The guest commentary below was written by Jesse Felder of The Felder Report.
“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” -J. Paul Getty
It’s hard to believe that it was over a decade ago that Matt Taibbi published his famous Great Financial Crisis post-mortem for Rolling Stone centered around the role played by Goldman Sachs.
It opened, “The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” I would say that there is plenty of evidence that this still holds true today.
Over the past couple of months, I’ve tried to chronicle here the speculative feeding frenzy in the options market that has seen volatility indexes surge along with stock prices and helped to power markets higher in the face of the worst economic decline in modern times. And, in the process of looking for clues, Goldman’s name has come up at every turn.
Tesla, a Goldman client, has been the focus of much of the call buying that has driven these trends. At its recent high, the stock had risen 800% from its March low even as revenue fell 5% in its most recent quarter so it’s clearly not fundamentals driving the share price.
No, as many have now demonstrated (most notably Luke Kawa back in February), massive call buying acts as a sort of manifest destiny that creates the higher stock prices call buyers envision. This happens by way of the options dealers who are forced to buy the underlying shares as a hedge against they calls they sold.
Anyhow, it turns out that Goldman recently profited $100 million from its own buying of call options on Tesla shares. Clearly, they understand how this game is played and couldn’t resist getting in on the action. However, it also turns out that Goldman (along with Morgan Stanley) was the lead underwriter on Tesla’s February stock offering. As such, it was entitled to buy hundreds of thousands of shares back then before the latest surge in price. Shortly thereafter the firm saw fit to put a buy rating on the shares that kicked off its glorious rally over the past several months.
It also turns out that Goldman (and Morgan) a while back also lent Elon Musk several hundred million dollars against his holdings of Tesla stock. In addition, they have also lent SolarCity, a troubled Tesla subsidiary, nearly $2 billion directly.
So Goldman has a keen interest in seeing Tesla shares rise for several reasons. First, so that they can profit directly from their own equity and derivates stakes. Second, so that the company is inspired to issue more equity, generating investment banking revenue (and offering more opportunities for equity purchases). And third, because rising equity prices make Elon a better credit risk and, more importantly, equity raises at inflated valuations make Tesla (and SolarCity) a better credit risk.
Now come back to Goldman’s recently revealed options profits in Tesla’s stock. Could the company have any greater incentive to try to manipulate Tesla shares higher by way of the options market?
Now consider that Goldman also has a very cozy relationship with Softbank, another investment banking client for which it also acts as creditor. Softbank, after running into trouble created by its disastrous investment in WeWork (to which Goldman lent $1.75 billion), recently revealed that it miraculously profited to the tune of hundreds of millions, if not billions, of dollars on equity investments and call options on popular tech shares including Tesla.
Of course, I have no evidence to actually prove anything but it certainly looks to me like Goldman has found a way to prevent what could have become very real “problems” for the bank, in the J. Paul Getty sense, by way of the market for equity derivatives.
Either that or it was just a very fortunate turn of events marked by a number of strange coincidences. Personally, I don’t believe in coincidences.
This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.