07.15
I have two obvious questions about today’s earnings hoopla. How in the world is it possible for a company to go from getting multiple bailouts just to survive to all of the sudden raking in record profits in a mere 9 months? And, secondly, why are the regular talking heads so oblivious to this glaring question? It makes no sense. Everybody in the financial media is doing backflips because of the wonderful Goldman Sachs earnings announcement. Um… hey guys. Goldman wouldn’t even exist right now if they had not been pumped full of billions of Federal aid. But, somehow, we’re now supposed to just accept without skepticism, that they made 1.5 billion more in profits in 2009 than they did last year. Nobody finds this odd? SeekingAlpha.com quoted Jim Kunstler on this topic:
The cat coming out of the bag this week — a frazzled, flaming, rabid, death-dealing cat — is the news that Goldman Sachs will announce impressive second-quarter profits, and set aside $18 billion or so for employee bonuses averaging $600,000 per head (though, of course, not evenly distributed among them). There probably are not fifty-three people in the USA who can explain how this development figures in with last fall’s bailout gift from the US treasury, or the $13 billion GS received on the backside of US gift payments to the failed AIG insurance company, plus the reams of necrotic securitized debt paper rotting in the back of the GS vaults. This is a company playing with the fire of world history.
I can understand Intel’s earnings. They are currently ripping large chunks of market share away from AMD, and the technology sector was already pretty lean. But, I can’t get rid of this uneasy feeling that a much worse economic scenario is building behind the scenes while all the talking heads are desperately trying to paint a picture of things returning to normal. Too much in our economy doesn’t make sense any more. I have a feeling that what’s going on in a lot of companies, like Goldman, right now are just accounting tricks. Lots of debt-to-equity conversions and such:
…Goldman is basically marking its loans to the value of the underlying real estate; it’s assuming that all of them will default, and is counting only on recovery value rather than mortgage payments.
…all that debt has been converted to equity. The problem of course is that Goldman doesn’t particularly want to own lots of commercial real-estate. It’s going to end up selling those assets, and when it does, the buyers will have financing — debt will come back. Indeed, there’s a good chance that Goldman itself will finance the sales. That’s the problem with debt-to-equity conversions: they tend to be temporary things, and get followed in due course by the raising of new debt to replace the old.
This just kicks the can down the road. At some point the real value of these companies’ assets will have to be reconciled in the clear. This creation of debt to pay for debt is a secondary bust just waiting to blow. Man, I hope I’m wrong. But I don’t like what I’m seeing.
