Thursday, July 02, 2009

This Just In: Hunter S. Thompson Now Working for Credit Suisse!

We were somewhere around Barstow on the edge of the desert when the drugs began to take hold….

—From “Fear and Loathing in Las Vegas” by Hunter S. Thompson.

So begins the best opening line to a book since…well, if there’s a better one, I can’t remember it.

And while the link between the musings of a drug-addled, gun-crazy journalist and that of Wall Street’s Finest might seem weak at best, we here at NotMakingThisUp nominate the following headline (from the indispensible as Exhibit A in the Case that Hunter S. Thompson did not shoot himself dead, but is in fact working at Credit Suisse:

Credit Suisse says strong case to be made that both GS and MS are overcapitalized…

Seems that certain research minds at Credit Suisse are making a call that Goldman Sachs (GS is the ticker) and Morgan Stanley (MS) might have too much capital.

Why would anybody in their right minds suggest—after what we’ve been through—that two of the remaining U.S. brokerage firms-turned-banks have too much money?

Let’s look at the story:

Credit Suisse notes that it was fewer than nine months ago that many questioned the sustainability of U.S. brokerage business models and only earlier this year that many doubted the notion that investment banking business models could generate adequate returns over the cycle.

So far, so good. It was indeed not long ago that the world seemed ready to implode and nobody in the investment business expected to live to see the next up-cycle.

This, however, is as far as rational thought took the Credit Suisse folks.

Then the drugs kicked in:

The firm now sees a strong case to be made that both GS and MS are overcapitalized. They estimate GS currently holds $6.6-8.6 billion of excess capital, equal in size to a buyback program for 8-11% of the co. They believe MS has the potential to repurchase up to $1.5 billion of its common stock (3% shares outstanding) with that opportunity materially expanding…


It is true that Morgan Stanley and Goldman Sachs have shrunk their asset base from Bubble-era peaks of 33-times equity and 22-times equity, respectively, to a low-teens multiple of equity.

That's a far more manageable chunk of leverage, and far less likely to require the Fed’s support down the road.

But given what we’ve just been through—i.e. the End of the World as We Knew It, to paraphrase R.E.M.—isn’t it a decade or two too soon for Wall Street’s Finest to be calling for the kind of mindless, capital-destroying, Returning-Value-To-Shareholders nonsense that got us into the crisis in the first place?

We here at NotMakingThisUp think so.

But not the normally sober folk at Credit Suisse—whose only excuse, as far as we can tell, is that the spirit of Hunter S. Thompson is alive and well and living among Wall Street’s Finest.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Are these guys joking? Can they possibly be serious? When will they follow up with a proposal to "lever up" with cheap debt to buy back stock? More of the same "high finance" (in the Thompson sense of "high") that got us to where we are today?

Jeff Matthews said...

Unfortunately we are not making this up.


Anonymous said...

That really is the most asinine thing I've seen in at least 4 days. Ready cash is the most important thing any financial institution can possibly have right now. The M0, base money supply, has increased by almost $1 Trillion, but banks' reserves have increased by nearly the same amount because they're all hoarding the cash. There's a reason for this....

Anonymous said...

Jeff: You know, after skimming through the latest 10-Q for GS, I wonder if its net Level 3 Financial Assets "blew up", for which the firm bears economic exposure, what effect that would have on its so-called "over-capitalized" total shareholder equity of $63.5 billion? In the spirit of your mantra, Jeff, I am not making these figures up - readers can see page 23 of the latest GS 10-Q for the Level 3 asset figure and page 3 for their total common equity figure. I think GS is one "black swan" like event away from implosion, but then, I could be wrong!

But What do I Know? said...

What did Talleyrand say about the Bourbons during the Restoration? They have learned nothing and forgotten nothing. . .

Same thing holds for the bonuses GS and MS are about to pay--is it really that urgent to have the big payday? Or are they afraid if they don't take it now it won't be around later?

mistere said...

Have you already forgotten that MS and GS always coveted the commercial bank moniker? I mean how to else explain their weekend conversion, last fall, to commercial banks. Only to be followed by Mr. B's comments on the conference call that they wouldn't do anything hasty. Of course they should buy back the stock....

Also I wonder how GE one of the largest recipients of TARP money can form an entity to invest in PPIP>>>>