Buffett Feasts on Goldman Scraps

 

By MATT WIRZ

If there is one skill Goldman Sachs Group Inc. GS +2.94% traders pride themselves on, it is the art of buying low and selling high.
But last year, anticipating new regulatory restrictions on proprietary trading and seeking to reduce the bank's exposure to risky assets, Goldman loan traders unloaded hundreds of millions of dollars of leveraged loans at a loss, people familiar with the matter say. Making matters worse, many of those loans have since jumped in value.

Associated Press

Goldman unloaded loans of troubled publisher Lee Enterprises, taking a loss. But Warren Buffett has made a tidy paper profit on the deal.

Details of one trade in particular have recently caused a stir in the market. In November, Goldman sold about $85 million of loans in troubled newspaper publisher Lee Enterprises Inc. LEE +3.52% Goldman sold the debt at about 65 cents on the dollar, having bought it months before at around 80 cents, resulting in a loss of at least $13 million.
The buyer: a unit of Warren Buffett's Berkshire Hathaway Inc., BRKB +0.95% according to several people familiar with the matter.
Mr. Buffett has since made a tidy paper profit on the loans, which are now worth about 82 cents on the dollar, the people said.
A Goldman spokesman declined to comment on the loan sales. Mr. Buffett didn't return requests for comment.

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The sale of loans came amid discussions of new regulations that Goldman officials worried might restrict its ability to own and trade loans, and concerns within the firm that financial markets could take a turn for the worse after a promising start to the year. Goldman, as well, was conducting a broad consolidation of its credit-trading desks as it focused more on facilitating trades between customers.

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Associated Press

The St. Louis Post-Dispatch owned by Lee Enterprises

Goldman decided in the spring of 2011 to vastly reduce the amount of loans held by its biggest loan-trading desk, called the global bank-loan trading and distressed-debt investing unit, which had a portfolio of more than $4 billion. The desk sold heavily through the summer, just as U.S. and European markets were collapsing. In October, that desk was merged with another desk, whose traders continued to sell, creating additional losses.
To be sure, the losses on the loan sales made up a small portion of Goldman's overall performance, and some of its trades were profitable over the course of 2011, according to people familiar with the matter. The loan desk also used hedges to offset some of its losses, the people said.

80¢ on the dollar

Goldman buys Lee Enterprises loans
in early 2011

65¢

Goldman sells the Lee loans to Buffett, November 2011

82¢

The value of Lee loans recovers, April 2012

But Goldman traders also sold at a loss loans of Clear Channel Communications Inc. and Harrah's Las Vegas PropCo LLC, which have since rebounded in price, according to people familiar with the matter.
"There's no question that when decisions are made to de-emphasize trading business, decisions are going to be made that are uneconomic," said one of the people.
Several senior loan traders left the firm last year. The head of the European business, Allen Ukritnukun, left the bank in the late summer, and a senior trader in the U.S., Courtney Mather, departed in October, the people said. Buckley Ratchford, who ran the loan trading unit globally, and Blake Mather, head of bank-loan sales, retired shortly thereafter, the people said.
The losses on the loan desk contributed to a $907 million net loss reported by Goldman for the third quarter from debt securities held across all its investing and lending businesses, though it is unclear how much. Goldman as a whole for that period booked its first quarterly loss since 2008.
By late October, about half of the trading desk's loans had been sold.
The value of the Harrah's loan, which was one of the larger positions that Goldman sold, dropped 18% in the third quarter. The unit also lost money on European loans, which were hit by the region's sovereign-debt crisis, the people said.
Still, not all sales produced a loss and some traders in the global bank-loan business made money in 2011, including on loans of bankrupt media company Tribune Co., they said.
At the end of October, Goldman combined the loan-trading desk with a trading desk that specialized in bonds. The difference between the two was large. The loan desk was a private desk with access to confidential information about the borrowers of the loans it held, a crucial advantage in proprietary trading. The bond desk only had access to public information.
But the two were combined because maintaining both was costly and "a majority of our clients prefer access to a fully integrated leveraged finance business," the Goldman spokesman said.

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Rob Bennett for The Wall Street Journal

Goldman Sachs's tower soars in Lower Manhattan.

Traders on the enlarged public desk jettisoned many of the loans they inherited because they didn't want to risk losses on positions they weren't familiar with, the people said.
That included the Lee Enterprises loans, they said.
In November, Goldman received a call from a loan trader at Citigroup Inc., C +2.16% who said an unidentified client was interested in buying Lee Enterprises loans, the people said.
Goldman had been working with other Lee creditors, including Monarch Alternative Capital LP and Mudrick Capital Management LP, on a bankruptcy plan for the struggling publisher that was on the verge of coming together.
Nevertheless, Goldman traders agreed to sell the Lee loan.
At the time, the bank didn't know the buyer was Mr. Buffett, who also had made more than $1.5 billion on an investment he made in Goldman during the financial crisis. While the trade was agreed in November, it wasn't until March that Mr. Buffett's identity leaked out.
Through BH Finance LLC, Mr. Buffett has been buying more Lee loans, snapping up $5 million worth last week, said a person familiar with the situation. This time he paid 81.5 cents on the dollar, 25% more than he paid Goldman.
Write to Matt Wirz at matthieu.wirz@wsj.com

A version of this article appeared April 12, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Buffett Feasts on Goldman's Scraps. COPY : http://online.wsj.com/