An unusual surge in Goldman Sachs' share price in the last 10 minutes of trading on Tuesday raised eyebrows on Wall Street, as it came two hours before news of Warren Buffett's big investment in the bank.
Goldman Sachs (GS.N) shares rose more than $5 heading into the close of trading even as the rest of the market tumbled, leaving traders suspicious that inside information was used to make a profit.
"Obviously someone knew the Buffett news that was coming out. I noticed it yesterday and I was telling my colleagues something is going on with Goldman," said Dave Rovelli, managing director of US Equity Trading at Canaccord Adams in New York.
Securities and Exchange Commission spokesman John Nester declined to comment on whether the incident is being investigated. Goldman Sachs could not immediately be reached for comment.
Just before 6 p.m. EDT, Goldman Sachs said it would get a $5 billion investment from Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N), which investors welcomed as a much needed vote of confidence in the bank.
Goldman's shares have since risen about 6 percent. If someone with inside knowledge of the deal was snapping up the bank's shares they would have made a significant, and illegal, profit.
"Someone is going to get caught, because that is easy to track, they can find out who did that," said Rovelli.
Goldman Sachs' stock rose from $119.53 at 3:50 p.m. to $125.05 at the close. The S&P financials sub-index meanwhile fell from 273.79 to 273.61 in the same time frame.
"That share move at Goldman was a clear outlier. It got everybody's attention. It was clear that there was something specific going on in that stock that wasn't going on in any other stock in that space," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
When a stock moves so sharply against the rest of the market, it is usually either due to company-specific news or a big seller of the stock taking a break also known as "a seller's strike," said Kenny.
Given that volume increased in Goldman's stock in the last 10 minutes, the "seller's strike" explanation seems unlikely.
Steve Claussen, chief investment strategist at OptionsHouse, a subsidiary of PEAK6 Investments, an options trading firm in Chicago noted that while options in Goldman were not particularly active, "it does raise eyebrows that the stock would attract so many buyers given that the Standard & Poor's 500 index closed near its lows."
(additional reporting by Doris Frankel in Chicago and Rachelle Younglai in Washington; Editing by Tom Hals)
Former General Electric Co (GE.N) Chairman and Chief Executive Officer Jack Welch said the U.S. economy faces a deep downturn in coming quarters, and he supports a proposed $700 billion government rescue package for the financial sector.
"I now believe we are in for one hell of a deep downturn," Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 will likely be "brutal."
Until recently, Welch said, he had believed the U.S. economy could avoid recession, but he has changed his mind.
"I am now caving," he said. "Get ready for real tough times. They're coming. There is no credit available."
Welch said mortgage lenders, legislators, investment bankers and others are all to blame for the crisis, which stemmed from easy credit and investors' appetite for yield.
"The problem was money didn't cost anything," Welch said. "People took swings."
He likened the crisis to Agatha Christie's "Murder on the Orient Express," in which all the suspects turn out to be guilty; but he singled out the role of investment banks in the crisis.
"We have to look at the damn investment bankers," he said. "They're playing with other people's money. The only penalty was a cut in their bonus, not their head."
Welch praised the actions taken so far by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and New York Fed President Timothy Geithner, calling them "brilliant public servants" who have "not let ideology get in the way of taking action."
"Thank God we have Bernanke, Paulson and Geithner," Welch said. "We have to act."
He said the U.S. economy would eventually recover, but this recovery would likely be gradual rather than V-shaped.
Asked whether the current crisis would change the character or shape of the U.S. capitalist system, he held his index fingers about 5 inches apart and answered, "For this long."
The 72-year-old Welch served as chairman and chief executive of GE from 1981 to 2001 and currently runs an advisory firm for business leaders. He has written or co-written two books on leadership.
He said the biggest change since his GE tenure is that globalization has intensified, and the world is more interconnected. As economies become more interdependent, he said, prospects for world peace improve.
Welch was also asked about the GE executives he had groomed as possible successors, including Jeff Immelt, who took over GE's leadership in 2001.
Welch said he supports Immelt's changes to GE's portfolio of businesses, even as GE moves to sell off some assets that Welch had bought.
"You want change, fresh eyes to look at things," he said about Immelt.
About GE alumnus Jim McNerney, Welch said that the current Boeing Co (BA.N) CEO is doing "just fine," adding that he likes McNerney for taking on Boeing's unions.
And Bob Nardelli, who heads automaker Chrysler LLC, is "doing as well as he could be in a brutal (industry)," Welch said. "If it works out, it's going to be one of the great turnarounds of all time."
Tougher fuel economy standards mean that Detroit automakers deserve "some support," Welch said, but their case for a $25 billion government package is not as clear-cut as the case for the financial rescue package now being debated in Congress.
In the current environment, Welch said, business leaders should focus on their cost structures, reduce debt, and take care of their best employees. Leaders of organizations must also communicate as often as possible about their vision and take advantage of investment opportunities as they arise.
"If you have capital, you can do what (Warren) Buffett did this morning," he said, referring to Buffett's $5 billion investment in Goldman Sachs Group Inc (GS.N). "That's what smart people do in times like these."
Welch said he supports Republican Presidential nominee John McCain and said he would work for $1 per year on a McCain task force to help the economy if asked to do so. He said McCain's policies would be more likely to create jobs than those of Democratic nominee Barack Obama, in part because Obama is overly beholden to labor unions.
The United States functions better when the executive and legislative branches are held by rival political parties, Welch added, so there is an exchange of ideas.
(Reporting by Nick Zieminski; editing by John Wallace and Gerald E. McCormick)
The FBI is investigating Fannie Mae (FNM.N), Freddie Mac (FRE.N), Lehman Brothers Holdings Inc (
They said the probe of the four high-profile companies at the center of the current financial crisis that has triggered the Bush administration's proposed $700 billion bailout was in the preliminary stage and no criminal charges were imminent.
While declining to confirm that the four companies were under investigation, FBI spokesman Richard Kolko said the FBI now is probing 26 cases of potential corporate fraud related to the collapse of the U.S. mortgage lending industry.
Just last week, FBI Director Robert Mueller told the U.S. Congress that 24 cases of potential corporate fraud were under investigation.
The FBI has been under increasing pressure from lawmakers to investigate fraud related to the mortgage crisis, which has expanded to a broader credit crunch. The financial-market turmoil has prompted the Bush administration to seek a $700 billion rescue package.
A spokesman for AIG said, "We don't have details about the FBI investigation. Of course we will cooperate with the FBI." A spokeswoman for Lehman Brothers declined comment. Officials at Fannie Mae and Freddie Mac were not immediately available.
In testimony before the House of Representatives Judiciary Committee, the FBI chief vowed to pursue corporate executives if necessary in mortgage fraud cases.
Mueller said the FBI was looking at all levels of the mortgage systems. With respect to the corporate probes, which could result in federal charges, the allegations would deal with misstatements of assets, he said.
The officials refused to discuss details of the investigation, and said the matter was sensitive and could affect the stock market and any bailout.
"It's not helpful to anyone to name specific corporations under investigation," one official said.
Justice Department spokesman Brian Roehrkasse said, "As part of our investigative responsibility, the FBI conducts corporate fraud investigations. The number of cases fluctuates over time, however we do not discuss which companies may or may not be the subject of an investigation."
(additional reporting by Randall Mikkelsen; Editing by David Wiessler)