Investment Banks Have Too Much Money On Their Hands http://financial.seekingalpha.com/article/17237 Posted on Sep 20th, 2006 with stocks: AIG, GS, KMI, MS Phil Davis submits: Morgan Stanley (MS) had blowout earnings yet again! Bad for me but good for the markets. But they say âeconomic conditions are challenging.â Not enough for me to hang my hat on, but I still say nay! The quarter ended August 31st. Amaranthâs quarter ended August 31st, and they reported $9.2B in assets on that day, a 22% return on the year... Perhaps I am being quixotic about this, but I just canât believe that they are making this kind of money in a risk-free environment. In my quest for overvalued oil companies, I came across Kinder Morgan Inc. (KMI) and this chart, and I was ready to pounce, before I remembered they were being taken private. Thatâs right, this pipeline company is being bought out for $14.56B, only $1B above their all-time high and a 25% premium to where they were prior to the May announcement. Should this company have been bought at what may be âthe peak"? More importantly, who is crazy enough to make a play like this? Must be someone with way too much money... Turns out itâs our buddies at Goldman Sachs Group Inc. (GS)! But Kinder is more than just a bloated energy distributor; they also have $7B in long-term debt and a negative 2005 cash flow! So Goldman is getting help from American International Group Inc. (AIG) and the ubiquitous Carlyle Group to make this massive LBO work. CW is so strong that this deal is a go (and it does seem to be) that the Jan â08 $105 puts are trading at $1.90, and Iâm going to take just a few on the off-chance somebody sobers up and either offers a little less or breaks the deal. At this point, it is unlikely to happen, and the option may expire worthless, but itâs a 10:1 bet and, if I'm lucky, I can exit without too much damage if the deal firms up over the next 6 months. Iâm using this bet to cover my new income-producing play of shorting GS and selling the Nov $160 puts for $4.10, as the thing I am most worried about (as a shorter) is that they stop making deals like this! More importantly though, my main point is that this is what investment houses like GS are doing with all that money they have sloshing around -- paying 350% of book value for a company. Now you can argue that itâs hard to use book value to judge an energy company. I would also point out the 3.2 debt/equity ratio (pre-buyout expenses) vs. say, ExxonMobil Corp.'s (XOM) debt/equity ratio of .07. Suncor Energy Inc.'s (SU) 1.2., Valero Energy Corp. (VLO) - .3, Transocean Inc. (RIG) - .2, TEPPCO Partners L.P. (TPP) â 1.3... you get the idea... This is the kind of out-of-control commodity spending that took down Amaranth, only itâs happening in slow motion at the investment houses. Here is an excellent article by Trader Mike on the Amaranth deal, which I maintain is a microcosm of in industry gone wild. According to the NY Times, âfunds operated by Morgan Stanley, Credit Suisse, Bank of New York, Deutsche Bank and Man Investments all had stakes in Amaranth, as of June 30, the most recent figures available. Those holdings, which ranged from 4 percent to 7 percent of the assets of the funds, are worth far less now than their stated values in June.â 4-7%. Whatâs 4% of $9B? $360,000,0000. Whatâs 4% of $4.5B? $180,000,000. How much did MS make last quarter? $1.9B (not bad!). It will be a very interesting earnings report! Gee, I hope they werenât the ones with 7%... âOfficials at those funds declined to comment yesterday.â I wonder if this will come up at MS's press conference? I'll be holding my puts until then!