Thomas Montag, the new head of of global sales and trading at Merrill Lynch (NYSE: MER), better be worth it. Everyone now knows about his pay package. In a government filing, documents show that he will be guaranteed $39.4 million in 2008. Beyond that Merrill is buying out his holdings in his former employer Goldman Sachs (NYSE: GS). According toThe Wall Journal, "one person close to Goldman estimated that the hodgepodge of stock-based holdings is worth at least $50 million."
The numbers look big and make nice headlines, but the fact of the matter is that Montag is probably worth it. Merrill's losses have knocked it out of the top tier of brokerages in the minds of many investors. At Goldman,Montag's people made money when most peers were losing buckets. The fact that he is willing to go to MER should calm some shareholders.
The compensation is unique because Montag has this double value to Merrill. He is a gifted trader and executive. And, coming to Merrill is a sign that the firm is not toast. Montag is no idiot.
But, Merrill's problems are not behind it, so Montag probably took his money up-front.
Douglas A. McIntyre is an editor at 247wallst.com.
TheStreet.com's Jim Cramer says they won't fail, but they can't be bought yet.
What do the words "we have enough capital" mean? It means get ready for an offering. Merrill (NYSE: MER) (Cramer's Take) last week said they had enough capital. So did Citigroup (NYSE: C) (Cramer's Take). Of course they left themselves some sort of out. Merrill said it had enough "equity" capital, so it did a huge preferred deal. Citigroup stressed that it had more than it needed, but they just made you look like a moron if you bought stock the other day at $27.
But if you did buy, I have no sympathy for you, none whatsoever. I have no sympathy for you because I have said over and over again that as bank stocks go up, they must issue equity until housing stops going down. Every uptick must be met by equity if the downcycle is elongated.
TheStreet.com's Jim Cramer says they can't be profitable with this huge cost – it's time to move on.
Here's a revelation. The airline industry is disappearing right before our eyes. And it doesn't even matter. They can merge all they want, they can try to cut costs through synergy, but the business can't survive $120 oil. The variable cost is 35% of their expense. That's not tenable and it is going higher. Fares have to double to make it up. That's just not tenable. The Dreamliner's a nice savings, but this American industry won't get there in time to be saved by it.
Last week we saw the big give-up, the departure of even the longest-term investors. The stocks are signaling that most of them will have to restructure through bankruptcy. They have done it before, but this time it doesn't matter. The fare increases have to occur, and they are such that the airline structures can't be profitable. It is one of those industries that can't stay afloat without massive federal subsidies, and that can't happen.
I have hated the airline stocks ever since 1985 when I recommended Delta (NYSE: DAL) (Cramer's Take) and my clients promptly dropped 50%. I reiterate that after the tremendous declines these stocks have, they are still worth avoiding. Don't be tempted to pick up these stocks if oil "swoons" down to $115. The airlines will rally, but they will need to do every bit of financing possible if a rally occurs.
With Citigroup's (NYSE: C) quarterly report, many investors hoped that the bank had gotten most of its bad news out. It wrote off a great deal of its mortgaged-backed inventory and LBO-debt. The firm also said it would fire 9,000 people. That number will likely rise. Citi has pledged that it will cut nearly 20% of its total operating costs.
Some of the gloom around the stock lifted. It traded over $25. It was as low as $17.99 recently.
But, many still view the future of Citi as grim. In an odd way, the quarterly report showed the bank as weaker than investors thought. According to Bloomberg, "The writedowns burned through much of the $30 billion of capital Citigroup has raised since late last year, leaving it vulnerable to further charges and loan-loss provisions." In other words, the bank may have to raise more money, or sell one of its successful divisions. Smith Barney often comes up in that conversation.
Or, if matters get worse quickly and there is not ready capital to bail out the bank, it could still be dismantled in a fire sale. Whether the Fed would turn to JP Morgan (NYSE: JPM) or Goldman Sachs (NYSE: GS) to buy Citi and handle the decisions of which parts must go or whether the firm's board would do it, the alternatives would ruin one of the world's largest financial companies. But, it did get into the mess all on its own.
Douglas A. McIntyre is an editor at 247wallst.com.
Goldman Sachs Group Inc. (NYSE: GS) shares are trading higher after Citigroup (NYSE: C) posted a first-quarter loss that managed to encourage investors. Though C lost $1.02 per share, below estimates of 95 cents per share, revenues came in ahead of targets and investors seemed to be relieved that C's report did not contain any bad surprises. This could mean that the worst effects of the credit crunch may be behind investment banks like GS and C. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on GS.
After hitting a one-year high of $250.70 in October, the stock hit a one-year low of $140.27 in March. GS opened this morning at $176.91. So far today the stock has hit a low of $176.91 and a high of $181.8. As of 12:00, GS is trading at $181.12, up $9.02 (5.2%). The chart for GS looks neutral and improving slightly, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $130 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just three months as long as GS is above $130 at July expiration. Evergreen would have to fall by more than 28% before we would start to lose money. Learn more about this type of trade here.
GS hasn't been below $140 at all in the past year and has shown support around $160 recently. This trade could be risky if the company's earnings (due out in early June) disappoint, but even if that happens, this position could be protected by the support the stock might find around $140, where it bottomed out in March. Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in GS or C.
The FBI says that deceptive practices at hedge funds and some banks may have made the subprime disaster worse. According toReuters, the head of the agency said the bureau's investigation of potential fraud in the U.S. home mortgage industry now encompasses 19 companies in "cases that may have a substantial impact on the marketplace."
While insider trading and accounting fraud may be part of any charges which emerge, one of the biggest single issues may be the sales practices of the firms which sold subprime paper to their clients. The subprime instruments were often presented as having high credit ratings and safe risk profiles. Of course, it didn't work out that way. Another problem may be whether mortgage banks were completely honest in what they told home-buyers about how their loans would work as their interest rates increased over time.
Some of the investigation is a witch hunt. Large banks which took subprime instruments onto their balance sheets had plenty of genius-level analysts who could have examined the products. At most firms, so one skipped that part. Caveat emptor and all that. Individuals who took on home mortgages sold by people who did not want them to read the small print is another matter.
Rumors are that Goldman Sachs (NYSE:GS) and and Morgan Stanley (NYSE:MS) could be targets of the probe. Countrywide (NYSE:CFC) is already under investigation. One news report on the potential scandal said that FBI head man Robert Mueller told a meeting of lawyers "that their corporate clients should come forward and admit any wrongdoing before the FBI or Justice Department become involved.."
That'll be the day.
Douglas A. McIntyre is an editor at 247wallst.com.
Since I have been a shareholder of Berkshire Hathaway (NYSE: BRK.A), I have enjoyed reading with great interest the musings of company chairman Warren Buffett as he gives almost a play-by-play review of the year in his letter to shareholders. He writes in a tone I would compare to Will Rogers, the writer, actor, comedian, cowboy and former mayor of Beverly Hills.
"My pal Warren" highlights both the triumphs and disasters of the year and his own perspective of the State of the Union and the economy like only he can. I strongly recommend investors take the time to read his letter(s).
One of the most often referred to items in Buffett's letters is regarding the quality of the management at each of the companies that Berkshire owns, or has major stock holdings in. There are many shrewd investors who will make a convincing argument that the quality of management is the highest priority.
He glowingly speaks of the wisdom, integrity and hard work of his management partners. He openly states that one reason that most of Berkshire acquisitions tend to work so well is the mutual appreciation of these character traits they all share. Unlike many companies that look to make money by shaking up the management structure, Buffett bases his investment strategy on keeping the strong management that built the enterprise in place.
Goldman Sachs (NYSE: GS) sure is a downer. I was starting to feel a little better about the market when it decided to say some bad things about the upcoming earnings season. Thanks a lot, Goldman! According to this Bloomberg article, Goldman believes that earnings for companies will be, overall, very bad, and that the broad market will be brought down by them. Already, reports by General Electric (NYSE: GE) and Alcoa (NYSE: AA) have rocked Wall Street -- and not in a good way, let me tell you. Goldman's David Kostin is, in fact, disagreeing with other analysts who believe that the quarter won't be so terrible; he also thinks the S&P 500 will be lower by the end of the year by perhaps 6%.
So, what does this tells us as investors? First of all, let me say that I think the guy has a point -- when you see GE miss like it did on 4/11, you've got to take notice and be on your guard. In other words, if you're planning on doing some cute buy-a-stock-just-before-it's-about-to-report trading, be extra careful! Now is not the time to take ridiculous chances with investment capital. If you are going to do it, make sure you do it with extra-safe stocks -- then again, if GE wasn't a worthwhile trade in the category I just described, what the heck qualifies for "extra-safe" this quarter? Probably not much. All of us have to realize that the recession is, most likely, real, and that stocks are going to be difficult equities to own.
When it comes to mergers and acquisitions (M&A), there has been little doubt that New York City is the center of the action. However, with the credit squeeze -- as well as the emergence of developing countries, such as India and China -- things are changing.
Take Deutsche Bank AG. This week, the firm announced the co-heads for its M&A group, Henrik Aslaksen and Brett Olsher. And they will operate out of London, according to a report from the Wall Street Journal [a paid publication].
Consider something else: the heads of M&A at Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) are also based in London.
There's definitely logic to this. After all, corporate clients want a global perspective and capability. And, for the most part, London has had a storied history in finance -- with strong ties to the rest Europe, the Middle East, and Asia.
As for Olsher and Aslaksen, they both have extensive global experience -- working on such high-profile deals as Tata Steel's purchase of Corus Group.
When's the worst time to raise money? Well, of course, when you desperately need it.
That's the predicament for Washington Mutual Inc. (NYSE: WM), which needs to shore up its beleaguered balance sheet. Rejecting a buyout offer from JPMorgan (NYSE: JPM) for $8 per share, WaMu has instead opted for a $7 billion capital infusion from an investor group that includes private equity maestros, TPG.
Unfortunately, the deal is extremely dilutive. In fact, a Goldman Sachs (NYSE: GS) analyst -- James Fotheringham -- thinks that investors should actually short the common stock of WaMu and buy the company's bonds.
It's a bold call -- but seems to make sense. The capital infusion should be a back-stop on the bonds. At the same time, there is likely to be more problems in WaMu's core business, as the economy continues its sluggish ways.
Simply put, Fotheringham thinks that WaMu shares should trade at its tangible equity value, which is estimated at $9.84 per share. Plus, he thinks there will need to be about $14 billion set aside for charges on bad loans. Oh, and profits aren't likely to come until 2010, which is an eternity for equity investors.
However, for individual investors, it can be quite risky to short stock. In other words, perhaps the best policy is to stay clear for awhile on WaMu.
Shareholders of Goldman Sachs (NYSE: GS) defeated (subscription required) a proposal to give themselves a non-binding advisory vote on executive compensation.
Here's my commentary: What the heck were they thinking? They decided that they didn't want to be allowed to say what they think about executive compensation so that the company's board of directors could take it under advisement.
CEO Lloyd Blankfein earned $68.5 million in 2007. Was that excessive? I don't know, but the company's shareholders should have their opinion heard on this matter.
At the annual meeting, Blankfein argued against the say on pay proposal, saying that it might cast "a cloud, a limitation, a restraint" over a decision that is traditionally made by the company's compensation committee -- and the high-priced consultants they hire who would likely not be rehired if they don't return with a package that the CEO is happy with.
Blankfein's argument is silly. It's a little bit like saying "There's no need to hold elections! Giving the unclean masses a voice would only confuse them. We know what's best!" And remember, the vote would have non-binding. The board could have completely ignored it.
Shame on Mr. Blankfein and shame on Goldman Sachs, but mostly shame on the big institutional shareholders who abstained and/or voted against the proposal.
Apollo Management, which is one of the largest private equity firms, has traded on Goldman Sach's (NYSE: GS) private exchange, GSTrUE OTC. Unfortunately, the shares are down 40% (since August). Of course, other alternative asset managers – such as Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG) – have suffered plunges as well.
So what's the next step for Apollo? Well, the firm plans to trade on the NYSE. The IPO filing calls for raising $475 million of capital.
Apollo got its start in 1990 and profited handsomely from distressed investments (keep in mind that this was after the buyout boom). Now, the firm manages $40.3 billion and has recently raised a fund for $12.5 billion. Over the past 18 years, Apollo has generated an impressive 29% net internal rate of return.
Goldman Sachs
Here are some highlights from this past week's 
Here are some highlights from this past week's 
The FBI says that deceptive practices at hedge funds and some banks may have made the subprime disaster worse. 
Since I have been a shareholder of 
Goldman Sachs
When it comes to mergers and acquisitions (M&A), there has been little doubt that New York City is the center of the action. However, with the credit squeeze -- as well as the emergence of developing countries, such as India and China -- things are changing.
and 
. He also operates 
When's the worst time to raise money? Well, of course, when you desperately need it.
Shareholders of 
Comfort Zone Investing: One thriving area of real estate: Apartments
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
