Tuesday, September 30, 2008

Warren Buffet Drove Hard Bargain With Goldman

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This article was taken from Wall Street Journal. A very interesting read indeed:

For six months, as the credit crisis deepened, billionaire investor Warren Buffett turned away a string of Wall Street firms that came hat in hand looking for help.

On Tuesday, Mr. Buffett says, he was sitting with his feet on his desk in Omaha, drinking a Cherry Coke and munching on mixed nuts, when he got an unusually candid call from a Goldman Sachs Group Inc. investment banker. Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal.

[Buffett, Warren]

Warren Buffett

That midday call from Goldman's Byron Trott, who had done deals with Mr. Buffett for years, touched off a rapid chain of events. Within hours, Goldman had announced that Mr. Buffett's Berkshire Hathaway Inc. would invest $5 billion in Goldman -- a move viewed by many investors as a vote of confidence in the nation's reeling financial system.

The swiftness of the deal underscores the intense pressure now faced by Goldman, long regarded as one of the most financially secure firms on Wall Street. Over a 10-day stretch this month -- amid federal bailouts of Fannie Mae, Freddie Mac and American International Group and a bankruptcy filing by Lehman Brothers Holdings Inc. -- Goldman shares dropped 36%. Investors began asking questions about whether it had the capital to survive. On Sunday night, Goldman secured federal approval to become a bank holding company, ending 139 years as a securities firm.

On Wednesday, Goldman said it had completed a separate $5 billion stock offering, double the size of the offering announced on Tuesday. Its shares jumped $7.95 to $133 in 4 p.m. New York Stock Exchange trading, although they remain far below their 52-week high of more than $250. The deal with Mr. Buffett and the stock offering means Goldman shareholders could eventually have their stake diluted by as much as 20%.

Mr. Buffett's decision to invest now in Goldman gives an indication of how the famed investor believes the financial crisis might shake out. At a minimum, he regards Goldman as a survivor, although the firm's profits could be pinched as it adjusts to life as a banking holding company, taking fewer risks and facing heightened regulation.

In a telephone interview Wednesday morning from his office in Omaha, Mr. Buffett said he believes the proposed federal bailout will be approved by Congress and that it will succeed. "The government has a great opportunity," he says. "If they buy things at market prices with the government's cheap funding, they should make a lot of money."

If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments."

Goldman's moves in recent days mark a repudiation of the strategy that catapulted the firm to enormous success. At one time, Goldman was a white-shoe investment bank that made its mark advising corporate clients on deals. In recent years, it became a hard-charging trading firm, more akin to a hedge fund than a bank. Run by Lloyd Blankfein, a former gold salesman, Goldman borrowed enormous sums to fund big trades. Profits soared, and the rest of Wall Street -- from Merrill Lynch & Co. to Lehman to Morgan Stanley -- followed suit.

[Blankfein, Lloyd]

Lloyd Blankfein

Neither Mr. Blankfein nor Mr. Trott, the Goldman banker who reached out to Mr. Buffett, responded to requests for comment.

This year, as the credit crunch tightened its grip, investment banks began to suffer. At first, Goldman reveled in its position as one of the strong players. Unlike many competitors, it hasn't posted a quarterly loss during the crisis.

But Goldman appeared to miscalculate how serious and how long the crisis would be. "We're probably in the third or fourth quarter," Mr. Blankfein said in April. "We're closer to the end than we are to the beginning." In June, Goldman's chief financial officer echoed those views. Even last week, as Goldman reported its worst quarter since becoming a public company in 1999, executives dismissed the notion that Goldman couldn't survive the storm without radical action.

'Should I Go On?'

Out in Omaha, Mr. Buffett had been fielding calls for months from Wall Street firms and other investors who wanted him to take part in rescue efforts. The first major pitch came on Saturday, March 15. Bear Stearns was reeling after clients had removed billions of dollars from the securities firm. Federal regulators were pushing for a white knight to buy Bear Stearns before the Asian markets opened late the following day.

Mr. Buffett received a call at 4:30 p.m. that Saturday from a private investment firm trying to assemble a group to buy the embattled financial giant. "I'm calling about Bear Stearns,'" the private investor began, according to Mr. Buffett. "Should I go on?'"

Mr. Buffett recalls thinking: "It's like a woman taking off half her clothes and asking, 'Should I continue?' Even if you're a 90-year-old eunuch, you let 'em finish." Mr. Buffett says he passed on the proposed deal. Bear Stearns was bought by J.P. Morgan Chase & Co. the following day.

A few weeks later, in April, Lehman executives made a pitch to Mr. Buffett to participate in a round of financing. Mr. Buffett says he felt the Lehman offer was unrealistic and he decided not to participate.

Lehman went on to raise billions of dollars more from other investors at terms similar to those it offered Mr. Buffett. But the pressure continued to build. Talks with a Korean bank failed to materialize. The government brought two ailing mortgage giants, Fannie Mae and Freddie Mac, into federal conservatorship. The financial markets were rickety.

[Berkshire Hathaway goldman chart]

By Saturday, Sept. 13, Lehman was collapsing and insurance giant American International Group Inc. was on the ropes. Mr. Buffett was in Edmonton, Canada, at a charity dinner when he started getting calls about AIG. Fielding calls throughout the weekend, Mr. Buffett considered a $5 billion insurance transaction, part of a larger effort to save the insurer that involved other investors. That transaction fell apart, and the Federal Reserve assembled an $85 billion bailout package for AIG three days later.

This past weekend, Goldman's top leadership -- Mr. Blankfein, co-presidents Gary Cohn and Jon Winkelried, and chief financial officer David Viniar, among others -- discussed ways to raise capital. The executives figured with the market's current emphasis on safety and soundness, the firm might need more capital, according to people familiar with the matter.

The executives soon zeroed in on Mr. Buffett as an ideal option. His holding company, Berkshire Hathaway, had often used Goldman as an investment banker on deals. His reputation, both for smart investing and solid ethics, would likely give investors the reassurance they needed, the executives reasoned.

Mr. Trott had approached Mr. Buffett before with at least one offer to invest in Goldman. "They had sounded me out in the past, as everyone else had," Mr. Buffett says. The previous offer, he says, was "nothing I would say 'yes' to."

"The swiftness of the deal underscores the intense pressure now faced by Goldman, long regarded as one of the most financially secure firms on Wall Street."

On Tuesday, however, Goldman put the ball squarely in Mr. Buffett's court. Mr. Buffett is famous for making quick investment decisions based on his gut. For the Goldman deal, he says, "I didn't see a book. I just made a judgment." The quality of Goldman's management team and its franchise, he says, sealed the deal for him.

He didn't insist on a complicated term sheet, he says. Instead, he spent 15 minutes with Mr. Viniar, Goldman's chief financial officer, outlining points of the deal. "They asked me about this or that," he says. "It sounded fair."

By the time markets closed in New York at 4 p.m., Mr. Trott was sealing the deal with a final call to Mr. Buffett. Mr. Blankfein was in Washington for the day to brief members of Congress about the state of the markets. After the deal was struck, he called Mr. Buffett. "We talked for five minutes," recalls Mr. Buffett, who says he told Mr. Blankfein to "keep working."

Mr. Buffett left his office at 7 p.m. and spent the evening reading the newspapers and "nibbling" on Cheetos and licorice pastel candies. He says Mr. Trott "called me once or twice to tell me what was going on with the equity offering." Mr. Buffett was asleep by 10:30 p.m.

Goldman executives were working the phones in hopes of raising more capital. Armed with a list of about two dozen of the firm's top investors, executives canvassed shareholders to see if they'd be willing to add to their Goldman holdings. It was an all-night affair.

Mr. Winkelried fine-tuned the details of the Buffett investment, and David Solomon, the firm's co-head of investment banking, coordinated the stock offering. By 8 a.m. on Wednesday, the group had gathered on the 50th floor of a Goldman building in downtown Manhattan to figure out who would get shares and at what price. They finished in time to announce a $5 billion offering, shortly before 9:30 a.m.

Sweet Deal

For his $5 billion, Mr. Buffett receives "perpetual" preferred shares that aren't convertible into equity, but pay a 10% dividend. That payout equates to roughly $1.3 million each day. He also has warrants to buy Goldman shares at $115, which, if he exercised Wednesday would theoretically net him a profit of more than $600 million. If Goldman's earnings grow at a modest pace, he could make a tidy profit, some investors say.

Some investors are griping about what they say is a sweet deal for Mr. Buffett. But some Goldman shareholders say Wednesday's stock offering was too good to pass up. "The valuation was right, the business expertise, we feel, is unparalleled, and the money coming in from Warren Buffett at this time was a catalyst to add to our position," says Tom Marsico, CEO of Denver-based Marsico Capital Management LLC, one of Goldman's largest investors.

Mr. Buffett's investment isn't without risk. As a commercial bank, Goldman will be forced to curb much of the risk taking that generated big profits. Hedge funds and private-equity firms are likely to try to lure away Goldman's stars with fatter pay.

The question now: Will Mr. Buffett -- whose firm has invested a total of about $24 billion in a number of ventures in recent months -- plunk down more money on Wall Street?

He says he remains interested in some of AIG's businesses "if they are available." He adds: "I still have some money left."

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Monday, September 29, 2008

Bond Market Weekly Commentary - 26 Sep 2008

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The bond market was well supported despite the sell-off in US Treasuries at the start of the week. The announcement of the 3-year MGS reopening amounting to RM3 billion was well received by the market and buying interest was apparent thereon. Although players traded cautiously ahead of the August CPI on Wednesday, the market remained resilient and ended the week on a positive note. Out in the news, August CPI remained unchanged at 8.50%, slightly above market consensus of 8.40%. Despite the high CPI reading, inflation is expected to moderate in the coming months in view of falling global food and fuel prices. The Government also announced another RM0.10 cut in petrol prices to RM2.45 per liter effective Thursday.

Government Securities

The government securities market was traded range bound at the start of the week before buying interest flocked the market post announcement of the 3-year MGS. The average daily turnover fell slightly to RM1.37 billion compared to RM1.6 billion registered last week. Focus for the week was on the reopening the 3-year MGS MN09/11. The When Issued for the RM3billion issue was traded in a range of 3.96% - 4.05%. The auction fetched a decent bid to cover ratio of 2.2 times and was issued at an average rate of 3.983%, with the high and low seen at 4.002% and 3.95% respectively. Trading interest was also apparent at the short end of the curve with the off-benchmark stocks maturing in 2009 & 2010 were well demanded by both local and offshore investors. Week on week saw the 3-year MN09/11 closed 6bps lower to 3.97% whilst the 5-year MJ07/13 fell 2bps lower to close at 4.08%. At the longer end of the curve, the 10-year MS02/18 continued its impressive run by closing 6bps lower to 4.65% while the 20-year MX09/28 shed 5bps lower to 5.15%. Short term bills closed below 3.50% as a result of a strong demand from corporate investors.

In terms of sovereign spreads, the 3/5s widened by 4bps to 11bps. The 5/10s narrowed by 4bps to 57bps while the 10/20s inched up by 1bp to 50bps.

The Week Ahead

The holiday shortened week shall see a range bound trading market with little volume. As most traders will be away for the festive holidays, we do not see any major changes in the market next week.

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Bond Market Weekly Commentary - 19 Sep 2008

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The credit crisis in the global financial market led by the bankruptcy of Lehman and the bail out of AIG has shifted the investment focus towards the safe haven assets as equity market tumbled significantly during the week. The bond market rallied at the start of the week in tandem with the huge gain in US Treasuries. Speculation on Fed rate cut also contributed to sizeable buying flows from interbank and corporate players. The Fed however maintained the benchmark rate at its current level and technical correction took place on Wednesday. Coupled with weaker MYR and uncertain political development, bonds erased earlier gains and looked softer by midweek. Nevertheless, selective buying by underinvested funds saw the market closed slightly stronger as at the end of the week.

Government Securities

The volatile week saw turnover in government securities increased to RM1.6 billion compared to RM1.08 billion traded last week. In tandem with US Treasuries, the market started on solid ground and was well supported by good buying flows. The significant downward move in yields also triggered aggressive short coverings at the long end of the curve and yields continued to plunge by midweek. Although the market corrected on the back of FOMC inaction on rates, it has certainly recovered from the post budget slump due to over supply concerns. The significant fall in oil and commodity prices has eased the global inflationary pressure and despite the still high local headline inflation, the pressure is clearly lower with potential cuts in pump prices in the coming months. The 3-year MN09/11 dominated the volume for the week and was traded to a low of 3.87% on Tuesday before closing 1bp lower to 4.03%. Liquidity in the 5-year MJ07/13 was much improved and the stock closed 5bps lower to 4.10%. At the longer end of the curve, the 10-year MS02/18 closed 7bps lower to 4.71% after touching its 3-month low of 4.56% on Tuesday whilst the 20-year MX09/28 received good demand post auction and closed 6bps lower to 5.20%. The short term bills closed unchanged at 3.53%.

In terms of sovereign spreads, the curve continue to flatten with the 3/5s, 5/10s and 10/20s gapped down by 4bps, 2bps and 1bp respectively.

The Week Ahead

Focus this week will be on the announcement of the 3-year MGS re-opening and players are expecting an issue size between MYR3 – 3.5 billion. Bearing any surprises in the issue size, we expect buying interest to reemerge after the recent correction.

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Sunday, September 14, 2008

Bond Market Weekly Commentary - 12 Sep 2008

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The bond market had a slow start for the week as players stayed sideline ahead of the 20-year MGS announcement. Trading activities picked up during the middle of the week as local players reacted to the lower than expected issue size of the 20-year MGS. Good flows were seen from insurance players and this has spurred further buying interest across the curves. News that the Government will discontinue the windfall profit levy on independent power producer (IPP) was positively received by market players and this ensured a strong finish for the week.

Out in the news, Industrial Production (IP) slowed to an 11-month low of 1.8% y-o-y in July, slightly lower than consensus estimate at 2.1%. The slowdown in IP signals some degree of moderation in the economy despite the still robust growth in export. With the global economic growth slowdown becoming more pronounced, exports and IP growth would likely soften in the coming months, as the lackluster external demand would probably lead to a cutback in production. However, resilience in domestic demand as indicated by strength in imports would provide the necessary support to offset some negative impact from waning external demand.

Government Securities

In line with the usual auction ritual, turnover in government securities increased to RM1,075 million compared to RM865 million traded last week. Although the market started on a cautious note ahead of the 20-year MGS announcement, buying interest was apparent during the middle of the week as players reacted to the lower than expected issue size for the 20-year MGS. Local flows continued to flock the market and with insurance players joining the buying fray, sentiment continued to remain bullish for the rest of the week. The 3-year MN09/11 dominated the volume for the week and was traded to a low of 3.99% before closing 14bps lower to 4.04%. The 5-year MJ07/13 was lightly traded before closing 19bps lower to 4.15%. Trading in the 10-year MS02/18 was rather choppy and saw an intra week swing of 30bps. The stock was bought to the week’s low of 4.73% before retreating on profit taking activities to close 23bps lower to 4.78%. The When Issued for the new 20-year benchmark MX09/28 was traded in a range of 5.18%-5.24% prior to its auction. The RM2 billon stock was auctioned on Friday with a commendable bid to cover ratio of 1.94 times. The stock was issued at an average rate of 5.248% with the high and low seen at 5.30% and 5.20% respectively. Post auction, the stock was lightly traded and closed at 5.26%. Despite the volatile USD/MYR, short term bills closed relatively unchanged at 3.53%.

In terms of sovereign spreads, the
3/5s and 5/10s narrowed by 5bps and 4bps to 11bps and 63bps respectively.

The Week Ahead

We expect further buying on the 20-year MGS and this could spearhead another bullish run for MGS this week. Nevertheless, players will be a bit cautious ahead of the 3-year MGS auction at the end of the month and this could cap the bull run.

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Monday, September 08, 2008

Bond Market Weekly Commentary - 5 Sep 2008

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The selling pressure resulting from the higher than expected budget deficit continued this week as players reacted to the revised auction calendar issued by BNM on Monday. Increasing concerns towards the oversupply factor saw yield curve continue to steepen for the week. The fact that MYR continued to weaken against the greenback and closed at the year’s high of 3.4600 also contributed to the bearish sentiment in the market.

Out in the news, export growth accelerated to 25.4% in July, from a revised 18.6% in June, significantly above consensus expectations of 14.5% and accelerating from 20.8% in 2Q08. Despite the slowdown in global economy and falling commodity prices, July trade surplus surged to the second highest on record. While some slowdown is inevitable given the global slowdown in 2H08, robust imports and a large trade surplus suggest a degree of resilience in economic growth.

Government Securities

Turnover in government securities fell to RM865 compared to RM1.2 billion traded last week as players stayed sideline and remained cautious ahead of the announcement of the 20-year MGS auction. The market started the week on a weaker note in reaction to the revised auction calendar issued by BNM and never recovered from that. There will be 6 more public issues for the rest of the year, an additional 2 issuances compared to the original calendar. In addition to that, there will also be 5 private placements to be conducted until year end. Selling pressure was imminent throughout the week as players continued to shed their position in anticipation of higher bond issuance for the rest of the year. The 3-year MN09/11 was the most active stock for the week, rising 26bps higher to close at 4.18% whilst the 5-year MJ07/13 was lightly traded before closing 34bps higher to 4.34%. The 10-year MS02/18 breached the psychological 5.00% mark and closed 19bps higher to 5.01%. No trade was reported on the 20-year MX05/27. In the bills market, offshore players were seen liquidating their position in tandem with weaker MYR. The 1-3 month bills closed 5bps higher to 3.55% in heavy trade.

In terms of sovereign spreads, the 3/5s widened by 12bps to 16bps whilst the 5/10s narrowed by 19bps to 67bps.

The Week Ahead

We expect sentiment to remain bearish ahead of the 20-year MGS auction. Market direction will also be largely influenced by the movement in spot USD/MYR.

Writer's view

The bond market is totally in deep shit now. Although BNM will hold the OPR at 3.50% for the rest of the year, the market can't stomach a total of RM6 billion worth of issuance in the space of 3 months. Expect the bloodbath to continue especially after the annoucement of 20-year MGS tomorrow. A simple direction towards trading....short whatever u can short.

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Monday, September 01, 2008

Bond Market Weekly Commentary - 29 Aug 2008

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Trading interest in the local bond market picked up for the week despite the higher than expected July’s CPI. The dovish MPS following the Central Bank’s decision to maintain the OPR at 3.50% was seen the catalyst for the rally in bonds at the start of the week. With corporate and real money investors joining the buying fray, the market maintained its bullish note for most part of the week. The Permatang Pauh by-election had no impact on the market despite the continued weakness in MYR. The market however, ended the week on a softer note as profit taking activities took place ahead of the 2009 budget tabling on Friday. News that the 2008 budget deficit will hit 4.8% of GDP, much higher than the original deficit plan of 3.1%, saw continued selling pressure on the bonds as players anticipated a larger bond issuance to meet the Government’s financing requirement for the year.

Government Securities

Government securities was actively traded during the eventful week with average daily turnover jumped to RM1.2 billion compared to RM634 million reported last week. The market started on a positive note as players took cue from the dovish MPS that dashed any likelihood of a rate hike for the rest of the year. Short covering activities at the longer end of the curve also contributed to lower yields at the earlier part of the week. However, the market succumbed to late selling pressure on Friday resulting from the higher 2008 budget deficit. The 3-year MN09/11 closed 7bps higher to 3.92% whilst the 5-year MJ07/13 was lightly traded before closing 4bps lower to 3.96%. Trading in the 10-year MS02/18 was rather volatile for the week. After being bought to the low of 4.68%, the stock was aggressively sold towards the end of the week and close 1bp higher to 4.82%. Some odd lot of the 20-year MX05/27 was traded at 5.05%, 3bps lower than last week’s level.

In terms of sovereign spreads, the 3/5s narrowed by 7bps to 4bps whilst the 5/10s widened by 5bps to 86bps. The 10/20s meanwhile shed 4bps lower to 23bps.

The Week Ahead

We expect the selling pressure to continue as players started to digest the impact of higher budget deficit on the bond market. The market will also be cautious ahead of the announcement of the 20-year MGS issuance in September.

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