Australian financial stocks took heart from the move by US investment legend, Warren Buffet to $US5 billion ($A6 billion) in newly created commercial bank, Goldman Sachs Group and to take options to put in a further $US5 billion over the next year.
Other Asian markets were firmer, Europe was unchanged in early trading and then fell by the close with losses reported in most of the 18 markets across the continent. Higher oil prices, the US bailout impasse and higher interest rates hit sentiment.
US futures showed a 1% gain for the Dow and S%P 500 in pre-market trading but that gain faded.
The US markets eased in late dealings as the debate in Washington continued over the $US700 billion bailout plan. Oil and gold were also weaker: the US dollar was steady and the Australian dollar traded around 83.30 US cents.
Much of the optimism generated by Buffett’s move was used up as it became clear from the debate that there was still opposition from Congress, and that the US economy was already feeling the pain and would get worse.
Buffett’s move, announced after US trading had closed Tuesday, buoyed investors here and across the region, and saw US market futures firm after a nasty fall during regular trading.
But the markets were again closely watching the testimony, debate and argument in Washington on the $US700 billion bailout plan.
In some respects it was a repeat of the events of Tuesday, except for the Buffett move.
In Asia late yesterday there were reports that the Sumitomo Mitsui bank of Japan was looking at taking an interest in Goldman Sachs, the third such move by a Japanese financial group to invest in troubled US banks.
Mitsubishi bank has snapped up 20% of the newly created commercial bank (and like Goldman a former investment bank) for $US8.4 billion and the Nomura broking and investment bank is busily recreating part of the failed Lehman Brothers investment bank in Europe, Asia Pacific, and including Australia.
Sumitomo had been considering taking up some of the $US2.5 billion share issue announced by Goldman but the news of the Buffett shareholding seems to have snuffed that idea. Goldman Sachs later raised a further $US2.5 billion to take its funding to a total of $US10 billion.
Here in Australia, the move was greeted like excitedly by some investors as a signal that the canniest investor in the US had made a move that showed he wasn’t that afraid of the credit crunch or the problems confronting US finance.
He of course has been involved in the investment banking industry before (that’s essentially what Goldman Sachs still is; it only became a commercial bank on Sunday when it was approved by the Fed).
At the close, the ASX200 index had risen 58.4 points, or 1.2%, to 4981.9, while the All Ordinaries was up 50.5 points, or 1%, to 5008.2.
The news of the Buffett move helped the major banks with the National Australia Bank up $1.74, or 7.3%, to $25.60, and ANZ 60 cents to $18.64.
But the Commonwealth eased two cents to $44.20 and Westpac was also off two cents at $24.48.
Two stocks subjected to attention from the now banned shorts last week had a better day yesterday. Macquarie Group jumped $3.90, or 10.8%, to $40.00, and financial services conglomerate Suncorp-Metway put on 50 cents to $10.01.
The conversion of Goldman Sachs and Morgan Stanley to regulated commercial banks was the key to the moves by Buffett and Mitsubishi, plus several major changes to regulations about non banks owning shares in US banks.
They can hold up to 33% but exercise control over no more than 15%.
Two days after the Fed rushed through approval of Goldman Sachs and Morgan Stanley becoming full regulated banks (and easing restrictions on ownership of said banks by private equity and other investors), Morgan Stanley sells 20% of itself to Mitsubishi of Japan for $US8.4 billion and Goldman Sachs gets $US5 billion and the promise of more from the biggest name in US finance.
Amazing coincidence? Hardly. A cleverly orchestrated bailout of both banks by the Fed.
Goldman Sachs is now the US’s fourth largest commercial bank holding company and Warren Buffett is it biggest single shareholder. He is also the biggest shareholder in American Express and in Well Fargo, the big Californian mortgage lender and bank.
Buffett is also known as the Sage of Omaha and he’s probably the most respected man in American finance and one of the most admired in the country at the moment.
It was the most dramatic move by Buffett so far: last week one of his companies bailed out a struggling energy company called Constellation at one third the cost back in July, and pumped in an immediate $US1 billion to stabilise that group.
But that had been Buffett’s only deal of related to the credit crunch: he had helped financed two major deals by Mars Inc and Dow, but had passed on all the dogs and sods so far from Bear Stearns, to AIG (Significant because if its one thing Buffett really understands, its insurance) and Lehman Brothers.
He bought 60% of an industrial company last October and earlier in the year bought $US6.l5 billion in auction rate securities when their prices worsened on funding woes: he will make a lot of money from those securities.
Mitsubishi’s move into Morgan Stanley hardly galvanised the US markets, which fell Monday when it was confirmed. Buffett’s move into Goldman came after the close of trading.
Goldman’s shares rose 3.5% in regular trading and another 7% in after hours dealings. The price for the extra option for Buffett is $US115 per Goldman’s share, it’s already in the money with the shares closing the day at $US133.80.
He gets 10% on his $US5 billion and if Gooldman Sachs doesn’t like him and wants to buy him out, he gets 10% more than he paid as a reward.
The decision to seek new capital is a reversal for Goldman, which less than a year ago was posting record profits and paying record bonuses: CEO, Lloyd Blankfein (Who succeeded Hank Paulson, the present US Treasury Secretary, who is driving the bailout plan) and his two top deputies reaped payouts totaling more than $US67 million apiece in 2007.
I wonder if that largesse will be allowed to continue now that Goldman has a new best friend and is a more sedate commercial bank.
Buffett has previously criticised the salaries and compensation of people in investment banks.
Goldman so far has booked $US4.9 billion of losses on devalued assets, a fraction of the write-downs taken by rivals such as Citigroup, UBS, Merrill Lynch and Morgan Stanley. That totals in excess of $US130 billion.
Buffet’s move came after a noisy day also in Washington as the $US700 billion bailout fund idea was battered around the US Senate’s banking and Finance Committee.
The debate sent US stocks lower by over 1.5%, for what turned out to be the worst two day fall since 2002, even steeper than last week’s roughing up which featured a more rollercoaster surge and plunge and then surge.
Perhaps Buffett will save western finance as we know it, but I wouldn’t bank on it, the opposing forces are too strong for even the Sage to stand again. It needs a big, positive lead from Washington in an election year, a big ask!
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