Blood in The Street.
By Sin-ming Shaw
When Warren Buffett speaks, the world listens. When he acts, the world better pay attention.
Buffett has bought about 10% of Goldman Sachs. The market considered the purchase a sign of confidence in the company. Not everything Buffett has ever bought worked out as planned though most did.
In 1998 he bought General Re, an insurance company that turned out to be a can of worms giving him not only a close look at a mix bag of derivatives General Re executives had foolishly bought, but also got him into many legal entangles with the government because of what General Re had done.
Buffett did not call derivatives “financial weapons of mass destruction” without good reasons.
While we may feel a little reassured that the Man with the Golden Touch has put $5 billion into Goldman Sachs, we should wonder why Goldman Sachs, supposedly the strongest, the bestest, bluest chip of all the investment banks needed to sell and at the most favorable terms to the buyer no less.
The terms are extraordinary. According to a September 24 New York Times report: “Berkshire Hathaway (Buffett’s investment vehicle) will receive perpetual preferred shares in Goldman, which will pay a 10 annual percent dividend, or $500 million a year. Those dividends take precedence over other payments to common shareholders. Goldman has the right to buy back the shares at any time for a premium of 10 percent.
In addition, Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period. Those warrants are already in the money: Goldman shares closed Tuesday at $125.05, up $4.27, and rose to $134.75 in after-hours trading after Mr. Buffett’s investment was announced.”
You don’t need much financial expertise is realize it was a distress sale. Goldman needed capital badly to have had to agree to such terms. This also means the Wall Street meltdown is at present only on a holding pattern.
The urgency with which Hank Paulson, US Secretary of Treasure and Fed Chairman Bernanke want the US Congress to hand them a blank check of US$700 billion takes on new meaning.
Underlying the urgency must be their realization that without that check available right away, the alternative might be a catastrophe the shape of which one dare not imagine.
There is a risk that an order of an unpredictable kind will be imposed on policy makers around the world by a panicked world.
That new order we can only imagine is likely to have the following elements. The financial markets will have a lot further to fall. Dow at 8000 or lower is not out of the question, with the Hang Seng closer to 14000 than to 24000 within the next 12 months. There will be a rising global unemployment, even in China where growth will be cut short by high inflation and low global demand. Gold could reach 1300 $/oz with oil approaching 200 $/barrel before an inevitable collapse destroying more personal wealth, corporate capital causing further unemployment.
If US Congress and the de facto Paulson/Bernanke Administration – with President Bush an entirely irrelevant figurehead – fail to reach an agreement soon, other countries will have to step in to provide the capital to save Wall Street from sinking into the Hudson River in order to prevent the fallout to trigger a global domino effect.
The incident involving Bank of East Asia is only a tiny pre-appetizer taster of what could hit the major financial centers.
Goldman and Morgan Stanley have already ceased to exist as investment banks, so it is no longer meaningful to use Wall Street as a symbol of American capitalism at its most creative as well as destructive.
Everyone is now a conglomerate bank such as HSBC with an investment banking department under the control of staid bankers who never made it to Goldman or Morgan after graduating from business schools. No one has ever accused HSBC for being creative or efficient.
In the new order governments in Beijing, Moscow, Tokyo, a few multibillionaires such as Buffett, oil-rich Arab sheiks, perhaps a couple of Hong Kong’s super rich, will own Wall Street – after “blood in the Street”.
That’s not all. The radical Republican Party faction that has taken over the US political agenda since Richard Nixon’s Presidency replacing the traditional moderate, middle-of-the-road, fiscal conservatives represented by such leaders as Dwight Eisenhower and Nelson Rockefeller such as the Rockefellers will finally be discredited as a bunch of crazy nuts on par with utopian but ultimately amoral, cynical Marxist that had impoverished Eastern Europe and China for over half a century
What is clear as in soccer that mayhem will result on the field without a competent team of referees. And that means competent regulators and laws to ensure the proper working of the market.
For too long the new Republican Party has been replacing competent public servants with business lobbyists who in that dishonestly twisted logic would represent the best interests of the Market.
Nonsense. They represented narrow financial interests without any regards to the greater good of the country.
The “free market” fundamentalists centered at the Universities of Chicago, Rochester, UCLA will redirect their considerable intellectual prowess to discussing “externalities” or “market imperfections” as the norm, rather than exceptions.
Meanwhile the French will be laughing all the way to their chatty salons celebrating the demise of the “Anglo Saxon” model of economics. They think the Statist model is the way of the future. Until one day, and heavens know when that might be, a swing away from Statism towards a free market will surely occur as certain as the sun will never rise from the west. As greed once again takes over, the world will begin once again a bull market.
Until then, prepare for more surprises. The only certainty right now is uncertainty.
Sin-ming Shaw is a former fund manager and visiting scholar at Princeton.
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