Thursday, January 17, 2008
Why Sub-prime sucks but its Culprits don't?
Imagine you are running a restaurant and you keep fouling up your business, your dishes taste awful and once in a while you get heavy fines from the health authority, you've run into heavy losses, about to go belly up, but yet people are lining up at your door, not for food but bringing cash to invest into your restaurant. Are we in Alice the Wonderland!
This wonderland now exists in U.S. financial sector.
You may wonder why the name of Buffett hasn't appeared on the buyer's list, for he is famous for buying great companies in distressed times. Aren't Citibank and Merrill great names to hold? In case you don't know Buffett has once bought a stake in Salomon Brothers, the then famous investment bank / bond traders and now part of Citigroup. So he already knew too well.
He invested at that time because he personally knew the then Chairman of Salomon, whom in his eyes was an honorable business person (but the business was corrupt). Well of course he also found the price attractive enough. The end result was bitter however and at one time when Salomon was investigated by the SEC and the government about it allegedly cornering the U.S. treasury bill market, Buffett had to step in as the interim chairman and got involved in day-to-day management in order to save the company (also his investment) from being banned from business. Along the way he discovered more about the inner workings of an investment bank which led to his decision to get out eventually.
Investment banking is really about reckless business management using OPM. During good times 50% of profit goes to the employees (in order to retain them), but in bad times, the employees go (because they shouldn't be retained) and owners have to bear 100% of the loss. It's not hard to imagine what the management would do under this payoff structure. This is plain stupid business proposition.
I'm not saying those funds buying now will lose money, they may win big too but only because this is a special situation play. Look at the losses of all the other shareholders. Investment bank as a category can never be classified as an investment.
This wonderland now exists in U.S. financial sector.
You may wonder why the name of Buffett hasn't appeared on the buyer's list, for he is famous for buying great companies in distressed times. Aren't Citibank and Merrill great names to hold? In case you don't know Buffett has once bought a stake in Salomon Brothers, the then famous investment bank / bond traders and now part of Citigroup. So he already knew too well.
He invested at that time because he personally knew the then Chairman of Salomon, whom in his eyes was an honorable business person (but the business was corrupt). Well of course he also found the price attractive enough. The end result was bitter however and at one time when Salomon was investigated by the SEC and the government about it allegedly cornering the U.S. treasury bill market, Buffett had to step in as the interim chairman and got involved in day-to-day management in order to save the company (also his investment) from being banned from business. Along the way he discovered more about the inner workings of an investment bank which led to his decision to get out eventually.
Investment banking is really about reckless business management using OPM. During good times 50% of profit goes to the employees (in order to retain them), but in bad times, the employees go (because they shouldn't be retained) and owners have to bear 100% of the loss. It's not hard to imagine what the management would do under this payoff structure. This is plain stupid business proposition.
I'm not saying those funds buying now will lose money, they may win big too but only because this is a special situation play. Look at the losses of all the other shareholders. Investment bank as a category can never be classified as an investment.
Comments:
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As I understood, this SA prince got Citibank shares which paid a much higher dividend. It makes sense that they would give a special price or perks to these big investors, else these investors could just snap up cheap shares from the market.
Here I found it:
"Singapore and Alwaleed, along with Los Angeles-based Capital Group Cos., the biggest U.S. manager of stock and bond mutual funds, Kuwait, the New Jersey Division of Investment and Weill, will receive a 7 percent annual dividend from the investment in Citigroup."
I'd probably also buy Citigroup shares again if they'd guarantee me a 7% dividend. :-)
Here I found it:
"Singapore and Alwaleed, along with Los Angeles-based Capital Group Cos., the biggest U.S. manager of stock and bond mutual funds, Kuwait, the New Jersey Division of Investment and Weill, will receive a 7 percent annual dividend from the investment in Citigroup."
I'd probably also buy Citigroup shares again if they'd guarantee me a 7% dividend. :-)
# posted by 
: 7:44 PM, January 17, 2008
: 7:44 PM, January 17, 2008
Manok hing,
Yes, special situation plays can be very profitable, and in this case, clearly the last dollar in speaks the loudest. This return is strategy specific only.
But investors like you and me, before buying, will need to factor in that every once in a while we'll be robbed by the bank management and then again by the white knight investors.
Yes, special situation plays can be very profitable, and in this case, clearly the last dollar in speaks the loudest. This return is strategy specific only.
But investors like you and me, before buying, will need to factor in that every once in a while we'll be robbed by the bank management and then again by the white knight investors.
I'll also guess that they got "special" shares, which will mean that in case of bankruptcy of the bank, these investors will be the first to get their money, and the ordinary investors like you and me would be left with nothing. This makes it a relative low-risk investment (for them, not for us. :-)
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# posted by : 3:04 PM, January 18, 2008
: 3:04 PM, January 18, 2008Subscribe to Post Comments [Atom]
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