Goldman Executives Duke It Out!
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.
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?
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.
Category: Stocks
