Goldman Sachs will be in the dock on Tuesday. Not in court, but in front of a U.S. Senate committee, where seven current and former employees, including boss Lloyd Blankfein and the self-styled Fabulous Fabrice Tourre, will appear. The danger is that the hearing becomes consumed with grandstanding and headline-grabbing hectoring. For past missteps to be avoided, more thoughtful probing is called for. Here are three possible icebreakers.
1. Would you do the Abacus deal again? The Securities and Exchange Commission has sued Goldman and Tourre for securities fraud, a charge the firm vigorously disputes. The deal in question is a synthetic collateralized debt obligation sold in early 2007, one of a series called Abacus. This complex beast was created primarily to allow Paulson & Co, a now-famous hedge fund, to bet against U.S. subprime mortgages. In hindsight the whole structure looks sketchy. Even Blankfein, in written testimony prepared for Tuesday’s hearing, concedes that Goldman needs to strike a better balance between clients’ trading desires and “what the public believes is overly complex and risky.”
Warren Buffett has been uncharacteristically silent about Goldman Sachs. The lack of public comment is especially curious given his $5 billion investment in the firm and the possibility a board director leaked news of that deal to an alleged insider trader. Buffett may be wise to keep his counsel; the investment bank isn’t making itself easy to defend.
It was a different story in March. “You cannot find a better manager” than Lloyd Blankfein, the firm’s chief executive, Buffett told CNBC at the time.
Dr. No has finally stopped James Bond. Producers behind the British spy movie series have put the next film on hold because of financial woes at the Metro-Goldwyn-Mayer studio. Presciently, the villain in the 2006 update of “Casino Royale” was a rogue trader who shed tears of blood; maybe the franchise can capitalize further on anti-Wall Street sentiment for the delayed 23rd installment in the series.
MGM’s troubles stem from a 2005 leveraged buyout that saddled it with too much debt. Its private equity owners — including TPG and Providence Equity Partners — have had the studio on the block since November. The uncertainty has led EON Productions to postpone the next 007 film indefinitely.
John Paulson “greatest trade ever” may be losing some of its luster. His hedge fund made some $15 billion betting against the U.S. subprime mortgage market. But one extremely profitable deal has led to a Securities and Exchange Commission fraud suit against Goldman Sachs. Paulson & Co isn’t charged, but the SEC’s portrayal isn’t favorable to the firm and could have wider repercussions.
Washington’s main securities regulator alleges that Goldman sold collateralized debt obligation securities in a deal where it failed to disclose to investors that Paulson had been influential in selecting the underlying residential mortgage bonds. The lawsuit also says buyers weren’t told Paulson was betting against them with credit default swaps — ultimately making the firm $1 billion. Goldman said the charges are “unfounded in law and fact.” Paulson didn’t immediately have any comment.
By Jeffrey Goldfarb and Richard Beales
The private equity industry looks poised to think bigger again. Buyout barons have spent almost three years twiddling their thumbs with pint-sized deals. The industry’s last 11-figure deal was Blackstone’s $27 billion purchase of Hilton in July 2007. And the acquisition of IMS Health in November is the only LBO to exceed $5 billion since the crisis hit. Yet there appears to be scope to double that in the not-so-distant future.
The money certainly has become available. In addition to dry powder held by the biggest private equity firms, banks are eager to lend again — even without demand from collateralized loan obligations to stoke the buyouts. Bubble accoutrements, including staple financing, covenant-lite loans and PIK toggle features, have re-emerged to make deals easier and more tempting for private equity firms. Interest rates also remain near historic lows and fixed-income investors have rediscovered an appetite for risk.
Bill Lockyer, the California state treasurer, is asking big banks which underwrite the state’s bonds to tell him about their role in the market for related credit insurance. It’s a fair question. And this kind of disclosure could be a better way to deal with concerns about credit default swaps than a hasty and simplistic ban.
Lockyer said in letters to six big banks that he had no preconceived notions about the banks’ role in CDS markets. But some of his questions were clearly aimed at potential conflicts that have been widely aired in recent months.
Janet Yellen has a reputation as a monetary dove. After all, she thought deflation a risk when she became president of the San Francisco Federal Reserve, and has suggested inflation may be too low now. But Ms. Yellen displays hints of talons beneath her feathers that could change the way the central bank does business.
Of the three new possible Fed governors to be proposed by the Obama administration, Ms. Yellen would be most influential in setting monetary policy. As a member of the Federal Open Market Committee she universally voted with the majority, but has hinted recently she thinks inflation is undesirably low – running below 2 percent.
Warren Buffett’s annual missive to Berkshire Hathaway’s shareholders is out. Among the usual folksy nuggets, the Sage of Omaha notes that he funded Goldman Sachs, General Electric and others at the height of the crisis.
The $21 billion invested is now worth a quarter more and yields 10 percent annually. Short term at least, that’s more than Buffett’s bet on railroad Burlington Northern Santa Fe is likely to deliver.
Bank regulators haven’t exactly covered themselves in glory. But an earlier defense against bank excesses ought to be their boards. It’s not an easy job, but directors could try harder to control risk-taking. Uncomfortable questions are welcome.
One worth repeating, with the financial crisis slowly fading and 2009 results heralding a possible return to normality for some U.S. and European banks: “Why are we doing so well?”
Irene Rosenfeld is clearly feeling lucky. The Kraft boss upped her price to secure Cadbury’s agreement to a takeover. But in reducing the stock component, she also removed a disapproving Warren Buffett’s chance, as Kraft’s biggest shareholder, to vote against the deal.
The Berkshire Hathaway boss had already expressed concern about the deal Rosenfeld was lining up for the British confectioner. Now, the Nebraskan investing legend has gone on the record with CNBC saying he is doubtful of the terms Rosenfeld agreed with Cadbury this week and would vote against the transaction if he could.