The Worst Trade in History
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Jon Najarian OptionMonster .com |
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There are some lists you want to see your name on, and others you'd rather not have anything to do with. It would be nice make the Forbes 400, for instance, but not the obituaries.
When it comes to listing the worst trades of all time, many of you might name Atlanta trading Brett Favre to the Green Bay Packers, or maybe Lou Brock for Ernie Broglio, or the Phillies trading Sandberg and Bowa for Ivan DeJesus. Yet as bad as those were, they are dwarfed by the worst trade in history that I am about to reveal.
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To paraphrase my friend Mark Fisher, founder of MBF Clearing and one of the biggest energy trader/brokers in the world, the federal government let the trade of the century slip through its fingers at the depths of the financial crisis. Worst of all, the Oracle of Omaha had already drawn the perfect blueprint, in steps so easy that even a Treasury secretary could follow! Doesn't that make the government the worst trading entity of all time?
For those with short memories, like our officials in Washington, I offer the following:
On Sept. 23, 2008, Warren Buffett agreed to invest $5 billion in Goldman Sachs through a purchase of perpetual preferred stock (take note of the "perpetual" reference). The shrewd chairman and CEO of Berkshire Hathaway also got warrants to buy up to $5 billion of Goldman common shares at $115 each, some 8 percent below where the stock was trading at the time.
In a single bold stroke, when Goldman and the global markets needed it most, Buffett put his money and reputation on the line. He stood to own roughly 10 percent of the bank, and his convertible shares also pay a fat 10 percent dividend.
Just weeks later John Mack, CEO of Morgan Stanley, completed a long-awaited deal to sell a fifth of his own Wall Street pillar to a big Japanese bank for $9 billion.
Yet even with these trades serving as very public models, what did then-Treasury Secretary Hank Paulson ask for? When he extended billions of government dollars to Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, and scores of other wounded financial leaders, did he demand Buffett's tough terms?
No. When these Wall Street giants had their backs to the wall, Paulson gives them our taxpayer dollars--BILLIONS of 'em--for practically nothing!
Spin forward to Oct. 21 this year, and now Geithner (former New York Fed president) is telling us what a great investment we made in Goldman. His office touts the 23 percent return we made on our $5 billion in taxpayer money. Yes, I am glad we made 23 percent, but before we break our arms patting ourselves on the back, let's consider what we might have gotten under terms similar to those negotiated by Buffett.
In mid-October 2008, Goldman Sachs and Morgan Stanley got $10 billion from the Treasury; Bank of America, Citigroup, JP Morgan, and Wells Fargo got $25 billion. If we, the taxpayers of the United States, had gotten terms similar to Buffett's, here is what investments in just Goldman Sachs and Morgan Stanley would be worth, according to my calculations:
Goldman was trading at $115, so a $5 billion stake bought us 43 million shares. With shares running to $180, that $5 billion stake would be worth $7.8 billion, a gain of $2.8 billion. But wait, it gets better--or worse, depending on your view.
Given that additional kicker of warrants on another $5 billion, 8 percent under the market, we'd also own share equivalent (warrants) of 43 million shares at $105. So we'd have made another $3.2 billion.
Thus, the total take before dividends would be $6 billion on a $5 billion investment. Last time I checked, that's 120 percent on our money, versus the 23 percent that Hank got us. I didn't go to Dartmouth as Secretary Paulson did, but I think Buffett got a better deal!
Morgan Stanley was at $17, so a $5 billion stake bought us 294 million shares. With the stock running to $34, that $5 billion stake would be worth nearly $10 billion, for a profit of $4.9 billion.
Again, with that additional kicker of warrants on another $5 billion 8 percent under the market, we'd also own share equivalent (warrants) of 294 million shares at $15.60--a gain of another $5.4 billion.
The total take before dividends would be $10.3 billion on $5 billion investment. That's another 206 percent, versus 20 percent.
Are you kidding me? Hey, if you're not outraged, you're not paying attention!
Jon Najarian will be available to take your questions until Wednesday, November 11. Please use the form below to submit your questions.
Jon "DRJ" Najarian is a professional investor, noted media analyst and speaker, and co-founder of optionMONSTER®. Following a brief stint as a Chicago Bears linebacker, Jon launched his financial career at the Chicago Board Options Exchange (CBOE) in 1981, trading in the pits for some 25 years. In 1989 he founded Mercury Trading, running the company for 15 years until 2004, when he sold his floor-trading operations to Citadel, one of the world's largest hedge funds. More recently, Jon--often known after his CBOE floor call letters "DRJ"--has developed and patented trading applications used to identify unusual activity in stock, options, and futures markets. Most notable is the Heat Seeker® program, which uncovers extraordinary buying patterns from among the millions of quotes per second that stream from America's stock, options, and futures exchanges. Jon is a regular contributor on CNBC.
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