by Addison Wiggin & Ian Mathias
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How the most profitable trade in history saved Goldman Sachs
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Another bank bites the dust… another SWF lines its pockets
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Chris Mayer on how falling home prices are even worse than they seem
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Our Maniac Trader on corn ethanol’s “dead zone”… plus his picks to usurp the ethanol throne
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Ron Paul zealots lash out at The 5… your editors set the record straight
Three analysts at Goldman Sachs just took the prize for the most profitable trade in history. In the wake of Goldman’s earnings statement yesterday, we’ve come to learn that a trio of traders — none over 40 years old — were all but single-handedly responsible for keeping Goldman’s head above water in 2007.
Long story short, the three shorted the subprime market like no other market has been shorted before… to the tune of over $4 billion in profits. Proceeds from the trade were wiped out thanks to bad bets elsewhere in the firm, but this gamble will still go down as the most successful of all time (ousting George Soros’ $1.1 billion gains from shorting the pound in 1992).
And good deeds don’t seem to go unnoticed at Goldman Sachs… each of the three men are reportedly getting $10 million bonuses this Christmas.
That deal certainly piques our “short” interest. We’ll be launching Dan Amoss’ Strategic Short Report in early 2008… keep an eye out for it. In the meantime, there’s one way to get it for free… learn about it here.
But it might not be all sunny skies and rainbows over at Goldman…an unnamed senior executive told CNBC yesterday that the firm’s November performance was “horrible” and that last two weeks were possibly the worst in Goldman’s trading history.
“November was very difficult,” was all Lucas van Praag, Goldman’s chief spokesman, was willing to say. We predicted yesterday that Goldman might lose its sterling reputation in 2008… perhaps 2007 still has some fight left in ’er. It might go something like this:
Morgan Stanley posted its first-ever quarterly loss today. The bank added another $5.7 billion to the previously announced $3.7 billion in write-downs. The nearly $10 billion in write-downs spelled a $3.5 billion loss for the firm this quarter… ouch.
But wait, it gets worse. Morgan Stanley simultaneously announced a $5 billion injection from… drumroll please… a sovereign wealth fund! China’s state-owned China Investment Corp. now owns a multibillion-dollar stake in Morgan Stanley, worth barely less than 10% of the whole firm.
“The collapse of the housing market is worse than it looks,” says Chris Mayer. “Interesting story in the WSJ today about how sellers are offering bigger incentives to buyers. These incentives don’t show up as part of the public record, which records housing transactions. But they can be substantial.
“What’s happening is something like this: Someone sells a house for $200,000, but gives $20,000 in incentives. For purposes of tracking housing prices, $200,000 is the sale. In reality, of course, the true net price is only $180,000.
“This practice fools all the data-gathering services. Bottom line: Housing prices are falling more than reported.”
If you’re looking for a housing-proof portfolio, few are more reliable than Chris’ Capital & Crisis recommendations. His readers are up about 25% this year despite some of the worst market conditions since the tech bust. Click here to learn more.
Ben Bernanke and the Fed proposed significant new mortgage restrictions and laws yesterday. Under the Fed’s proposed regulation, mortgage lenders would be forced to show that subprime borrowers can realistically afford their mortgages. Lenders would also be required to more overtly disclose the types of fees and rate adjustments that are currently crushing subprime homeowners.
And of course, Bernanke suggested that borrowers be allowed to sue lenders that violate his proposed rules. That’s precisely what the country needs… more government-enforced regulations and civil lawsuits.
Bernanke’s proposal certainly doesn’t help subprime borrowers already in trouble. Yesterday’s RealtyTrac data showed nearly 202,000 foreclosure filings in November, up 68% from the same time last year. Nevada once again topped the foreclosure charts, with a filing rate of one in every 152 homes.
By the time any kind of subprime regulation or bailout comes to fruition, we think this crisis will have already taken its toll.
Here’s a sizable correction to a report in yesterday’s 5: The government announced earlier this week that the entitlement deficit had grown a trillion bucks, to $45.1 trillion in 2007. Slap on at least $4 trillion more, says our government stats watchdog John Williams.
“On a consistent basis, year to year, I estimate the 2007 deficit at $5.6 trillion, or worse,” writes John in his latest Shadowstats report.
“The results show that the GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare, narrowed to $1.2 trillion in 2007, from $4.6 trillion in 2006. The reported reduction in the deficit, however, was due to a one-time legislative-related accounting change in Medicare Part B that likely will be reversed, and, in any event, needs to be viewed on a consistent year-to-year accounting basis.
“The [Treasury’s annual financial] statements show that the federal government’s fiscal woes continue to careen wildly out of control. The phrase ‘out of control’ is not used loosely. If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.”
“Creating money this way is a barbaric process because it further debases the dollar,” writes James Turk in response to the latest round of liquidity injections by the world’s central banks. “But it is hailed by the banking insiders and their apologists as a brilliant maneuver to fight the worsening liquidity crunch. Of course, it is a view of those with vested interests and, bluntly, is just their selling pitch to the masses.”
“We are in a monetary crisis… It is a crisis of fiat currency, where ‘money’ can be created out of thin air in an instant and in any quantity, which are actions that cause people to distrust the money. This lowers the demand for the debased money, and eventually leads to a flight from it.”
The bright side to this story, according to Mr. Turk? These waves of injections create “a wonderful opportunity to buy more gold bullion and get rid of overvalued dollars, dollars that continue to be debased and inflated.”
Gold prices traded flatly overnight in the $800-805 range, most likely waiting to hear the results from the Fed’s cheap money auction on Monday.
And as European printing presses whirred to record-breaking speed, the dollar continued its recent rally. The greenback is now up to $1.44 on the euro and $2 even on the pound. The dollar index has held steady at 77 all week.
“The costs of corn-based ethanol are getting more expensive by the day,” reports Kevin Kerr. Aside from the usual ethanol shortcomings — expensive startup, low fuel yield, depletion of the world’s food supply, etc. — Kevin’s found even more tangible evidence of the ethanol hoax — the expanding “dead zone.”
“The dead zone is a 7,900-square-mile patch of ocean that has been ravaged by runoff from the Mississippi River. The river is a conduit for millions of pounds of nitrogen that is used to fertilize all of this corn.
“The nitrogen makes its way into the Gulf and basically depletes all of the oxygen. Fish, shrimp, crabs and vegetation all suffocate… just another example of the devastating impact of corn-based ethanol. I was on the air with a Louisiana radio station and the phones lit up to talk about this subject and to try to find a solution. One thing is clear: More corn is not the answer.
“To me, biofuel and bioheat from soy- and sugar-based ethanol are the clear winners going forward. The damage corn-based ethanol causes, coupled with the low return on investment, means that corn-based ethanol is not likely going to last.
“That doesn’t mean corn as a crop will not continue to do well — not at all. Corn demand is higher than ever and will likely just keep going. The big winners, however, will be sugar and soybeans once the shift to a better alternative begins, likely sometime in mid-2008.”
For more on the ethanol hoax, click here.
“The scary part of everything happening is that while most think 1929 cannot happen again,” writes a reader, “because, after all, we crashed once in the ’80s and the computers took over and saved us. Sadly, it can happen again. The market CAN crash.
“A Depression CAN happen again because we are now worse off overall than in the 1920s. The current account deficit is beyond scary. It’s a global disaster waiting to happen. We continue to treat government like a money tree — all you have to do is walk outside and pick what you need. Tomorrow will take care of itself!
“The best protection will be for small investors to be debt free, at the very least. House — paid off or close to it. No credit cards sitting there with thousands in outstanding debt. School loans… paid off entirely.
“Even the middle class readers can do that if we play wisely with investments, make smart decisions, take advantage of trends and don’t run out and take a second and third mortgage for the addition to the house. Make wise trades, and do it with confidence to take control of your own future. The future is not going to be nice and you’ll need a truckload of cash to pay for milk if the political class doesn’t do what needs to be done.
“It will make the fall of Rome look like a tea party.”
“Your nihilist approach to Ron Paul and the presidential status of the U.S. show you to be just another apathetic who deserves any other useless president that comes along,” writes a reader. “Paul does stand a chance, and he could well win. But it won’t be thanks to anyone like you. It might take a virtual revolution, but that could happen, and would be preferable to your acquiescence to failure.
“Future reality is never a done deal; it is always in the making. Get out there and make a new future, instead of slouching around saying, ‘I have to take the one they are gonna give me,’ or, by implication, ‘The system cannot be changed.’ Rubbish. The system will change. It’s just a matter of how and when. Your apathy is an invitation to an even worse one.
“If you are American, you might be better off just emigrating to Panama, Nicaragua or some other haven and renouncing your American citizenship, as you are incapable of even giving verbal support to those offering help with the administrative problems plaguing your country and people.
“Anyone content on accepting a bad system deserves to stay suffering in it. As such, I expect you to never again say anything against the Fed or IRS: You deserve them.”
The 5 responds: Perhaps. Or maybe we’ve been spending absurd amounts of time writing books that explore fiscal responsibility (sweet irony, eh?) and governmental change… and obscene amounts of money financing a movie that highlights these issues and the efforts real people are making to change them. Yeah, come to think of it, we’ve spent most of 2007 working on it, day and night, while still taking time to write to you and run our business. If that’s what you call “slouching” and “apathy,” we’d love to know what you’ve been up to.
Boy, we’ve really come to admire how Paul’s supporters believe he’s the answer to all that plagues us.
For what it’s worth, we never said we wouldn’t vote for him… although it’s looking like we won’t ever get the chance. The political system is too broken, too corrupt, to usher someone like Paul into the Oval Office. No amount of angst on your end is going to change that. In our work, we aim to encourage you think for yourself, which in turn will make you richer, happier and smarter… we hope. “You can’t guarantee success,” we often paraphrase Winston Churchill saying, “but you can deserve it.” Working to that end is a much better use of our time — and yours — than getting involved in public causes.
You are right, however: We do believe the “system” will change. But it’s going to take a fiscal crisis of massive proportions to shake people out of their apathy and wake them up to the issues Ron Paul champions. Trust us, we’ve been barking up this tree for nearly 15 years. Your average Joe couldn’t care less about things like the national debt or the demise of the dollar. And in our view, they will continue to slumber until disaster forces them to change.
Or until they see the movie I.O.U.S.A., starring, among others, umn… your buddy Ron Paul!
To my mind, the fact that you’re suggesting we don’t have a right to write about the Fed or the IRS is just as knuckleheaded and oppressive as those very organizations themselves. It’s your kind of zealotry that makes politics dangerous.
Hope you can enjoy your evening,
Addison Wiggin
The 5 Min. Forecast
ADDITIONAL RESOURCES
The $4bn killing
Fed Approves Plan to Curb Risky Lending
November foreclosures take a dip