Friday, September 16, 2011

Flip Sides of the Same Coin

As everyone knows, President Obama has surrounded himself with crony corporatists in order to brandish his credentials as a business-friendly President.  The transactions between them are fairly standard and straightforward.  In return for government contracts, subsidies, regulatory exemptions, tax breaks and the like, corporate chieftains like Jeff Immelt at General Electric and Andrew Liveris at Dow Chemical do the President's bidding in public affording him a much needed fig leaf with which to cover his lack of interest in actual business.

While the distinction is not always clear between businessmen and those who capitalize them, George Soros and Warren Buffet are another species of the genera "businessmen" altogether.  They are investors, financiers, money people.  Yes, they do business, and yes Fortune 500 CEO's deal with finances.  Yet, these investors' primary distinction is buying and selling things, not making and marketing them.  Soros runs a hedge fund that makes investments, sometimes hands on.  Buffet runs an insurance company that uses float to make investments.

Watching these two over the years, and especially during the current Administration, Noman has come to recognize them as flip sides of the same coin.  Buffet is a bull.  He buys low to sell higher.  His is the happy side of investing, the optimistic order, plain vanilla.  Soros is a bear.  He sells high to buy lower.  His is the dark side of investing, the pessimistic order, rocky road.  Both the long and short sides are legitimate in Noman's book.  But, they require different acumen.  The long trader sniffs out greed and divines where it will take hold driving men mad with the lust to own.  The short seller sniffs out fear and divines where it will take root driving men mad with the urge to flee.  Each sees where the other side, the investor's recessive inclination, has driven price to excess, and steps in at a comfortable margin of safety where market price deviates from some standard of intrinsic value.  Each pounces and waits for the inevitable to transpire.

Something else these two men have in common is that they've figured out how to get a sneak peak at tomorrow's newspaper.  Not content to wait for time to vindicate their choices, they are able to plant tomorrow's news through the agency of government.  Nothing of what follows should be taken to discredit the financial brilliance of either man.  But the public-private line, which shouldn't be crossed, seems to be regularly violated by this White House and its investor friends.

Buffet, the famed value investor, is a student and protege of the master himself, Benjamin Graham.  Lately, he's taken to investing in a new niche: crisis investing, or vulture-light.

He's been in the news recently because CEO Jeff Immelt of General Electric, President Obama's Jobs Czar, wishes to use the company's untaxed profits to buy back $3.3 billion of preferred shares that GE was forced by the crisis to sell to Buffet's Berkshire Hathaway in the fall of 2008.

The deal will net Buffet $1.2 billion, or a 36% return on a chunk of money in just three years.  Combined with even shorter term profits from crisis loans to Goldman Sachs ($1.7 billion profit) and Swiss Re ($1 billion profit), it's not hard to see why he's referred to as the Oracle of Omaha.

Nevertheless, Buffet is not happy:
In his annual letter to Berkshire shareholders in February, Mr. Buffett called the repayments of crisis-era investments he made in GE, Goldman Sachs Group and reinsurer Swiss Reinsurance Co. "unwelcome."

"After they occur, our earning power will be significantly reduced," Mr. Buffett wrote to investors. Mr. Buffett, however, restocked his investment cupboard with a deal struck last month to plow $5 billion in Bank of America Corp. The bank got slightly less dear terms from Mr. Buffett than GE did. Bank of America will pay Mr. Buffett 6% annual dividends, or $300 million. And Bank of America will owe Mr. Buffett a 5% premium when it buys back his preferred stock.
The Bank of America investment is Buffet's latest play in his new niche.  Note that he is able to exact hard terms and generous conditions for Berkshire while retaining warrants to purchase inside blocks of stock in these mammoth institutions even after his investment has been handsomely repaid.  Hats off to Warren.

It's a lucrative business for those who can stand the risk that the bailed out company will not go bankrupt a la Lehman Brothers.  That is where a cozy relationship with a beholding President who drops your name repeatedly can be a real comfort.  Noman is watching eagerly to see if Buffet will lend to BNP Paribas, Credit Agricole, or Societe Generale, but doubts that his ties to French President Nikolas Sarkozy are close enough for him to venture it.

Noman was mystified that Buffet supported the economically naive Barack Obama so lustily against John McCain during a financial crisis, using the glitter of his name earned over decades on the investment battlefield to bolster the standing of a neophyte with hackneyed ideas and no business experience save knowing how to use law as a means to shake down corporations.  Perhaps Buffet reasoned that America's inevitable relapse into financial crisis would provide him with exceptional opportunities to ply his new trade.

Soros is a bird of a different feather.  While willing to profit on an occasional oil deal, he's made a career of profiting from other's self-inflicted wounds.  His forte, his genius, is overvalued currencies.

Soros has found his dream in America: a political system that protects people who attack it from within, along with a party wholly dedicated to that activity.   What greater trade than to cash in on the collapse of the greatest economy in human history; and he can dedicate his resources entirely to bringing it about.

Soros doesn't have to wait for folly to bring about ruination.  He can put the right people in place to make it happen more certainly and quickly.  No battle is too small to undertake, e.g., foisting Liberals and trial lawyers onto State judiciaries.   The states will play a prominent role in the dollar's incipient collapse against gold, the Renmibi or some basket of currencies.

But, he really hit pay dirt with President Obama, and Democratic hegemony in Congress between 2006 and 2010, a period during which national debt rose by $5 trillion, the country began routinely running trillion dollar deficits, and quasi-socialized medicine was erected as an entitlement.  Given economy-killing regulation, financial reform that smothers financial activity and a President whose solution to every problem is the redistribution of ever more borrowed money on a scale heretofore unimaginable, Soros must believe there is no chance that this trade will get away from him.  John Paulson move over.  The greatest trade ever will once again be his.  Soros's kill will make $20 billion of investment profit in a year look like piker's winnings.

All that remains necessary is secrecy behind which to operate with as few people snooping as possible.  Happily, Dodd-Frank contained an exemption from transparency rules for hedge funds that the Securities and Exchange Commision (SEC) considers "family office" advisors.   (Did Soros lobby for the exemption?)  After throwing his weight behind passage of the Bill, he has now decided to sidestep it's provisions.  Soros recently availed himself of the exemption by returning $1 billion of outside investor's money, and retiring to manage his remaining $25 billion.
Initial media reports trumpeted the end of Soros' 40-year career as a hedge-fund manager, although the billionaire investor's firm is far from being done. Soros will return less than $1 billion to external investors, a drop in the bucket compared to the firm's total assets of more than $25 billion. 
The reason? Under new requirements from the Dodd Frank act, hedge funds are required to register with the Securities and Exchange Commission by March 2012 if the fund continues to manage more than $150 million in assets for outside investors. The new requirements would call for funds to report information about the assets they manage, potential conflicts of interest, and information on investors and employees. The act allows an exemption for what the Commission considers "family office" advisers.
Noman wonders how much money Warren Buffet will be able to make by picking up broken pieces and injecting them with hard-terms capital.  Ironically, the same cataclysm will provide both men--bull and bear alike--with the substance of their dreams: Buffet's, a world filled with undervalued securities that have nowhere to go but up; Soros's, a world filled with people who deserve what they got for not being him.  Such are the dreams of old lions.

Noman considers these investor friends of the President to be flip sides of the same coin.  Moreover, they strike him as colossal egomaniacs.

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