TMFDeej (< 20)

Scumbags: If you can't beat 'em, join 'em

April 03, 2009 – Comments (7) | RELATED TICKERS: GS , USO

I don't know whether to start this post off by saying what a bunch of scumbags I believe the people at Goldman Sachs are or that I currently own both its preferred stock and bonds.  As the old saying goes, I figured: if you can't beat 'em, join 'em.

Forbes has an extremely eye-opening article on Goldman and the shenanigans that they often pull in this month's issue.  I urge everyone who fell for the parabolic rise in the price of oil last summer, like I did, to read the piece:  Did Goldman Goose Oil?.

The article tells the story of Semgroup Holdings, a private company that imploded last summer when it made huge bets against oil during its record run up to $147 per barrel.  Now Semgroup certainly is not blameless in its demise.  Any time that you load up so heavily on a trade, it lost $2.4 billion betting against oil and its short position represented 20% of the crude inventories in the U.S., you get what you deserve if it backfires.

Having said this, many believe that Goldman traders may have deliberately manipulated the price of oil to create a short squeeze to push up the price of oil up to the point that it would torpedo Semgroup.  Here's how one party who was involved describes what happened:

"What transpired at Semgroup was no less than a $500 billion fraud on the people of the world," says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days. - Author's note, don't ever Google up what Catsimatidis looks like.  He's a freaking mess and will make you want to tear your eyeballs out of your head. Regardless of what he looks like, he's right. -

In hindsight, what happened here is not surprising at all.  Flash back to the late 1990s to the Long Term Capital Management fiasco.  I read the book about that mess, When Genius Failed, a couple of years ago.  It's a great work that ties in very nicely to what is happening today.  I urge all investors to read it.  Any how, the book describes how when LTCM became desperate for funding when things started to go wrong its founder John Meriwether approached Goldman.  Goldman agreed to give LTCM money in exchange for half of the fund and full and open access to its trading strategies and positions,

After reaching this agreement, Goldman sent an army of traders and lawyers to LTCM’s Greenwhich office to inspect its books.  Witnesses say that Goldman traders, downloaded all of the fund’s positions onto laptops and used that information to sell those very same positions at its trading desk, driving the LTCM's equity even lower. 

Flash forward to today and it looks as though history repeated itself in the Semgroup case.  Goldman Sachs gained detailed information about Semgroup's trading positions when it ran into trouble and attempted to do a $1.5 billion private placement deal last spring. 

In short, Semgroup ran into financial trouble, they approached Goldman for help, Goldman forced them to expose themselves in exchange for help that never materialized, and then Goldman used its commodities trading arm J. Aron & Co.to profit tremendously from Semgroup implosion.  J. Aron was Semgroup's largest counterparty.

Again the Forbes piece is a must read.  I take a couple of lessons away from it.  One, regardless of the sound theory behind peak oil and the rapid global growth that we were experiencing oil should have never come even close to rising as fast as it did last summer.  When oil was in its parabolic rise, many people believed that as the immortal Fred Sanford would say "Dis is da Big One" and that the world would never be the same.  That oil would be so expensive that we all would have to grow our own food and walk to work.  Ahhhhh not so fast.  That might happen some day a hundred years from now, but not now.

The other big lesson that I learned from this piece is that the people at Goldman are a bunch of shady scumbags.  That's just the sort of people that I want on my side when investing.  I currently own both Goldman preferred stock and Goldman bonds.  I don't recall the exact yields that I am getting from them off of the top of my head, but I believe that they were approaching double digits when I pulled the trigger.  You too should look into them.

Deej