Randomly Noted

Kinder Morgan, the largest refined petroleum products operator in North America, filed new documents with regulators today giving a little more color on its upcoming initial public stock offering. It set the size of the deal at 80 million shares and is telling us there will be 707 million shares outstanding after the offering. It didn’t give us a range yet for the size of the offering but this will clearly be a deal that places a market cap on the company at more than $10 billion. This blogger surmises that because one number the company did give was its expected dividend payout: $1.16 a year or a total of $820 million in dividend payouts.

If the market cap was $10 billion, that would be an 8.2% dividend payout – and we shouldn’t expect a dividend yield that high.

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One of the interesting little tidbits in the Goldman Sachs earnings report today – the company took a $305 million impairment write-down against its “Designated Market Maker” rights at the New York Stock Exchange.  What that’s referring to is the old specialist business that Goldman owned through Spear, Leads & Kellogg.

Once upon a time, before technology became such a big part of our lives, traders called specialists made markets in a stock. He/she matched buyers and sellers from orders over the phone. If someone wanted to buy but no sellers were available, the specialist became the seller. Or vice versa. But as technology became more prevalent, it became apparent you didn’t that brokers to so the matching of orders.

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You would never see an ad in an American newspaper hawking a stock offering like the headline on this blog suggests. But it is apparently different elsewhere around the world. As I travelled to Singapore today, I was flipping through the Straits Times when I saw this large ad that caught my eyes. In big letters on top of the ad it reads: “Initial Public Offering: Hurry! Subscribe Now!”

The ad itself touts the strengths of the company, it’s growth strategies etc. And it does contain on the  bottom a footnote that suggests investors should get hold of a prospectus to read up on the company. But in the U.S., you can’t so openly reach out to investors in this way. Maybe this approach is being a little more honest and transparent. In the U.S., companies conduct “road shows” where the corporate executives get out in front of institutional investors looking to buy some of the shares. The executives are supposed to say nothing beyond what is in the prospectus. Of course, if that was the case, no investors would come to the road shows. And the road shows are not open to anyone – a small retail investor does’t get an invite.

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They all wanted to be like Mike (remember the Michael Jordan commercials from yesteryear?)

In this case, they were every Wall Street firm. And Mike was Goldman Sachs. There was this envy of by every Wall Street firm to be as successful as the secretive Goldman Sachs.  It was strong in equities, bonds, investment banking. And so, when Stan O’Neal took control of Merrill Lynch, the idea was that he wanted to compete with the likes of Goldman. More risk was taken on, a big cultural shift was underway. In one year, Merrill went from a firm with 45 billion to $6 billion exposure in subprime mortgages to one with $55 billion. It went overboard with collateralized debt obligations.

There was probably a lot of high-fiving and hand clapping when the Tesla Motors IPO was priced and closed the day $6.89 higher – a remarkable feat for an IPO these days and especially given how poorly the stock market in general performed.

So, maybe I am taking the glass half full approach, but, it seems to me the underwriters really mispriced it and left a lot of money on the table. The company itself sold 11.88 million shares. If the deal had been priced closer to where it closed rather than the original $17 price this morning, the company (a novel electric car maker) would have taken in an additional $81 million or so in proceeds. And for the selling shareholders? They would have pocketed nearly $10 million more.

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Warren Buffett and Charlie Munger, the gurus of Berkshire Hathaway Inc., are the latest to weigh in on that puzzling concept of securities law, what is and what is not  “material.”

Who can blame them from jumping in? 

The decision about what’s material still winds up way too often in litigation. Sometimes the resulting court decisions are surprising to this layman.

As for the eminence grises of investing, Buffett and Munger, who have sat atop highly successful Berkshire for a long time, their take on materiality came as part of the general defense they offered this past weekend of Goldman Sachs Group Inc., in which Berkshire has a substantial investment.

Goldman, of course, has been charged by the SEC with civil fraud in an instance of selling mortgage-backed securities. Disclosure is the issue there. Goldman vehemently denies the charges.

What caught my eye is a side issue to the main Goldman drama, but important because it happens so frequently in the investing world.

That is whether Goldman had an obligation to disclose to the public when it received a Wells notice from the SEC. That essentially is notice that civil charges are likely to be brought, allowing the company receiving the notice one more attempt to change the SEC’s mind. Goldman didn’t disclose receipt of the Wells notice at the time it received it.

That’s fine with Buffett and Munger, Dow Jones Newswires reported. They said they wouldn’t consider Goldman’s receipt of the Wells notice material.

At least a few Goldman shareholders beg to differ. They have sued Goldman, alleging that the Wells notice should have been disclosed.

The SEC doesn’t like bright line definitions of what’s material. What passes as an announced standard for what’s material includes the following: if “there’s a susbtantial likelihood that a reasonable shareholder would consider it important” in making investment decisions.

I’m no lawyer, but it seems to me investors in any company receiving a Wells notice of pending charges would like to know.  That’s even if the coming civil charges aren’t overwhelmingly important.

On April 15, the day before the SEC charges, Goldman’s common shares closed at $184.27. They trade now around $149.25. Yes, more has happened besides the SEC charges, including news last week that there’s also a Department of Justice probe of Goldman.

Also, share price movement observed after the fact is not in itself confirming evidence that something was material and should have been disclosed. Lots of things influence share prices and court decisions have noted this.

Still, it would make better public policy if not legal necessity if public companies uniformly told investors when they receive Wells notices.

(UPDATE: In an earlier version of this post, Buffett and Munger were incorrectly referred to an non-lawyers. Munger has a degree from Harvard Law School.)

How about this -  a synthetic CDO that allowed one to go long or short the U.S. Senate Permanent Subcommittee on Investigations hearings today into Goldman Sachs and its role in the subprime mortgage meltdown. Something tells me there would be more people looking for the short position than the long position.

This subcommittee has spent 18 months looking into Goldman and its mortgage operations. A good six hours into the hearings, and in this blogger’s view, there have been no smoking guns. In fact, if anything, you come away with the feeling that these senators don’t understand what they are looking into.

For example, Chairman Carl Levin repeatedly asks the executives of Goldman if the firm had a significant short position. And they keep saying, yes we did, to offset a long position (something called hedging, Mr. Levin). And Levin replies that’s not what he asked (the long position answer).

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Senator Pryor asks this question. Dan Sparks hems and haws. Says he hasn’t thought about it enough to respond. Josh Birnbaum says it’s complicated – too much credit sloshing around - and says we all contributed. Sparks concurs. I say: Yes, that’s right. Goldman and many other institutions and individuals brought the economy down. The financial crisis was a collective cultural failing. The only truly interesting and relevant issue in the Goldman hearing is this: Should Wall Street bankers behave more ethically by selling only products they believe in? The answer: It’s up to the bankers and their employers. The rest of us need to invest more prudently. (By the way, the core issue isn’t about banks’ disclosure obligations- customers of the notorious CDO had access to info about the toxic junk it contained.)

Here’s the thing that will likely save Goldman from the SEC’s clutches: High-level investing is a complicated endeavor, and as Dan Sparks has just said, investors can “like” a deal and still short it because it makes sense in the context of a broader strategy. Is it ugly and shameful that a bank or banker could sell a likely-to-fail package of synthetic subprime mortgages to a customer in order to allow another one to bet against it? Yes. But should we be surprised? No. Should it be illegal? No.

“A second-lien subprime deal” – Goldman’s Dan Sparks has just told the Senate hearing about a particular product the bank was peddling and it was chock full of this stuff. Second-lien subprime! If the buyers – sophisticated financial firms – didn’t beware, it was their own fault – assuming they knew they were betting long on synthetic products based on American homes with two liens. TWO LIENS! If Goldman managed to sell this cr*p, well, that’s their prerogative. As Sparks has just said, a lot of clients had “appetite” for this stuff.