Goldman Executives Duke It Out!
The Dynamic Wealth Report
April 27, 2010
by Brian T Mikes, Editor
The temperature is rising fast… and I’m not talking about the recent 90
degree days we’re seeing here in Phoenix. The temps I’m talking about
are at the Senate Subcommittee on Investigations. Our esteemed
politicians are turning up the heat and some people are really
sweating!
This time around, it’s Goldman Sachs executives.
The Senate’s holding their feet to the fire. Goldman executives are
having to account for their actions. They’re having to describe their
role in the credit crisis and the mortgage meltdown. You can see the
beads of sweat gather on their foreheads…
The stress is palpable.
The spotlight has turned on Goldman and that’s never a good thing. Just
a few days ago the SEC charged a Goldman bond trader, Fabrice Tourre,
with fraud.
Apparently he failed to tell investors a very important detail. He
failed to mention the group (Paulson) structuring the bonds he was
selling were going short against the very same bonds.
It’s like having a contractor build you a house… then finding out the
contractor’s bought insurance that pays him if the house falls down.
Kind of shady if you ask me.
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But here’s the funny thing… technically, it’s not illegal to do. It’s
only illegal not to tell people you’re doing it! (I’m not a lawyer, but
that’s what it seems to me.)
Add to those fraud charges the claims Goldman was shorting the mortgage
market in 2007… and now you’ve got a scapegoat. Carl Levin, Chairman of
the Senate Subcommittee, estimated Goldman made $3.7 billion shorting
the mortgage market!
Everyone from small town newspapers to Senators and Congressmen are
taking shots at Goldman.
Now Goldman’s own shareholders are taking aim at the company. On Monday, a
handful of lawyers filed a shareholder lawsuit claiming the company
failed to disclose an SEC investigation.
Can it get any worse?
Of course it can.
In the midst of this PR storm, the financial industry is facing a
massive overhaul. As we speak, a reform bill is making its way through
Congress. A bill that could change everything about the financial
markets.
Some believe this reform bill will be the most sweeping overhaul to the
financial markets since the 1933 Securities Acts. And that’s saying a
lot. These acts were put in place after the Great Depression.
What is Congress trying to do?
With this new bill, they’re trying to establish rules for the orderly
shutdown of huge financial institutions. They also want to go even
further when protecting consumers. And this financial reform bill also
calls for the standardization of derivatives.
These are the very contracts Warren Buffett called “financial weapons of
mass destruction”.
However in an odd twist, good old Warren wants his company to be exempt
from the new regulations. Berkshire, it turns out, has a whopping
$63
billion in financial derivatives outstanding. (I guess derivatives are
bad only if other investors use them.)
So where am I going with all this?
Take a look at the chart.
Despite the bad news, the fraud charges, and the proposed financial
reform, financial stocks are relatively stable. They’ve spent the better
part of three months climbing higher. A significant portion of the climb was
driven by positive news and earnings.
What’s interesting is this latest storm of bad news hasn’t caused a huge
selloff. Investors don’t seem to be worried about the financial reform…
and the Goldman stuff looks to be a short term blip.
It tells me the financial markets are ready to shake off the bad news
and move higher from here. It’s not guaranteed, but when you see the
markets shake off bad news like this, they often head higher.
An easy way to profit is by grabbing a few shares of
Financial Select
Sector SPDR (XLF). It’s an ETF holding a basket of financial stocks. For
those of you a bit more aggressive, you might take a look at
Goldman
Sachs (GS) shares… they’ve pulled back a bit recently.
Over in Europe, Enel Green Power SpA is preparing to go public. The
company is looking to bring in just over $5.4 billion for green energy
projects. The success of this IPO could set the stage for the next wave
of public companies… those focused on green energy and green living.
We’ll know more by June when the deal is expected to be ready to go.
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