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THE WALL STREET JOURNAL.
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10–YR. TREAS. Closed yield 1.815%
Tuesday, January 20, 2015 | C1
OIL $48.69 Closed
Missteps in a Goldman Loan
Espírito Santo Collapsed Weeks After Senior Executives Approved $835 Million
BY MARGOT PATRICK
AND PATRICIA KOWSMANN
When Goldman Sachs Group
Inc. arranged an $835 million
loan to Banco Espírito Santo SA
last summer, it was the result of
a concerted, monthslong effort
by senior Goldman officials to
win business with the large Portuguese company, according to
people familiar with the matter.
Today, Goldman’s embrace of
Espírito Santo has come back to
haunt the Wall Street giant.
Weeks after Goldman arranged
the loan, Banco Espírito Santo
collapsed amid allegations of
fraud. Goldman now is in an unusual public fight with Portugal’s
central bank, which bailed out
Espírito Santo, over whether the
loan should be fully repaid. Anticipated losses linked to the
loan took a bite out of Goldman’s
already weak fourth-quarter re-
sults, the firm’s executives said
last week.
And the Goldman loan is under review by Portuguese regulators, which are trying to untangle the web of financial
arrangements surrounding Banco
Espírito Santo at the time of its
implosion, a person familiar with
the inquiry said.
The situation highlights a series of missteps by the Wall
Street bank.
European Pressphoto Agency
Don’t Count Out
Nielsen Just Yet
The loan was approved by at
least three Goldman committees,
which are composed of senior
bank executives and are designed
to rigorously assess transactions
for their credit risk and their potential to harm the bank’s reputation, according to people familiar with the matter. And the
Bank of Portugal moved the loan
toward the back of the line for
repayment because Goldman last
Please turn to page C7
EURO $1.1608 YEN 117.57
See more on C4 and at WSJMarkets.com
Price Matters
Cheap stocks usually rise more than expensive ones. Annual average
price gain for the S&P 500 over ﬁve-year periods, with stocks divided
into 10 groups based on how expensive they are. Data back to 1945.
MORE EXPENSIVE
LESS EXPENSIVE
13.1%
11.3
9.6
8.2
6.7
6.2
6.3
Current market’s
group
6.8
4.7
0.4
1
2
3
4
5
6
7
8
9
10
Note: P/E ratios use blends of ﬁve different earnings-calculation methods, including earnings for
past 12 months, average 10-year earnings and others.
Investor Bind: How Low Can Oil Go? Déjà Vu: Mounting
Source: Goldman Sachs Private Wealth Management
BY NICOLE FRIEDMAN
AND ROB COPELAND
Worries Hit Stocks
The collapse in the oil market has been very
good for Anuraag Shah. His hedge fund,
Tusker Capital LLC, last spring made a bet
that oil prices would fall and has since reaped
big profits from their nearly 60% decline.
But last Tuesday, Mr. Shah decided he had
seen enough. He cashed out all of Tusker’s bets
against oil, walking away for the moment from
a market that has already fallen 8.6% this year.
Tusker, which manages roughly $100 million
from Manhattan Beach, Calif., saw returns of
17% in 2014 and 10% this month alone through
the middle of last week.
Oil prices have plunged from north of $100 a
barrel in June to less than half that level now,
the victim of a growing surplus brought on by
booming U.S. production and weaker-than-expected demand. As prices have careened toward six-year lows, the market has become
more volatile. That has given investors opportunities to score big profits by betting on further declines. But some traders say the market
has fallen too far, too fast—creating the potential for an equally sharp rebound.
“It’s bloody nuts,” said Mr. Shah, a veteran
of trading giant Louis Dreyfus Commodities
BV. He isn’t putting a figure on it, but after
oil’s historic plunge, he doesn’t see much further room for bearish bets to go. “I’m not saying this is the low, but we’re not going to $20
or even $30 in the next month or two.”
Seven months into a swoon that few saw
coming, investors such as Mr. Shah are reluctant to call a bottom for oil prices. Analysts
Please turn to page C4
BY E.S. BROWNING
Investors are starting the
year as they did in 2014: pushing
U.S. stocks lower in a season
when stocks usually rise. They
are optimistic
ABREAST OF for the longer
THE MARKET term, but that
hasn’t kept people from selling now.
Once again, money managers
fear stocks have risen too fast
and that the global economy
isn’t strong enough to support
them. They worry about disappointing corporate earnings,
coming Federal Reserve interestrate increases, weak December
retail sales and soft December
industrial production. They are
alarmed to see disruptions not
only in stocks, but in commodities, bonds and currencies. Mon-
BY TELIS DEMOS
Unpredictable
When foreign-exchange broker FXCM Inc. was forced to seek
a rescue last week following a
surprise surge in the Swiss franc,
a number of potential white
knights surfaced, including private-equity firms and Leucadia
National Corp.
It soon became apparent,
however, that the best-suited
among them to pull off the lightning-fast cash infusion FXCM
needed was Leucadia and its Jefferies Group LLC unit, which in
recent years has honed its skills
as a rescuer of firms succumbing
to bouts of market turmoil.
Jefferies bankers in about 36
hours put together a $300 million financing from its parent
company that will keep FXCM in
business. In addition to the 10%
Friday
56.46
60
40
2014
'15
The Wall Street Journal
Ryan Etter
20
AHEAD OF THE TAPE | By Spencer Jakab
Oil Helps Delta Air Gain Altitude
Say “delta” on Wall Street
and traders will assume you
mean one of two things—the
resurgent airline or the jargon
for rate of change.
Both Delta Air Lines Inc.
and the delta of analysts’ expectations have been something to behold in recent
months. An already strong underlying business case was supercharged by collapsing oil
prices. Delta’s shares are up
more than threefold since the
start of 2013 and by 15% since
crude prices peaked last June.
But competitors’ shares and
earnings projections have rallied even more.
That isn’t because investors
expect bad or even mixed news
from Delta when fourth-quarter results are released Tuesday. A preview the company
gave on Jan. 5 shows it exceeded guidance on many measures. Analysts expect adjusted
earnings per share to rise to 77
cents from 65 cents a year earlier.
But unlike a rising tide that
lifts all boats, a sinking crude
price doesn’t benefit all airlines equally. On the one hand,
Delta’s practice of operating
older, cheaper aircraft makes it
less energy efficient than
peers, and should translate
into a bigger bonus from cheap
jet fuel. That is outweighed,
though, by its hedging strategy.
That includes traditional derivatives that benefit when oil
prices rise, and suffer when
they fall. Competitor American
Airlines Group Inc. is essentially unhedged, while others
such as United Continental
Holdings Co. are less hedged.
Nonetheless, Delta expects a
Wheels Up
Consensus earnings-per-share
forecast for 2015
$10
Jan. ’14
8
June
Friday
6
4
2
0
Delta Air American
United
Lines
Airlines Continental
Source: FactSet
$1.7 billion earnings benefit
from fuel alone in 2015 compared with last year.
Delta’s other hedge is unique
in the airline industry: In 2012,
it bought an oil refinery and
converted much of its output
to jet fuel. That much-criticized move turned out to be
pretty savvy. Until the final few
months of last year, when the
price differential vanished,
Delta captured some of the extra profit between depressed
U.S. benchmark crude and jet
fuel, which is priced off of international varieties.
Delta trades at a nearly 20%
discount to the average multiple of enterprise value to earnings before interest, taxes, depreciation and amortization of
four U.S. peers. That is too
steep, given that the extent to
which Delta will benefit or suffer from oil-price swings beyond the next several months
is unknown. Meanwhile, its operational and financial health
have kept improving impressively. Delta has plenty of room
before hitting its flight ceiling.
Email: [email protected]
INDEX
Financial Flashback............................................ C5 Heard on the Street.......................................... C8 Money Rates.......................................................... C6
Bonds, Rates & Yields............................... C5 Global Finance........................................................ C3 Markets Dashboard........................................... C5 Moving the Market............................................ C2
New to the Market...................................... C5
Ticker..................................................................... C2
initial annual interest the loan
commands, Leucadia stands to
reap an outsize share of any dividends FXCM generates and of
proceeds from any sale of the
company or its parts.
Jefferies’s role in bailing out
FXCM is reminiscent of one it
played in 2012, when Knight
Capital Group Inc. needed an
emergency infusion to stay afloat
after a slew of accidental stock
orders put the trading firm on
the verge of collapse.
Jefferies, an investment-banking and securities firm, initially
invested $125 million in Knight
and is now sitting on a stake in
its successor firm valued at $270
million. It also earned tens of
millions more when Knight was
acquired by a trading firm and in
banking and financing fees.
Please turn to page C7
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P2JW020000-5-C00100-1--------XA
CBOE/Nymex’s crude-oil volatility index
80
Source: SIX Financial Information
day’s 7.7% drop in the Shanghai
stock market, which had been
one of the world’s top gainers
last year, made things worse.
With so many worries, “when
we get disappointing economic
news, people are more inclined
to panic and do the kind of selling they typically do in times of
uncertainty,” said Bruce McCain,
who helps oversee more than
$25 billion as chief investment
strategist at Cleveland’s Key Private Bank.
Last year, the S&P 500 fell
3.6% in January and didn’t rebound until February, eventually
ending 2014 with a 13.7% gain
including dividends. Mr. McCain
forecasts that stocks will recover
this year as well, finishing with
perhaps a 9% to 10% gain for the
S&P 500, but only “after a cloud
Please turn to the next page
Jefferies Reprises Role
Of Market White Knight
Some investors fear being caught wrong-footed on
oil bets as price swings increase
0
The Wall Street Journal
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