Jonathan Weil: Goldman, GE, GM and a rigged game

ROUND THE WORLD
Jonathan Weil / Bloomberg November 23, 2008, 0:23 IST

The fleecing knows no end. Take a look at General Motors (GM) 8.375 per cent bond due in July 2033, and feast your eyes on the new world of American capitalism. Yesterday’s price, at about 15 cents on the dollar, tells you the market believes GM will last long enough to make a little less than two years’ worth of interest payments.

Were it not for the chance of a government bailout, in lieu of an imminent Chapter 11 bankruptcy filing, the bonds would trade for much less. And there lies the truth about what America’s capital markets have become: a rigged game. You can see it all over. Nobody who knows anything about General Electric Co (GE) actually believes it’s a AAA credit. And yet the raters at Moody’s Investors Service and Standard & Poor’s continue to give GE their highest mark. Meanwhile, the company just landed government insurance for as much as $139 billion of debt for its lending arm, GE Capital Corporation, which also is rated AAA. If GE were really that strong, it wouldn’t need the help.

At American International Group Inc, the $150 billion ward of the Treasury Department, management had the audacity to claim in the company’s latest quarterly report that it “believes it will have adequate liquidity to finance and operate AIG’s businesses.” In other words, AIG’s executives are counting on a blank cheque from the government, should the money run out again.

If you had considered betting against Fannie Mae and Freddie Mac this summer — that is, when the Securities and Exchange Commission wasn’t banning short sales of their stocks — the biggest risk wasn’t that they would surprise investors by turning in a good quarter. It was that Treasury Secretary Hank Paulson or Federal Reserve Chairman Ben Bernanke would show up before Congress to talk up their stocks and squeeze the shorts.

PAULSON’S STING
Your worry is the same if you’re thinking of shorting Morgan Stanley, Goldman Sachs Group Inc or Citigroup Inc. All Paulson might have to do to separate you from your money is call a press conference. And if you bought toxic mortgage bonds, just before Paulson cancelled Treasury’s purchases of troubled mortgage-related assets, you’ve felt his sting already.

When the government let Lehman Brothers Holdings Inc die, there at least was the sense, for a day or so, that somebody very large wasn’t too big to fail. Today we understand better: The government is picking winners and losers. Instead of just a couple giant government-sponsored enterprises, now we have dozens. With so many beggars in Zegna suits lobbying for handouts, it’s easy to see why lots of Americans are aghast at what our country has become.

Many of the companies receiving bailout treasure will get washed out to sea in the end. When we look back on the money showered upon them, whether to fund banker bonuses or preserve Michigan’s share of the Electoral College, we will wish we had saved it, if for no other reason than to preserve the Treasury’s own AAA-credit rating.

MARKET UNDERSTANDING
Think back to the price of that GM bond. It doesn’t imply that a government bailout would be enough to let the automaker continue as a going concern until its bonds mature. What the market understands is that GM will collapse long before then, no matter how much taxpayer money it gets now. In Congress, lawmakers may be fancying a $25 billion bailout for the auto industry. Yet even if they earmarked all that money just for GM, which has $59 billion more liabilities than assets, it wouldn’t make the company solvent.

ADVANCE KNOWLEDGE
So, for the time being, the clearest path to making money in the public markets is to know in advance what the government plans to do next with which companies, and when — and then trade on it. Let there be no doubt: Plenty of people with access to such inside information are enriching themselves this way now. My guess is none of them is named Mark Cuban, and that the Securities and Exchange Commission will never sue any of them.

It’s long been cliche to say the securities markets are a giant casino. This notion hasn’t been explored enough. Aside from the free drinks, the only reason a rational person would play a slot machine in Las Vegas, aware that the house controls the outcome, is because of the mindless entertainment it promises. For ordinary folks with money to burn, this might be the last, best reason to invest in the US capital markets, too. Good luck.