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Greed, Greed, Greed Ain't Good
Martin T. Sosnoff, Atalanta Sosnoff Capital 09.24.08, 7:00 PM ET
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I single out multibillion-dollar hedge funds as the heavies in the destabilizing of our financial markets these past few months. Last week, they came close to precipitating a major financial panic, the equivalent of Black Monday, possibly another 1929.
Welcome to the poker tournament. You're playing against a handful of hedge fund operators who shove huge stacks of chips into the pot, aiming to drive you out of the game shirtless and confused.
Where's their patriotism? Do they want to precipitate a long, deep recession here and abroad? Will 10% unemployment make them happy? Don't they understand that we won the Cold War by compounding our gross domestic product momentum, outstripping the USSR? The Ruskies couldn't match our defense spending dollar-for-dollar, even after cutting consumer goods to a bare minimum.
If bear-raiding hedge fund operators pounced in Russia as they did here, they'd be jailed indefinitely, maybe put up against the wall and shot. Nobody would shed a tear.
I admire smart operators in the financial markets. Warren Buffett and Larry Tisch come to mind. Tisch liked to short stocks, but when he sensed systemic risk he sold Standard and Poor's Index futures. Nobody has a problem with that approach.
Every Sunday night, I take my 5mg Valium tablet, not knowing whether Paulson and Bernanke can pull another rabbit out of their hats over the weekend. I'm afraid to go out to lunch. Either I'll miss the start of the next bull market or another panic session will unfold. Last week, I experienced both on the same day.
I respect the swimming rat axiom. You want to be a swimming rat rather than a dry rat drowning in a sinking ship. How else do you explain everyone crowding into Treasury bills. My chart on yield disparities between triple-A corporates and 10-year treasuries is as wide as I've seen these past 20 years. The same goes for BBB corporates and treasury yields. The widening of the risk premium today is a major depressant because it has raised the cost of capital for everyone but the U.S Treasury.
By now, everyone knows that Wall Street employed too much leverage. How else could headmen take home pay packages of $40 million per annum? Only with an exceptionally high return on equity. Those players are gone and not to be mourned. It's a benign thing to drive Merrill Lynch (nyse: MER - news - people ) into the arms of Bank of America (nyse: BAC - news - people ), and maybe the bank even paid too much for it.
Then the bears snapped at the heels of Morgan Stanley (nyse: MS - news - people ) and Goldman Sachs (nyse: GS - news - people ), less leveraged to iffy paper but somewhat vulnerable. Goldman and Morgan Stanley as stocks danced dizzily on my screen with intraday moves in amplitude of 50% or more--something I've never seen before.
I bought Goldman Sachs near par, their stated book value. My point of view is simplistic. When I can watch smart people work for me at no premium, it's a good to-do. Goldman's management this summer bought back 1.5 million shares at $180 a share. Nobody's perfect! I feel smart to be in around $100.
The most notable point of Warren Buffett's $5 billion investment in Goldman is that the preferred stock carries a yield of 10%. This comes on the heels of JP Morgan's issuance of an 8% preferred now selling at a discount. Preferred stock is an after-tax expense. Goldman paid up to make itself invulnerable.
Back to the hedgies. They destroyed AIG (nyse: AIG - news - people ), where the economic consequences alone from the unraveling of credit default swaps would have contaminated a long list of banks, brokerage houses, even commercial real estate operators and private investors. The U.S. Treasury stepped in and saved the country from a major financial panic.
I'm no fan of AIG. I never believed in Hank Greenberg's magic as an insurance operator. His numbers always looked too pretty to me, like looking at a fake Andy Warhol. Greenberg superimposed the credit default swap guarantee business on a sound insurance underwriter. He deserved to be cashiered. But AIG had operating properties sufficient to weather the storm if given time.
The geopolitical risks of minimal gross domestic product momentum these next few years is something the U.S must overcome. Financial panics destroy consumer spending by eating into everyone's net worth, evenly split today between homes and financial assets. Business are pinched, too, of course, some worse than others. General Motors (nyse: GM - news - people ) is starved for working capital, having tapped its last big credit line at Citigroup (nyse: C - news - people ).
Budget deficits initially rise when you stimulate the economy with deficit spending. Still, we need to rebuild our military establishment, which puts needed infrastructure spending in second place. Restoring a healthy growth rate to the country is pushed further out unless we can unlock the seized up credit system.
I own plenty of Apple (nasdaq: AAPL - news - people ) and Google (nasdaq: GOOG - news - people ), which, I'm sure, are short-selling targets. After all, they stand as high valuation properties that hedge funds short axiomatically if they believe we're in a bear market. Apple and Google can take care of themselves, their balance sheets awash in billions of dollars of excess liquidity. Steve Jobs complained about short-sellers knocking his health status, the reason why he looked so gaunt. Let the shorts gang up on Jobs. He can take care of himself.
In 1929, Andrew Mellon ran the U.S. Treasury. He believed recessions were inevitable periodically. They purged excesses in capital spending and inventory accumulation and happened every five years or so. President Herbert Hoover believed in a balanced budget, and our Federal Reserve Board sat on its hands while investors bought stock on 10% margin. Currently, we have a proactive Fed and U.S. Treasury putting out fires. The country is indebted to Hank Paulson and Ben Bernanke.
Even FDR relented on deficit spending by 1936 after the country stabilized. This precipitated a depression that was ended only by World War II armaments programs. Nearly half a century later, Paul Volcker in 1981-82 put the country into a deep recession with high interest rates to curb inflationary expectations that were out of hand and destroying our competitiveness. The Teamsters and United Auto Workers stood too powerful, creating wage inflation approaching double-digit percentage annual leaps.
Today, our major corporate multinationals stand tall and competitive, but we need to stop the hemorrhaging of our financial institutions and give them room to recover. Then we'll regulate the leverage they employ--on and off of the balance sheet.
So, listen up you ******************** toads on the short side. The country can't afford a deep recession. There are 10 million families with homes underwater, their mortgages exceeding today's clearing prices. Unemployment is rising everywhere, not just on Wall Street. Visit Detroit. Many states and municipalities, starting with New York, will face huge tax receipt shortfalls and dangerously high deficits for years to come.
My solution to the frenzied shorting of financial stocks? Put a 90% excess profits tax on all short-sales for 12 months. Earmark the taxes to shore up the home mortgage sector.
Martin T. Sosnoff is chairman and founder of Atalanta/Sosnoff Capital, a private investment management company with more than $9 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser . He was a columnist for many years at Forbes magazine and for three years at the New York Post. Sosnoff owns personally and Atalanta Sosnoff Capital owns for clients the following stocks cited in this commentary: Apple, Bank of America, Goldman Sachs and Google.
Greed, Greed, Greed Ain't Good
Martin T. Sosnoff, Atalanta Sosnoff Capital 09.24.08, 7:00 PM ET
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I single out multibillion-dollar hedge funds as the heavies in the destabilizing of our financial markets these past few months. Last week, they came close to precipitating a major financial panic, the equivalent of Black Monday, possibly another 1929.
Welcome to the poker tournament. You're playing against a handful of hedge fund operators who shove huge stacks of chips into the pot, aiming to drive you out of the game shirtless and confused.
Where's their patriotism? Do they want to precipitate a long, deep recession here and abroad? Will 10% unemployment make them happy? Don't they understand that we won the Cold War by compounding our gross domestic product momentum, outstripping the USSR? The Ruskies couldn't match our defense spending dollar-for-dollar, even after cutting consumer goods to a bare minimum.
If bear-raiding hedge fund operators pounced in Russia as they did here, they'd be jailed indefinitely, maybe put up against the wall and shot. Nobody would shed a tear.
I admire smart operators in the financial markets. Warren Buffett and Larry Tisch come to mind. Tisch liked to short stocks, but when he sensed systemic risk he sold Standard and Poor's Index futures. Nobody has a problem with that approach.
Every Sunday night, I take my 5mg Valium tablet, not knowing whether Paulson and Bernanke can pull another rabbit out of their hats over the weekend. I'm afraid to go out to lunch. Either I'll miss the start of the next bull market or another panic session will unfold. Last week, I experienced both on the same day.
I respect the swimming rat axiom. You want to be a swimming rat rather than a dry rat drowning in a sinking ship. How else do you explain everyone crowding into Treasury bills. My chart on yield disparities between triple-A corporates and 10-year treasuries is as wide as I've seen these past 20 years. The same goes for BBB corporates and treasury yields. The widening of the risk premium today is a major depressant because it has raised the cost of capital for everyone but the U.S Treasury.
By now, everyone knows that Wall Street employed too much leverage. How else could headmen take home pay packages of $40 million per annum? Only with an exceptionally high return on equity. Those players are gone and not to be mourned. It's a benign thing to drive Merrill Lynch (nyse: MER - news - people ) into the arms of Bank of America (nyse: BAC - news - people ), and maybe the bank even paid too much for it.
Then the bears snapped at the heels of Morgan Stanley (nyse: MS - news - people ) and Goldman Sachs (nyse: GS - news - people ), less leveraged to iffy paper but somewhat vulnerable. Goldman and Morgan Stanley as stocks danced dizzily on my screen with intraday moves in amplitude of 50% or more--something I've never seen before.
I bought Goldman Sachs near par, their stated book value. My point of view is simplistic. When I can watch smart people work for me at no premium, it's a good to-do. Goldman's management this summer bought back 1.5 million shares at $180 a share. Nobody's perfect! I feel smart to be in around $100.
The most notable point of Warren Buffett's $5 billion investment in Goldman is that the preferred stock carries a yield of 10%. This comes on the heels of JP Morgan's issuance of an 8% preferred now selling at a discount. Preferred stock is an after-tax expense. Goldman paid up to make itself invulnerable.
Back to the hedgies. They destroyed AIG (nyse: AIG - news - people ), where the economic consequences alone from the unraveling of credit default swaps would have contaminated a long list of banks, brokerage houses, even commercial real estate operators and private investors. The U.S. Treasury stepped in and saved the country from a major financial panic.
I'm no fan of AIG. I never believed in Hank Greenberg's magic as an insurance operator. His numbers always looked too pretty to me, like looking at a fake Andy Warhol. Greenberg superimposed the credit default swap guarantee business on a sound insurance underwriter. He deserved to be cashiered. But AIG had operating properties sufficient to weather the storm if given time.
The geopolitical risks of minimal gross domestic product momentum these next few years is something the U.S must overcome. Financial panics destroy consumer spending by eating into everyone's net worth, evenly split today between homes and financial assets. Business are pinched, too, of course, some worse than others. General Motors (nyse: GM - news - people ) is starved for working capital, having tapped its last big credit line at Citigroup (nyse: C - news - people ).
Budget deficits initially rise when you stimulate the economy with deficit spending. Still, we need to rebuild our military establishment, which puts needed infrastructure spending in second place. Restoring a healthy growth rate to the country is pushed further out unless we can unlock the seized up credit system.
I own plenty of Apple (nasdaq: AAPL - news - people ) and Google (nasdaq: GOOG - news - people ), which, I'm sure, are short-selling targets. After all, they stand as high valuation properties that hedge funds short axiomatically if they believe we're in a bear market. Apple and Google can take care of themselves, their balance sheets awash in billions of dollars of excess liquidity. Steve Jobs complained about short-sellers knocking his health status, the reason why he looked so gaunt. Let the shorts gang up on Jobs. He can take care of himself.
In 1929, Andrew Mellon ran the U.S. Treasury. He believed recessions were inevitable periodically. They purged excesses in capital spending and inventory accumulation and happened every five years or so. President Herbert Hoover believed in a balanced budget, and our Federal Reserve Board sat on its hands while investors bought stock on 10% margin. Currently, we have a proactive Fed and U.S. Treasury putting out fires. The country is indebted to Hank Paulson and Ben Bernanke.
Even FDR relented on deficit spending by 1936 after the country stabilized. This precipitated a depression that was ended only by World War II armaments programs. Nearly half a century later, Paul Volcker in 1981-82 put the country into a deep recession with high interest rates to curb inflationary expectations that were out of hand and destroying our competitiveness. The Teamsters and United Auto Workers stood too powerful, creating wage inflation approaching double-digit percentage annual leaps.
Today, our major corporate multinationals stand tall and competitive, but we need to stop the hemorrhaging of our financial institutions and give them room to recover. Then we'll regulate the leverage they employ--on and off of the balance sheet.
So, listen up you ******************** toads on the short side. The country can't afford a deep recession. There are 10 million families with homes underwater, their mortgages exceeding today's clearing prices. Unemployment is rising everywhere, not just on Wall Street. Visit Detroit. Many states and municipalities, starting with New York, will face huge tax receipt shortfalls and dangerously high deficits for years to come.
My solution to the frenzied shorting of financial stocks? Put a 90% excess profits tax on all short-sales for 12 months. Earmark the taxes to shore up the home mortgage sector.
Martin T. Sosnoff is chairman and founder of Atalanta/Sosnoff Capital, a private investment management company with more than $9 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser . He was a columnist for many years at Forbes magazine and for three years at the New York Post. Sosnoff owns personally and Atalanta Sosnoff Capital owns for clients the following stocks cited in this commentary: Apple, Bank of America, Goldman Sachs and Google.