Goldman – why the sudden change??

One week before Goldman declined any need for fresh capital and suddenly they called Buffett to offer him a sweet deal. To hire him as they cheerleader for the sale of the bailout plan and for more capital. What do they need the $10 bil. for??

First of all, they have around $50 bil. tier 3 capital. That is, by definition, what we know as toxic, since it’s illiquid and hard to price. Goldman was very agressively unwinding toxic material and had entered massive hedges on mortgage exposure, which (we have to admit) was a smart thing to do.

Goldman has only marked down roughly $5 bil. in losses so far and basically should not need fresh capital, since if buying a bank with deposits is the issue, they could swap their stock and the merger partner would gladly except the stock offer. That cannot be the raeson at all. I suspect that, due to the upcoming situation, Bernanke and Paulson plan to buy assets far above ‘value’ and will create absurd potential for profits for the better informed ones. My assumption is that this bailout plan will raise the prices of some assets easily by 100% ( e.g. if something was marked at 20% and Paulson buys it at 40%) that will create an outstanding opportunity to make big money. Goldman is famous for this trading smartness. They examined the books of LTCM to the needle under the idea to bail them out before they finally collapsed and took according positions that need to be covered by LTCM and made a fortune. The $10 bil. they raised just before the bailout plan has the background to collect parallel to the Treasury, since the government will deliver a floor for the prices and resell them higher. I hope that the Treasury will not go ahead and buy those securities sold to Private Equity from Goldman, Merrill and UBS at higher prices. They do not need a bailout. They will have a benefit anyway by this transaction and that is the part of this bailout which does not make any sense. I agree that a capital injection of new equity is inevitable but not this program, which aims to buy assets at steep premiums and create an temporary artificial market where some insider pundits can make a killing but the core problem does not get solved.


~ by behindthematrix on September 25, 2008.

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