(Warren Buffett and Goldman Sachs story updated for Berkshire Hathaway earnings results.)
OMAHA, Neb. (
) -- The last week began with the biggest story in the markets still being the fraud charges against
. It was the big verbal hug offered by
to Goldman Sachs CEO Lloyd Blankfein at the annual shareholder meeting of
, in particular, that dominated last Monday morning headlines.
A lot has changed in the past week. The violent protests in Greece last Wednesday that resulted in three fatalities, followed by Thursday's Dow drop of nearly 1,000 points, pushed macroeconomic fears ahead of any other market headline, and took some of the focus away from Goldman Sachs.
Yet just as suddenly, the announcement on Sunday that Europe was putting forth a $1 trillion bailout package to turn the tide against worldwide investors fears, sent the markets up by huge gains to start the week's trading.
There's just that much less time to worry about a measly little thing like fraud being alleged against the most powerful Wall Street firm when all of Europe is crashing and burning and taking down the global equities markets with it, before Europe is resuscitating those markets after a weekend break from the pandemonium.
Will Europe's bailout package sustain the global recovery, or is Monday's big day just knee-jerk euphoria from investors? The U.S. market has certainly been recovering nicely regardless of the European mess. Last Friday, the monthly nonfarm payroll and unemployment report from the government showed job gains that far exceeded the Street consensus expectation: 290,000 jobs added versus a consenus of 187,000. Yet the markets continued down as Europe took precedence.
Over the weekend, there was more positive news from the U.S., this time directly involving Warren Buffett, as Berkshire Hathaway reported its first-quarter earnings and big gains made by its operating subsidiaries that are most sensitive to the U.S. consumer. In fact, in
the Berkshire Hathaway first-quarter earnings -- the highest revenues generated by the Warren Buffett company in three years -- it was the consumer-linked stocks, and not Buffett's insurance bread and butter, that drove a solid quarter.
While the mysterious cause of the Dow's dive became a bigger riddle than the cause of the underwater well leak in the Gulf of Mexico oil spill, the biggest of cynics might make the case that it wasn't human trading error; it wasn't electronic systems run amok in a market version of James Cameron's Terminator taking control of capitalism -- Adam Smith's invisible hand finally trumped by an algorithm; it wasn't Osama bin Laden; and it wasn't just the general pessimism about the stock market headed for another crash that brought the Dow down by more than 900 points in a flash.
The biggest cynic might be able to convince a few on Main Street that the Dow big dipper was another clever Goldman Sachs manipulation of the markets, this time to deflect attention from its woes. After all, the firm known for doing God's work could surely call in a favor or two from the man upstairs to pull off the markets equivalent of an 'act of god."
All that trading volume ain't a bad thing for Goldman Sachs either. As Goldman Sachs has said over and over again in its legal defense, long, short...what's the difference? Goldman Sachs is just a market maker facilitating the trading of others who decide if they want to be long or short a particular bet.
In the least, this outlandish hypothetical proposition reminds us that the Goldman Sachs issue has not gone away, even as the markets swing high and low on the agony and the ectasy of the day to day changes coming from Europe.
In fact, last Friday was a busy day in terms of news related to Goldman Sachs and the SEC's fraud case: The
Wall Street Journal
reported on Friday that Goldman was working on a settlement with the SEC to stave off an actual day in court, a settlement that would not only require the payment of a big fine, but possibly, an agreement from Goldman to change some of its business practices.
By Monday morning, Goldman Sachs revealed in a regulatory filing with the Securities and Exchange Commission that litigation and investigations related to the sale of CDOs the type of which are the focus of the SEC civil-fraud complaint, could negatively impact operating results.
"We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses. Given the range of litigation and investigations presently under way, our litigation expenses can be expected to remain high," Goldman Sachs said in the filing.
Those Goldman Sachs profits, on the other hand, may be able to easily stomach the impact of litigation. Goldman also announced on Monday that through the first 35 trading days of its fiscal year, it had not had one day with a loss, the first time in its history as a public company during which it had not a single day with a trading loss.
There are already estimates that the SEC case alone will result in a settlement of $1 billion to $5 billion.
Goldman Sachs also held its annual meeting on Friday, a day after CEO Lloyd Blankfein held a conference call with key clients to reassure them about Goldman Sachs' commitment to its clients, and that the firm was not at all distracted from that commitment by the SEC case. Blankfein faced a vote on Friday at the annual shareholder meeting to have him stripped of his chairman's title.
Many of the other big Wall Street firms have already separated the chairman and CEO roles as part of improving governance structure, and institutional heavyweights including CalPERS had voted to force Blankfein to give up the chairman post. Goldman's board was dead set against the change, and while the investment bank is yet to prevail against the SEC, Goldman Sachs did prevail in defeating the shareholder proposal to make Blankfein give up the dual title.
Warren Buffett has said as part of his support of Goldman Sachs, that if he had a brother, he would want the brother to be like Lloyd Blankfein, and so, with the dual titles of CEO and chairman to stay on Blankfein's desk, it's almost as if Buffett has twin imaginary brothers.
All that love between Buffett and Blankfein was, of course, raising questions as to Buffett's impartiality, given the $5 billion investment that Berkshire Hathaway has in Goldman Sachs. As the week began with a 3% gain on Monday for Goldman Sachs, after Buffett spoke up in support of the bank, we wanted the opinion of
of the Buffett-Blankfein Bounce. We asked,
Do you think Warren Buffett and Charlie Munger's words are a reason to be bullish on Goldman Sachs stock?
For the majority, Buffett's word -- leaving aside the words from his right-hand man and Berkshire Hathaway COO Charlie Munger -- is still the word of God when it comes to the subject of God's workers at Goldman Sachs.
Approximately 39% of survey takers were as unequivocal in the belief that Buffett's words were a reason to buy shares of Goldman Sachs as Buffett was unequivocal in his support of the investment bank.
Another 29% of more Machiavellian market gamblers thought Buffett's position on Goldman Sachs was irrevocably biased. However, these voters thought that Buffett's biased words had the power to prop up Goldman Sachs share price.
In all, 31% of survey respondents dared to say they didn't trust the man with best reputation in all the business land. Approximately 26% of votes voiced the moderate opinion that Buffett' s position was too obviously biased by his investment to rally Goldman's stock; while only 5% of voters said they flat out didn't trust the Oracle of Omaha.
While the 31% who doubted Buffett's words were in a clear minority in these poll results, 31% is not a minor indication of lack of trust in a market figure who is defined by his trustworthiness. In fact, when we recently ran a related poll asking
readers if they thought that the
Goldman Sachs fraud charges had tainted Buffett, almost the exact same one-third of voters voted with the negatively affirmative opinion that Buffett's impenetrable armor had been tarnished.
Standard & Poor's wasn't ready to buy shares of Goldman Sachs on Friday, putting out a research note that told investors to continue to view the stock as a sell. "We think any potential settlement would likely involve a monetary fine, and could also include an agreement to change its business practices and oversight." S&P believes that Goldman Sachs faces an uphill battle to rebuild its reputation, and a settlement may only be the beginning.
Nevertheless, most voters in our survey were ready to buy the words of Warren Buffett, and thereby, shares of Goldman Sachs. Shares of Goldman Sachs ended the tumultuous week with a gain of 0.5% on Friday. The closing price on Friday of a penny under $143 was still the second-lowest closing price for Goldman Sachs shares since last July, second only to Thursday's close. Buffett's word may still be worth its weight in gold, but given the wildness in the market, it's a good thing Buffett's words are measured in euros.
On Monday morning, trading in both Goldman Sachs and Berkshire Hathaway was positive, with the solid quarterly profits delivered by Berkshire Hathaway and the European bailout package sending all U.S. shares up. Yet the resolutely positive trading on Monday could not completely mask that fact that when it comes to Buffett, Blankfein and the Goldman Sachs fraud case, there is still a less-than-completely-positive view coming from Main Street.
Warren Buffett may be better served by sticking to reporting Berkshire Hathaway's earnings, as opposed to reporting on the wonderful character of his imaginary brother over at Goldman Sachs.
-- Reported by Eric Rosenbaum in New York.
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