5 billion in Goldman Sachs (GS) through a purchase of perpetual preferred stock. The shrewd chairman and CEO of Berkshire Hathaway also got warrants to buy up to $5 billion of Goldman common shares at $115 each, some 8% below where the stock was trading at the time.
In a single bold stroke, when Goldman and the global markets needed it most, Buffett put his money and reputation on the line. He stood to own roughly 10% of the bank, and his convertible shares also pay a fat 10% dividend.
Yet even with this trade serving as a very public model, what did then-Treasury Secretary Hank Paulson ask for? When the Wall Street giants had their backs to the wall, he gave them billions of our taxpayer dollars for a relative pittance . . .
Great stuff — thanks Jon!
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Source:
The World’s Worst Trader?
JON NAJARIAN
Barron’s NOVEMBER 16, 2009
http://online.barrons.com/article/SB125815667838947645.html
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November 16th, 2009 at 7:50 am
Reminded me of the Prizzi plot line in “Prizzi’s honor” where they kidnapped the corrupt bank manager and made money at both insurance/extortion ends all whilst keeping the family together. LOL.
November 16th, 2009 at 8:06 am
It’s a compensation problem… If you gave Paulson a bonus, he would have nailed his old firm. … All he cared about was his “reputation,” and reputations in the WSJ culture – your self worth – is your net worth.
Fix Treasury official pay now… big bonuses based on how much “money they make” off their bailouts.
November 16th, 2009 at 8:12 am
Great observation. And to make matters worse, they gave the warrants back for NOTHING, when they could have kept them for 10 years and pay off all the bailout funds with them.
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November 16th, 2009 at 8:30 am
I think you’ll find that their defense would be along the lines of: Our objective was to stabilize the financial system and prevent the markets from imploding, not to squeeze a profit.
November 16th, 2009 at 8:54 am
Barry, why don’t you w/ Najarian write a follow-up to the “Bailout nation” – “Hank Paulson: Trading for the enemy” ?
November 16th, 2009 at 9:01 am
While we’re at it, how do Paulson’s “trades” compare to the Bush administration’s purchases of oil during the run-up to $147 to fill the Strategic Petroleum Reserve?
Oh wait… they cost averaged into $37 oil, didn’t they. We’re saved!
November 16th, 2009 at 9:05 am
This is an expression of nepotism as policy, not a trade.
With the markets up 60% off the bottom, methinks the US should be taking some profits here.
November 16th, 2009 at 9:48 am
Oh come on, you have two TOTALLY different investors with two TOTALLY different objectives.
Clearly, the USGov’t sought a LOWER risk and therefore LOWER potential return investment.
November 16th, 2009 at 9:53 am
He almost undoubtedly should have recused himself during these negotiations.
He was negotiating with his life long business partners with other peoples money. Paulson should be in jail, and I suspect that when the transcripts of the calls he made come out, GS will be out of business and he will be in jail.
November 16th, 2009 at 9:53 am
You didn’t expect Paulson (like Buffett) to take advantage of his old firm did you? I think they made a movie about this; “Sleeping with the Enemy”. Paulson figured GS would reward his allegiance to them with a job once his Treasury Secretary gig was up. Paulson couldn’t care less about the U.S. taxpayer.
November 16th, 2009 at 10:08 am
WHAT do Barry Ritholtz and Jon Najarian have in common ?
Answer: they BOTH spend so much time in the spotlight they both have suntans from all those digital “flashbulbs”.
~~~
BR: I spend a lot of time working outdoors on the ranch. Raising thoroughbreds is hard work . . .
November 16th, 2009 at 10:11 am
Having traded 30 minutes of my time to watch Fast Money (once)….
I refute your thesis.
For I am the worst trader of all time.
November 16th, 2009 at 11:06 am
When has the government ever done anything to generate a profit? Cronyism aside, Paulson wasn’t putting the governments money at risk, they don’t have any. If there is no capital, you don’t think of your actions in terms of the return on “investment”. The only money the government has it gets through taxation, fees and the printing press. If the government wants more money they don’t think about ways to increase their profits, they just raise taxes or acquire another printing press.
November 16th, 2009 at 11:44 am
The Najarians are brothers, not twin brothers. There are four of them, all in varying stages of baldness. They would make a good hair club for men commercial.
November 16th, 2009 at 12:20 pm
LOL — that is just cold!
November 16th, 2009 at 1:02 pm
Geesh. You don’t think Buffet had inside information about how Goldman Sucks, and its employees that work at every key position in the financial world were going to juice the stock market to make his so-called ingenius bet, a sure thing?
Amazed at the naivete on this board.
You don’t actually think he was taking a risk with 5 billion do you?
November 16th, 2009 at 1:29 pm
I guess when you are negotiating with your friends to give them some of other peoples money then its not so easy to do a good job.
November 16th, 2009 at 3:19 pm
That is a bad trade but I still think that the BOE selling their gold around $275 just a few years ago is still the number 1 worst trade of all times. No surprise they are a government also
November 16th, 2009 at 8:12 pm
HTCMSI@BOE Gold sale
You just beat me to it, and I agree this is the most underwhelming Government trade of all. This sale of Gold at the precisely imperfect timing is now widely known amongst London Gold traders as “The Brown Bottom”!
November 16th, 2009 at 8:19 pm
On a separate matter, if the US had adopted the Swedish model (Known to work) rather than the Japan model (Known not to work) the Banks would all have been temporarily Nationalised (And the Managements and Boards all fired). The returns to both Government AND the macro economy would then have been potentially even better with the savings from not paying bonuses on gratuitous spreads (Which takes a Banking genius) and from channeling financing into the real economy.