Much has been said about Goldman Sachs by articles like Mr. Matt Taibbi July 2, 2009 Rolling Stone article “Inside the Great American Bubble Machine”.  But most have not heard about how Goldman Sacks manipulated the initial public offering (IPO) of Baidu (BIDU) back in 2005.  

Goldman Sachs (GS), Piper Jaffray (PJC), along with Credit Suisse First Boston (CS), underwrote Baidu (BIDU) IPO.  The IPO would be the first for a pure-play Chinese search engine company.  Baidu American depositary shares (ADS) started trading on August 5, 2005.  An initial 4.04 million ADSs were offered at $27 per ADS; opened at $66, more than double its $27 price, climbed, stabilized and then rallied anew before ending its historic opening day at $122.54.  

With a rise of 354%, Baidu’s first-day gain ranks 18th in history and ranks as the best performance ever by an overseas deal.  At its IPO price of $27 a share, the company raised $109 million.  Part of the big debut-day move from Baidu.com can be traced to the relatively small size of the deal.  With only 4.04 million shares in the IPO and strong indications of interest from both retail and institutional investors, demand had driven up the price throughout the process. The widely circulated rumor at the time that Google had attempted to buy the firm fueled interest in the stock and gave investors confidence in it as well. 

Typically, underwriters would only be overjoyed when a stock they took IPO shot up like this in its debut.  But the course of action Goldman and Piper Jaffrey took next was totally unprecedented and completely out of character for investment bankers. 

Forty days after Baidu went public, the minimum period before an underwriting firm can release an analyst report, on Sep. 14, 2005, at 6 am before the market opened, Goldman Sachs and Piper Jaffray, two of Baidu’s underwriters, issued a joint statement that rated the company stock as “underperform”. Goldman even went so far as to say that the company is worth exactly $27 a share, which is the same as its IPO price.  Anthony Noto, the Goldman analyst, also said that “at the most extreme”, Baidu could be worth $45 a share.  At the Piper Jaffray camp, $45 was also cited as the price target on the stock -- a mark, Safa Rashtchy, the analyst at Piper Jaffray said, that includes “an aggressive valuation premium”.  Shares of Baidu closed at $113 the day before, and it had been as high as $153.

At the time, media touted Goldman’s unusual move as a welcoming sign that analysts and investment banks were moving away from rubber-stamping clients stocks.  Investment banks normally wouldn't have been so harsh on a recent IPO, fearing it might get left out of future lucrative banking deals.  In the 1999 and 2000 heyday, only 3% of IPOs were initiated with a "hold" or lower rating after the IPO. 

According to Taibbi, Goldman's bankers used techniques called "laddering" and “spinning”.  In fact, Goldman settled the laddering and spinning charges with the government without admitting any wrong doing.  In laddering, an investment bank would allot IPO shares to institutional investors who promised to buy more once trading in the new firm began.  There is also ‘spinning” where the investment bank would offer a chosen few the newly public company shares at extra-low prices, in exchange for future underwriting business.  Banks that engaged in spinning would then undervalue the initial offering price — ensuring that those "hot" opening-price shares it had handed out would be more likely to rise quickly, supplying bigger first day rewards for the “insiders”.   Now do they sound eerily familiar in the case of Baidu’s IPO? 

BIDU dropped 29% to $81.05 by Oct 26, 2005.  Goldman then subsequently made five consecutive major downgrade calls from October 2005 through Nov 2006.  However, Baidu only reached its lowest ever share price of around $51 in Feb. 2006.  Despite four more Goldman downgrades from Feb. to Nov 2006, Baidu shares went up to $117 by Dec. 15, 2006. 

Up till May 2006, Goldman was still saying Baidu shares at $65 were 10% overvalued.  True to the old saying “If you can’t beat them, join them.”, in Nov. 2006, Goldman quietly raised Baidu target price to $128, only one year after the conspicuous 6:00 am joint press conference with Piper Jaffrey, where Goldman named an exact $27 as fair price on Baidu.   

Knowing what we know about Goldman Sachs, anyone would be highly suspicious of it’s suddenly emerged “objectivity” of BIDU`s fair value.  One could only draw the conclusion; it was to Goldman’s benefits to push down the share price of Baidu.  There are three possible scenarios:

(1) Goldman did not do its homework and seriously undervalued Baidu; therefore, the 6:00 am press conference was meant to save face and avoid potential law suits from Baidu.  Baidu and Goldman (GS) were reportedly far apart on valuation.  Baidu was looking for a market cap of $1 billion, and Goldman, suggested around a third of that.

(2) Between the laddering and spinning, Baidu shares went up too high, too quickly for Goldman and its insiders to profit.  So, at that point, the only way Goldman could rectify the situation expeditiously is to issue a major downgrade immediately after the 40-day lockout period.   

(3) The growth momentum of the Internet run in China had and sill has room to expand, and is expected to accelerate on the heels of strong user base expansion and increased utilization.  Goldman, who spent all this time, energy and money doing road shows, knew the true value of Baidu, evidenced by the $128 target price one year after the “objective” $27 valuation, was trying to accumulate positions by artificially pushing down the stock price through six consecutive major downgrades.   

Among all the scams and manipulations Goldman has been involved, this little anomaly has never caught any publicity or ethical scrutiny, partly because Baidu just went about its business as usual without escalating it into a public fiasco, which has been Baidu’s management style.  In addition, Baidu is an overseas company, hence under most major media’s radar screen.   

To Baidu’s credit, the company’s sound performance and strong market fundamentals have propelled its shares from the low point of around $51 back in Feb. 2006 to a high of about $409 the week of Oct. 29, 2007.  BIDU closed  at almost $327.40 on Tuesday 8/17/09.       

So, there you have it – another example of how Goldman can afford to pay out record bonuses every year – they play by a different set of rules – this is why they can take so much money out of the capital markets every year. Goldman Sachs’ powerful political and financial connections have insulated it from regulators whose job it is to maintain fair and balanced markets. However, when Goldman Sachs is involved – fair and balanced takes on an entirely new connotation.            

In Berkshire Hathaway's (BRK.A) Annual Report, Buffett announced that Berkshire has taken in $7.7 billion in premiums on 94 derivatives contracts it has entered into.

Buffett said he has taken in $3.2 billion in premiums on 54 derivative contracts that require the firm to pay up if certain bonds in various high-yield indexes default. The options expire between 2009 and 2013, and could expose Berkshire to losses as large as $4.7 billion. The odds of that are "extremely unlikely to occur" according to Buffett, who said that as of Dec. 31, Berkshire had paid out just $472 million on those contracts.

The remaining options come from the sale of put options, which give the buyer the right to sell a contract to Berkshire at a certain date. Buffett says the company has sold 15- or 20-year put options on the S&P 500 and three foreign indexes. The puts are exercisable only at their expiration, which is between 2019 and 2027. The options were struck at the market price on the day they were written.

Essentially, Buffett is betting that stock prices will rise over the next 15 to 20 years. This means that any rise in the S&P to levels above the level on the day the contract was written renders to options worthless to the buyer. On the put option sales Buffett has taken in $4.5 billion in premiums.

The selling of put options is a great way to add to your returns and decrease your cost basis on the purchase of a stock. If done correctly, the strategy is very low risk. You sell out of the money put options on companies that are trading at prices you would buy the stock at today. In this scenario if the stock rises, you keep the money and walk away, if the stock drops in price (below where you sold the put at), you are then forced to buy the stock but because you sold an out of the money put, you are buying it at a lower price than you would have initially.

This only works in stock that you would want to own and hold. The worst thing would be to own a stock in a company that you have no interest in.

感觉自己还没有资格感慨这些吧，但确实有点触动的。一次又一次的感觉到自己的无比平凡，一次又一次地回身看身边白发的父母。每次他们的叮嘱，总不忘一句“自己当心身体”。可能真的是为人父母最大的心愿吧。

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转贴CD上的名帖：What matters to you most?

感慨人生的攀登何时是个尽头。

刚出生时，只要身体健康，父母就已经心满意足了。后来发现其实无数人都身体健康，这个要求太低。

考上省里最最重点的中学，身边伙伴的羡慕和叔叔阿姨的夸赞，也许让你第一次觉得自己很了不起，

 ---但父母脸上的骄傲还未退去，你已发现其实这个学校所有的人都是重点中学里普通的不能再普通的一员。

考上所谓的china top 2， 也许会有地方电视台的采访，那时会飘飘然，已有了白发的父母却开始担心你的远行。

-- 直到你艰难的挣扎在校园，或者试图挤进literally 人山人海的招聘现场，这时你会模糊的想起，其实这个top 2学校的所有人都已普通得连前台的招聘人员都懒得理你。这时仍然只有白发已增的父母，依然会偶尔拿出看看那份有着你幼稚照片的“高考状元”报道。

还好，你进了所谓的top 公司，想狗一样在做着不见天日的pitch book，面对客户的谄媚，让你惊吓于自己humiliate自己的能力。偶尔和同事聊天你会发现，原来身边也这么多当年的状元，和着都是扔到人堆里看不出来的那么普通的一张脸。

于是立志，他妈的上美国的top MBA，不怕不能differentiate 自己。

经历CD workshop，经历怀疑， 经历考了自己口头不屑说出口，心里挺美，别人听了表面夸心里骂的750。终于拿到top 3的MBA录取。走在北京的大街上确实觉得心里不一样，好像鲤鱼已经跳了龙门。

---突然会想起，父母再爬楼梯也已很艰难了。

来到校园，还没没完，旋即开始一场又一场的summer recruiting。周末去net working， informational interview，一轮又一轮，终于来到自己敬仰已久,但几个星期前还读作够得曼瞎吃的final round 前。却再次不惊奇的发现，原来身边战战兢兢的candidate 却都是普通的不能再普通的top MBA一员。好像也没什么退路，背负贷款，大家又再次像狗一样，讨好见到的每一个I-banker。

终于，在惨痛的top MBA 平均只有不到70%的summer offer 的统计数据下，拿到了一个所谓的bulge bracket offer，信心再次膨胀。。。

直到来到无数summer associate蜂拥的training room，一遍又一遍向MD介绍其实自己也相信他们不会记住你名字的internal net working，才再次发现原来自己又是其中普通得不能再普通的一员。

经历着魔鬼summer，你不再怀疑自己和身边的人一样，优秀而普通，也许你甚至相信，这个bank 再裁50%，也不会轮到above average的你，虽然身边拿着H-W 履历的校友默默的在收拾行装。

偶尔逛逛CD，笑笑别人对牛人的定义，你终于不在分得清什么是牛，什么是人，什么是牛的标准，什么是人的标准。但经常，更经常，你会想起，远在万里的父母其实给的标准很低，仍然像出生时的那一刻 --“身体健康”吧，我的孩子。