Goldman Sachs: nice guys
Here is a weird article about Goldman's charitable efforts, which includes some anonymous internal grousing about how it's indiscreet ("run as if it's a Broadway show"), too big ($1.6 billion since 2008), and run by someone paid $2 million a year, which I suppose a lot of people share my view that I could give away money and charge you half that. Corporate charity is weird, since it consists of employees giving away shareholders' money, so there are agency problems. This guy knows:
Warren E. Buffett, whose holding company Berkshire Hathaway is one of Goldman's largest shareholders, says he fully supports the work of the Goldman charities, but is troubled by the principle of large-scale corporate philanthropy. After all, most of the money comes out of the firm's profits — out of shareholders' pockets.
"I think Goldman's programs are the best that I have seen," Mr. Buffett said, "but I personally don't like the idea of giving away other people's money."
It's okay though because, as Goldman's John F.W. Rogers puts it, Goldman's charity has "generated returns" in recruiting and presumably public image and keeping the villagers with torches and pitchforks off the castle grounds and so forth. Is that true? Oh I don't know, this article is not the kind of press you'd pay $1.6 billion for, but Goldman's bosses are pretty smart and presumably they know what they're doing. But there's a nagging paradox: If you talk about how your charitable works are improving your bottom line, how charitable do they really seem?
This is old news but indulge me, I've been away. Plus it wouldn't kill you to read it again, it's amazing. Blackstone's credit unit, GSO Capital Partners, bought a bunch of credit-default-swap protection on the debt of troubled Spanish gaming company Codere SA, and then bought into Codere's revolving credit facility. GSO agreed to roll the revolver, in exchange for Codere agreeing to default on its unsecured bonds -- by missing an interest payment by two days. Everybody wins: GSO triggers its CDS, which because Codere is still a shaky credit pays out like 40 percent. Codere gets to roll its revolver despite being a shaky credit, and quickly cures its bond default so faces no negative consequences. The CDS writers are hosed but I mean are you going to feel sorry for them? What's delightful about this trade is the purity of its focus on exploiting contract terms. What was the economic thesis of GSO's trade? If you said "that Codere is an undervalued credit and will pay off its loan," or "that Codere is an overvalued credit and will default," you would have been wrong. The thesis was "we have discovered a trick and are going to use it."
An amazing Greek bonds trade
On the other hand, the three best performing bond funds in the world this year, each with 100+ percent returns, had an economic thesis, and it was "let's buy Greek government bonds because how much worse can it get?" Here's Aris Papageorgakopoulos of Eurobank Asset Management:
"Greek bonds at one stage were the single most hated asset class in the world and we thought that there was not much to lose at the bottom of the market."
There are important lessons here about investing psychology and serial correlation -- past performance not predicting future returns -- and also about the importance of investment mandates. These guys are as surprised as anyone else to find themselves on top of the league table: Their funds' rules require them to invest in Greek government bonds, and they did, at the right time. The right time being last year, at like 12 cents on the euro. But those rules also required them to invest in Greek government bonds at the wrong time. The wrong time being, for instance, in March 2009, just before Greece imploded. That's when Papageorgakopoulos's fund launched.
Irish tax trade
Here's a profile of Feargal O'Rourke, the Irish tax accountant who helps multinational companies set up Irish subsidiaries in such a way that lots of their income is subject to no tax in Ireland or anywhere else. The trick, known as the "Double Irish," is to make the subsidiary Irish under most countries' tax laws -- so those countries leave it to pay income tax in Ireland -- but Bermudian under Ireland's tax laws, so it doesn't actually pay income tax in Ireland. O'Rourke is properly indignant that anyone blames him, or Ireland, for this: Sure Ireland isn't collecting taxes from the company, but neither is anyone else. Why focus only on Ireland? O'Rourke:
"Why should Ireland be the policeman for the U.S.?" he asks. "They can change the law" -- he snaps his fingers -- "like that! I could draft a bill for them in an hour."
He's right you know. And who better to rewrite U.S. tax law than a guy with a long track record of helping U.S. companies avoid taxes?
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