Blain’s Morning Porridge 24 Oct 2019 – Boeing, Tesla and Goldman

Blain’s Morning Porridge  – October 24th 2019

“You steal a little and they throw you in jail. Steal a lot and they make you King.” 

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Book: The Fifth Horseman – How to Destroy the Global Economy, is on Amazon in Kindle or book format.

October 24th 2019

It’s Mario Draghi’s last day chairing an ECB meeting today. End of an era – move along, nothing to see..

Boeing – yet more evidence they are numpties. 

I have to accept I am a complete idiot.  I’ve been so focused on the many trees representing Boeing’s multiple problems: its failure to make planes airlines want to buy, its pursuit of profits and management bonuses over safety, it’s wobbly finances in the wake of unpaid for aircraft, potential fines and claims, plus the loss of credibility – that I missed the forest:  the dismal quality of its management who clearly understood precisely nothing about their company.

The proof is in its Stock Buyback history.  In 2018 it bought back $9 bln of its own shares, and boosted dividends by 20%.  It approved a further $20 bln stock buyback for 2019.  Its stock price has rising pretty much in line with the $40 plus bln in equity its bought back in recent years.

Conventional logic says companies buy back stock when they perceive it as the most efficient thing to do with their profits.  It’s also an alarm bell warning of unimaginative/poor management.  Perhaps the right thing for Boeing to have done in the mid-2010s would have been to invest $10 bln to develop a new modern smaller regional single airliner?  Instead Boeing’s bosses went with the bull stock market, stuck some bigger engines on the venerable and increasingly unbalanced B-737 and gave it the snappy Max moniker, while awarding themselves bigger bonuses.

The cost of the Max debacle will far exceed $10 bln and could crush the company.  Their failure to invest in the future during times of easy money is the ultimate management failure – failing to ensure the company’s long-term future with new products.  Instead they chased a higher stock price and higher bonuses juiced by the buybacks.  Numpties indeed.  Sack them all.

How many other senior company executives have made the same short-term mistake?  How many were seduced by the rising stock market, access to cheap and easy debt from the bull bond market?  Leverage up companies to push up stock prices?  The rot goes right across the corporate world. Central banks and politicians are complicit – QE, Austerity, bad regulation… The unintended consequences of the last 10-years are coming back to bite us all.

Tesla – a profit?

Long-term porridge readers know I blow hot and cold on Tesla. It surprised the market to the upside last night, by producing numbers that we’re nearly as bad as the market expected.  It’s on course to sell shy of 400,000 cars this year, which still means it’s a small fry specialist firm.  Yet its valuation would say it’s a world leader.

Declaration: I own 10 Tesla Shares.  I keep them out of curiosity.  They will either be worth nothing or a lot.  I’m just not sure which.  There is massive value in the data Tesla has collected in terms of driverless cars, but I reckon we are years away for that reality.  They dominate the EV sector and forcing everyone else to play catch up – with raises long-term competition issues for them.  Their existing line up of cars is looking tired, but they will intro a new sports next year.  The only thing I’m certain of – Tesla is probably not worth $50 bln.  That doesn’t mean it doesn’t have a future.

I do find it hilarious to view the comments sections on any Tesla story: opinion is extreme – with Telsaphobes or Musk-o-philes and few perspectives inbetween. Some will praise Musk as the greatest visionary of all time, and say they’ve invested their whole pension pot in him. Others call him a con-man.  I’m pretty sure the reality is out there somewhere… (I’d judge Musk by his actions: his disgraceful accusations about the British diver who rescued kids trapped in a cave does not speak in his favour.)

Goldman Sachs.. 

I read a story this morning about Goldman Sachs sacking a senior banker over compliance violations in the Middle East.  Excellent stuff.  Suggests the Squid is learning.. but far too late.  It’s also the day a couple of former Deutsche Bank traders will face the judge in NY accused of the most heinous crime in financial history – rigging LIBOR!  Anyone with any real understanding knows the charges are bunkum – individual traders wishing for a high or low rate were more than balanced, and the real effect of the “fraud” will have been a rounding error. Yet the authorities are determined that justice is seen to be done and the guilty proven so!

All of which compares rather badly to what’s going on in Malaysia.  I am reading a superb book at the moment. For a racy story and improbable characters, I really can’t recommend better than The Billion Dollar Whale.  (If you can’t find the time, try the BBC’s Channel 4 Storyville: “The PM, The Playboy and the Wolf of Wall Street” for the gist of the story.)  The fact a Malaysian Sovereign Wealth fund got conclusively turned over by the country’s kleptocracy is bad enough, but in the introduction to the book is the line:  “Goldman Sachs has made unfathomably large profits helping the fund raise money”.  It looks like about half the $8 bln Goldman raised for the fund was nicked.

Gosh. Surely not?  Goldman is the universally admired top investment bank, advisor to the rich and powerful and centre of the Davos set…. Someone must have pulled the wool over their eyes?  (US Readers – raised eyebrow (denoting sarcasm) alert.)  That the Vampire Squid Sucking the Face off Humanity (allegedly) might have been duped into ramming its feeding funnel into the Malaysian people’s rainy day development fund must be profoundly shocking to clients of the firm.. but the only surprises for anyone working in professional finance will be they apparentlygot caught.

In today’s compliance driven banking business it should be 110% impossible to be facilitate, or miss a financial heist on the scale of 1MDB.  But, no. The story confirms its relatively easy. It’s always been easier to steal a couple of billion dollars than it is the steal a loaf of bread.

I won’t go into the whole story – check it for yourself – but I do think the book doesn’t dwell enough on just how deep Goldman’s involvement in the fraud might have been – despite describing the bond deals as “one of Goldman’s biggest ever paydays”.   The book is littered with similar comments about how the bank operated.  I’d like to understand more, but I’m pretty sure the US journalists who wrote have had it explained carefully to them why they should not to go there.

It really doesn’t matter.  Facts are simple.  Goldman was involved.  The only question is how gullible they were, or how guilty might they be?

Goldman’s former star Asian banker and regional chairman Tim Leissner has already pled guilty in the US to Money laundering and bribing foreign officials.  The books says he admitted circumventing compliance because he knew Jho Low, the playboy at the centre of the scandal, was “dodgy”.  Yikes.

Earlier this week Bloomberg carried a story naming Goldman’s top HK banker, Andrea Vella, currently on a break “preparing for a triathalon” from the bank, as “Co-Conspirator No 4” in the investigation of the fraud in Malaysia.  Court documents says he was briefed on plans to pay bribes and kickbacks to ensure the Fund was able to raise bond finance, for which Goldman was paid extraordinarily high fees for what should have been a quasi-sovereign deal.

Goldman apparently earned 8% fees on $8 bln of effectively SSA bond debt it raised for 1MBD.  That should have set alarm bells ringing.  Vella arranged the deals.  Goldman’s ex-employee Leissner has told US investigators the he and others arranged the fundraising for 1MBD as bond issues specifically to generate higher fees. Who was asking questions internally about it?  He’s said a lot of other things – allegedly.  (Thanks Mr Hislop for reminding me to add that qualifier.)

I suspect the book and its allegations must be true-ish – the efforts made to prevent its publication were extraordinary.  Being gullible of allowing fraud, or being guilty of fraud are both financial crimes.  Has Goldman been punished?  I even read the US Department of Justice is investigating Deutsche Bank over a former Goldman Sacks banker involved in the story its hired.  I was wondering how long it would take for DB to be implicated.

And that’s the really interesting thing…  Can you imagine how the US authorities would be reacting to a European bank so clearly wrapped up – either for being gullible or guilty – in something as fraudulent as 1MDB?  They would have been fined for gross incompetence or for facilitating it.  If it was Deutsche Bank, HSBC or Barclays, I bet my bottom dollar they’d already have paid fines in double digit billions.  But this is Goldman.  So That’s different.  Isn’t it?

Thus far Goldman does not appear to have paid any fines in relation to the case.  At one stage the Malaysian Government was looking for Goldman to divvy up about $7 bln to settle the case for “misreprenting to investors” the proceeds of the bond sales would be used for legitimate purposes, although the latest rumours say a $3.3-2 bln settlement is more likely.  Although the bank intends to “vigorously defend itself”, a settlement that ends the investigation will be great news for the 17 Goldman executives currently under investigation by the Malaysians for their involvement in the trades underlying the fraud.  The US DoJ say they are investigating.

On the much wider global scale, zoom out and look at this in terms of all the other things now breaking across markets: the collapse and bust of the hollow WeWork model, the fact Boeing isn’t making any planes airlines want to buy and has potentially fatally wrecked its future, Nissan and Renault self-destructing over pride, or Saudi Aramco failing to convince investors their fossil fuel based business is worth as much as they think it is.  Snapshots of disintegrating business entitled capitalism?

Goldman is a bank with a reputation for making money.  The fact they are being exposed for not particularly caring how… well that’s for their clients to opine on and for markets to value in terms of their stock price.  Seller.

Five things to Read Today

Thunderer – Big pay packets, freebies and abuse of power: fund managers must wake up

Bberg – Mario Draghi Reaches the End of His Fight to Save Euro

BBerg – Last of the Libor Riggers Face Judge In End to Uneven Crackdown

FT – Boeing targets share buybacks to cover costs from 737 Max Crisis

WSJ – Blue Chips are Lagging Behind The Broader Market

Out of time and back to the day job

Bill Blain

Shard Capital