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In case you followed the business and stock market news in the last two or three years, you might know already what's the secret behind this post. If not, it will be revealed to you within the next five minutes.
Going into the year 2008, we saw big problems arousing from the housing markets which started in the USA by giving customers mortgages which they couldn't afford anymore. These customers couldn't afford the mortgages because the interest rates went up steadily each quarter from 2004 on. In 2003 many of the house owners could get mortgages with interest rates of as low as 1 or 2%. But the interest rates have been connected to the fed's interest rate's decision. Which means a rise of the Fed fund rate, gave the mortgage owner a rise of their interest rates, too.
In 2008 these interest rates for mortgages went to over 6% for many house owners. The installments had already been bigger and bigger each month and reached now their climax for these house owners. Many of them hadn't the money already months ago and tried to find second or third jobs, some paid these bills even with their credit cards (with much higher interest rates of up to 25%) just for not getting the red letter of a foreclosure of their house from their bank!
In 2008 several big banks and investment banks collapsed and got bought from other banks or got big cash infusions from the government and the FED. The collapse began in March/April 2008 as Bear Sterns - a big player in CDO's - made too risky investments without backing them up with "real" money (actually none of these big banks have backed up these bets with real money). The other big player in the CDO game is Goldman Sachs which was/is on the other side of the bet(since late 2006) and won big $$ with it during this financial crisis.
In September 2008 the government and the Fed didn't help Lehman Brothers to survive. They simply let them go bankrupt. This caused Goldman Sachs and Morgan Stanley to change on 21st September 2008 from a Investment Bank model to a Business Bank because in this case they could receive help from the Fed and the government.
Two days later it was time for Goldman Sachs as the credit market tightened and the money supply stopped nearly to ask several investors and the government for a cash infusion of several billion $. A smart person came all the way from Omaha, Nebraska to offer Goldman Sachs 5 Billion US-$ in exchange of a favorable offer. He even gets the option for giving Goldman Sachs another 5 billion in exchange for these preferred stocks. These preferred stocks have been not only given to him and his company with a discounted price, they yield him each year with a 10% interest rate (or dividend).
10% from 5 Billion $ = 500 Million $ / 525.600 minutes (one year) = 951 $/minute
Ok, it's only possible if you have 5 Billion $ in your account ;-)
Coming back to the banks, Goldman Sachs bought a lot of these different type of mortgages, mixed them together and sold them as CDO with an AAA-Rating (as the rating of the issuer overrides the rating of the included mortgages) to their investors knowing that some of the mortgages will fail soon. Goldman Sachs even bet against its own created CDOs which led to the actual fraud claims from the SEC against Goldman Sachs.
But for sure Warren Buffet the person who closed this great deal said yesterday on the Shareholder meeting of Berkshire Hathaway in Omaha that he still stands by the Goldman Sachs transaction. But he and the Advisory board will consider another move if the fraud claims develop in a direction which wouldn't be supportable by him and for his shareholders.
What would you tell your investors when you are invested with such a massive amount of money and the stock (Goldman Sachs) already declined over 15%? If Buffet would have told that he might sell it now, the share price would move immediately downwards on Monday's trading day.
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$900 per minute? Reminds me of playing mafia wars on Facebook hehe
ReplyDelete5 Billion dollars is more money than I can conceive. I would be happy with just one million tucked away for financial security. Goldman Sachs is definitely a corporation of greed.
ReplyDeleteHe he he you are right, my blogs do look great here in ur sidebar! ;)
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