Fixing A Hole

[Daveparts]

Fixing A Hole
By David Glenn Cox



Today billionaire Warren Buffet stepped in and purchased five billion dollars in Goldman Sachs preferred stock with an option to purchase five billion dollars more in regular stock at some point in the future. Buffet, known for his market acumen, has shied away from purchasing banks in the past. Yet this morning at 8:00 a.m., Goldman stock is up by almost 10%. Does Buffet smell a deal?

In October of 1929 the chairman and founder of GM, Billy Durant, and members of the Rockefeller family along with others began to buy large blocks of stocks, trying to buoy the market. Durant spent most of his personal fortune before admitting defeat. By 7:00 p.m. the market had lost another 12% or 14 billion dollars. Durant saw the future; he could have cashed out and walked away like Henry Ford. But Durant had built GM from the ground up and to walk away meant abandoning his life’s work. He tried, with his own fortune, to put out the fire. Durant failed and ended life sweeping floors.

Buffet, like Durant, sees the future; it is now or never. Try to save the market or watch it all melt away. The precedent is clear; we are on the edge of a financial castrophe that most of us won’t live long enough to see the end of.

“At 1 p.m. on Friday, October 25, 1929, several leading Wall Street Bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank and Charles Mitchell president of the National City Bank. They chose Richard Whitney, vice president of the Exchange, to act on their behalf. With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other "blue chip” stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. In this case, however, the respite was only temporary.”

September 14, 2008, "Bank of America said it agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, snagging the world's largest retail brokerage after one of the worst-ever weekends on Wall Street.

“The price, which comes to about $29 per share, represents a 70 percent premium to Merrill's share price on Friday, although Merrill's shares were trading at $50 in May and over $90 at the beginning of January 2007. The deal has been approved by directors of both companies. Three Merrill directors will join the Bank of America board.

Merrill plans to make an internal announcement to employees sometime between 8 and 9 a.m. New York Monday.” -- CNBC

Just prior to the opening of the market and at the market's close by the end of the day, Bank of America shares had lost a dollar per share and Merrill Lynch closed the day without loss. From a 52 week high of $77.00 per share to a close of $26.20 with outstanding number of shares in excess of a billion and a half and $26.20 was considered good news!

Yesterday, Bank of America announced that they wouldn’t extend any further credit to McDonalds restaurant franchisees. McDonalds, the most successful restaurant chain in the history of planet earth, has had their credit line shut off. What does that say to you about the availability of credit? If McDonalds can’t get credit, can you? General Motors stock fell after management announced that they would use $3.9 billion in reserves for daily operating expenses. From a high in October, 2007, of $41.00 per share, to a close yesterday of $10.74, about what GM stock sold for in the 1950’s. GM’s future has not looked this bleak since Billy Durant spent his personal fortune trying to save her in 1929.

“An interim bottom occurred on November 13th, with the Dow closing at ***** that day. The market recovered for several months from that point, with the Dow reaching a secondary peak at **** in April. The market embarked on a steady slide in April that did not end until **** when the Dow closed at **** on July * concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.” -- Wikipedia

The past? Or the future?