There is nothing like a public flogging to get the people on your side. At least that seems to be the approach the Obama administration is taking towards financial reform. Over a week that saw an EU's debt downgraded to junk status and an oil rig pouring 5,000 barrels a day into the ocean, the headlines were dominated by Goldman Sachs and a derivatives contract between sophisticated investors.
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Buffett's Carrying "Weapons of Mass Destruction"?
Warren Buffett has referred to derivatives as weapons of mass destruction (WMDs), but his fears of their destructive potential hasn't stopped the world's greatest investor from using them. It should come as no surprise that a company as diverse as Berkshire Hathaway (NYSE:BRK.A), which has a portfolio of companies spanning everything from insurance to soft drinks, uses derivatives contracts to hedge risks and, yes, even make a profit. Buffett is against provisions that would require Berkshire to set aside billions in capital to cover derivatives contracts it has written. His argument is that existing contracts shouldn't be altered by new financial regulations. (Get to know some of the best stock pickers, their strategies and how they got their starts in The Greatest Stock Picker Of All Time?)
Contract law tends to side with Buffett, as does Nebraska Senator Ben Nelson. Buffett is, of course, one of Mr. Nelson's constituents and a donor. Between the Goldman investment and the fight against derivatives regulation, the results of the Berkshire shareholders' meeting is going to be followed more closely than usual - no small feat for an event that has become the Woodstock of investing.
Palm's White Knight
Going from the top of the heap to rock-bottom isn't easy, as any washed out star currently doing reality television can probably tell you. In March, 2000, Palm Inc. (Nasdaq:PALM) hit the market with a huge IPO that saw the shares jump from $38 to $165 - better than 300% in a single day. After the internet bust was followed by some disappointing years, the company settled into the $10-$18 range. This year, you could have picked up the former tech star for less than a cup of coffee. Fortunately for Palm, Hewlett-Packard Co. (NYSE:HPQ) has swooped in as the white knight, paying $1.2 billion to acquire Palm. HP may be getting ready to use Palm's handheld experience to enter the tablet market - a market set to get more crowded with the introduction of the iPad.
Greece in the Dumpster
After flirting with it for weeks, Greek debt was finally given a junk rating. This means that Greece's cost of borrowing will increase sharply because investors will have to pay much more to insure the debt against default. The pressure on the Eurozone has been ratcheted up another notch because of the downgrade. The euro was already under huge pressure, and the plan to bailout Greece is in danger for several reasons. Some of the countries expected to help bailout Greece, like Spain, Italy and Portugal, are in no better shape. They are seeing downgrades on their debt due even as they are agreeing to further outlays to rescue another country's balance sheet. (How will the fallout from Greece's sovereign debt crisis impact investors on Wall Street and Main Street? Find out in EU Economics? It's All Greek To Me!)
Fiscally conservative Germany saw this coming and made sure strict budget restrictions were a condition of entering the Eurozone, but the enforcement has been lacking. With every other nation spending like drunken sailors, Germany is being forced towards propping up the system with its credit rating. The Eurozone is far from shattered, yet there does seem to be some hairline cracks.
Jobs Hates Flash
In a clear case of the pot calling the kettle black, Steve Jobs has accused Abode's Flash of being a closed system and all the Flash products of being proprietary. Mr. Jobs apparently doesn't use the internet for anything but publishing letters, or he may have noticed these are complaints that people have, as shocking as it sounds, leveled at Apple. I'm not making this up.
Everyone Hates Goldman
Last, but not least, the ongoing Goldman Sachs flogging before the Senate has been grabbing headlines all week. It was a spectacle right from Fabrice Tourre's emails to a universal refusal to apologize for, well, that's the question. Is Goldman on trial for letting sophisticated billionaires place a bet on whether a group of overleveraged U.S. homeowners would default on their mortgages? Or is it for encouraging such bets? Or is it for somehow not telling congress to stop Freddie and Fannie from churning out mortgages that were at the heart of the crises? Or is it for making money while other people lost money?
Good luck figuring it out from the questions leveled at the firm. Still, the SEC is undeterred, and a Federal probe is going to get to the bottom of, well, whatever it is that Goldman did wrong. (Despite the airtime this scandal has received, the details aren't clear. Find out what happened and how it affects you in The Goldman Sachs Fraud Explained.)
The Bottom Line
Money is lost and made daily - lots of money - and only a few of those stories are ever told. We know Warren Buffett is making money off his investment in Goldman - half a billion every year - and writing derivatives that he makes more money on. We know Goldman made money selling synthetic CDOs. We know John Paulson made $1 billion betting against mortgages using one of these CDOs. And finally, we know poor budgeting skills are keeping Greece from borrowing - let alone making - enough money to keep itself (and the EU) out of trouble. What we still don't know is how worldwide financial regulatory changes are going to impact this daily business of making and losing money.
At least we have the aftermath of the Berkshire shareholders' meeting to look forward to.
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