I’ll be back in a minute, but it dawns on me that the Goldman Sachs settlement may actually be the more important development than the milquetoast Financial reforms.
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UPDATE: July 16, 2010 10:33am
Ezra Klein makes the case in the Washington Post that FinReg, while not Wall Street Reform, is good enough to stand on its own as a significant legislative improvement:
June CPI fell .1%, in line with expectations but rose .2% ex food and energy which was above the expected rise of .1%. The m/o/m core gain is the most since Oct ’09 led by apparel prices which rose by .8% (cotton prices are up 100% since Mar ’09). Owners equivalent rent, 25% of CPI, rose .1%, the 1st gain since Aug ’09. Rents have firmed as seen by comments from various apartment REITs. Vehicle prices rose by .3% and are up sharply over the past few months led by used cars and trucks which were up .9%, in part thanks to cash for clunkers which permanently scrapped a whole slew of used cars just as the demand has picked up in a slower economy. Energy prices fell by 2.9% while food was flat. Food prices need to be watched over the 2nd half of the year as corn, sugar, cocoa, wheat, soybeans and coffee have all been rallying sharply. Deflation talk in the market has taken over but was not evident in the core data today.
Corporate earnings remain front and center (BAC, GE, GOOG) with it being that time of the year and news from GS and BP add more flavor to the mix. If BP is successful this time around in capping the well, a tremendous amount of direct economic uncertainty can be more confidently quantified for everyone else down south and hopefully AL, MS, LA and FL can get some relief as the clean up progresses with now a finite amount of oil. On GS, all I will say is, can I find out who shorted that stock to me yesterday? The $ index is down for a 4th day to an 11 week low led by Euro strength. 3 mo Euribor is rising to the highest since Aug ’09 and hasn’t fallen since Apr 20th. As liquidity from the ECB continues lower, short rates are rising. Also there is likely bank hoarding of cash going on ahead of the stress test results next week. Spanish yields continue lower with its 2 yr spread to Bunds at an 8 week low and 10 yr spread at 3 week low.
Amongst the regular complaints I have about the financial media is the lack of accountability of alleged experts. The bad stock picks, the terrible market calls, the unsupported opinions, all blithely made and forgotten. Yet the same experts are trotted out week after week to give more money losing advice.
The silver lining to this institutionalized incompetence is that its good for business for those who are not incompetent. Nonetheless, it is horrifying to watch on a daily basis.
Nowhere has the lack of qualifications been more evident than in the coverage of the SEC indictments of Goldman Sachs. The parade of pundits who opined about things they knew nothing about was an impressive display of the blind leading the foolish. The silliness got so bad that it forced to stop doing more important things to post 10 Things You Don’t Know (or were misinformed) About the GS Case. I was surprised that this became the single most read post in the Big Picture’s history.
Now that Goldman Sachs has lost their will to fight and settled the case for a record breaking amount, the same media fools who told you a) this was a weak case and b) GS was going to win are now spinning this massive Goldman Sachs defeat as some sort of a Goldman victory.
Don’t believe them. This is a painful loss for Goldman Sachs, with expensive repercussions likely to last far into the future:
• Our “no-brainer” bullet point proved to be dead on: GS conceded misleading disclosures, and hence was forced to settle. This will be important in related actions (keep reading).
• As we noted yesterday, Goldman paid the highest fine/settlement in the history of the SEC. For an ego-driven corporate culture such as Goldie, that is a painful loss. Silver lining: Settlement was under a billion dollars. Regardless, expect some high profile resignations to follow.
• Goldman admitted material omissions/misstatements in their marketing materials; They disgorged profits and made up investor losses (Yves notes IKB and ACA were made whole). When you admit to misleading investors, you open the firm to future liability from all clients who bought money-losing synthetic derivative products. Hence, this is a significant litigation risk for GS — client civil suits to follow.
• The latest brain dead spin: “The settlement is only the price of a few days’ revenue.” See here and here. This is a classic example of conflating two unrelated issues: 1) The biggest SEC settlement ever; 2) GS is an incredible money machine. But the latter says absolutely nothing about the former. The bottom line remains this is a black eye, and an early Christmas present for the litigators who represent Goldie’s clients who lost money on CDO deals.
• Bloomberg reports that the settlement changes the vetting and approval process for the marketing of structured securities. “Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors.”
In other words, the entire street, and not just Goldman Sachs, lost this case.
• Here is a question for GS shareholders: Why didn’t Goldie write a $20 million check to settle this a year ago? What sort of bad legal advice did they get, and from whom? What executives allowed what should have been a simple action to turn into a record setting settlement?
• First Moody’s now Goldie: Warren Buffett is the other loser in the case. His claim that GS didn’t commit fraud was wrong. Now Buffett looks like just another shareholder defending an investment, right or wrong. There is mud on his formerly squeaky clean reputation.
~~~
Which leads me to our headline question: What media pundits, talking heads, and other fools completely blew this one?
I don’t mean honest analysis that turned out to be incorrect — that is part of engaging in informed debate, using imperfect information, about unknowable future outcomes. What I am referencing is — who really shat the bed on the Goldman Sachs case? Who got this totally wrong? Who continues to get this wrong?
Wow, look at this:
-BP capped the leak in the Gulf.
-The SEC to make a significant announcement (likely about Goldman Sachs).
-Fin Reform passes.
Stocks made up all of their losses on news of the above.
These are the salad days of summer, the days we will look back upon quarters from now, with a wistful mix of bittersweet nostalgia for our naivete and youth.
If only we knew now what we are going to know then . . .
Way back in April 2004, I discussed why most people make bad coffee (Your Coffee Sucks!). In 2006, I got a Capresso 455 grinder/brewer/thermos for a B-Day (it was $300).
Since then, its dropped to about $200 (Amazon), but I noticed in today’s NYT that you can pick one up for $119 (refurbished) at J&R.
CoffeeTEAM Therm Stainless Coffeemaker – REFURBISHED $119.99 at J&R.
I’m a gearhead. I like the sound a V8 or V12 makes when I mash down my right foot and those pretty butterflies open up.
But I am not unaware of the external costs of my hobbies. Which is why I found this research piece, titled Energy Subsidies Favor Fossil Fuels Over Renewables, rather interesting. It turns out, according to this one analysis, that the vast majority of federal energy subsidies are for fossil fuels rather than to renewables or new alternative technologies: $72 billion vs $29 billion over the same period. (These are direct subsidies, tax breaks, etc., and do not include things like the military budget).
The question I have is given how wealthy Oil and natural gas firms are, why on earth are we subsidizing them at all?
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The vast majority of subsidy dollars to fossil fuels can be attributed to just a handful of tax breaks,
Note: Almost half of the subsidies for renewables are attributable to corn-based ethanol.
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Source:
Estimating U.S. Government Subsidies to Energy Sources: 2002-2008
Environmental Law Institute, September 2009
http://www.elistore.org/Data/products/d19_07.pdf
Ned Davis Research looks at the earnings picture heading into this earnings season (Note this is based upon Q1 earnings):
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click for larger chart
Calculation is median 12-month percent change in rolling one-year forecasted EPS. Rolling one-year forecasted EPS is a time-weighted average of current fiscal year’s earnings estimates and following fiscal year’s earnings estimates. Forecasted EPS based on median estimates from Zacks Investment 111 Research.
Reproduced with permission . . . all rights reserved.
The Senate votes 60 to 38 to “advance the legislation.”
• Financial Overhaul Passes Key Senate Hurdle (WSJ)
• Financial Bill Is Set to Pass After Clearing Senate Hurdle (NYT)
• Finance-Overhaul Clears Senate Hurdle, Moves to Final Action (Bloomberg)
• Senate defeats filibuster threat on bank bill (Marketwatch)
• Wall Street reform: One vote from law (CNN Money)
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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