Saturday, October 3, 2009


I will be busy this weekend on other matters primarily related to football and other pursuits which require no thinking.

I did pare my stock exposure some on Friday, a knee jerk reaction to what I view as a series of slightly negative economic reports last week that culminated with what I view as an awful jobs report. Over the years, being a cautious sort, I try not to over analyze bad news or put a happy face on it. So, back in February 2007, when the really bad news started to filter out about the mortgage problems, my first reaction was to sell some stock positions. And, when I start to see inflation becoming a problem, I will sell some of my fixed coupon long term corporate bonds. There is always some danger that the selling may be premature or overdone. I understand that issue which explains why I do not generally engage in massive swings in asset allocations. I do not view the concern about selling too soon as militating against cautious selling when news starts to suggest the advisability of caution.

My investment problem for the weekend is to solve, as best as I can, a hypothetical investment issue. For purposes of illustration only, I want to assume that an investor wants to buy one security on Monday morning, spend exactly $5,000, and wants to buy a floating rate security issued by Goldman Sachs. I will assume that the purchase can be made at the closing price from Friday, and the investor wants to pick one of the following six choices:

254 shares of GSPRC at $19.72 GS.PRC Stock Quote - Goldman Sachs Group Inc PFD
265 shares of GSPRD at $18.89 GS.PRD Stock Quote - Goldman Sachs Group Inc
336 shares of PYT at $14.88 PYT Stock Quote - Pplus Tr GSC 2 CT FL RT

This is a summary of the basic terms of each security:

GSPRA Greater of 3.75% or .75% over 3 month Libor, No maturity, No Maximum
GSPRC Greater of 4% or .75% over 3 month Libor, No maturity, No Maximum
GSPRD Greater of 4% or .67% over 3 month Libor , No maturity, No Maximum
GJS .9% over 3 month Treasury Bill, Maturity 2/15/33 at $25, Maximum 7.5%
PYT Greater of 3% or .85% over 3 month Libor, Maturity 2/15/34 at $25, Maximum 8%
GYB: Greater of 3.25% or .85% over 3 month Libor, Maturity 2/15/34, Maximum 8.25%

GSPRA, GSPRC and GSPRAD: These securities are non-cumulative equity preferred stocks.
PYT & GYB: These securities are linked to a GS junior bond, interest may be deferred for up to five years
GJS: This synthetic floater is tied to a GS senior bond.

GJS, PYT and GYB are in the Trust Certificate form of ownership with the float created by a swap agreement.
The underlying bond in both PYT and GYB is a typical Trust Preferred issue that permits deferral of interest payments for up to five years. Any deferred payment is cumulative. If payment is deferred on the underlying bond, then that will of course result in a deferral of payments on both PYT and GYB. This is a link to the prospectus filed on the underlying bond: Interest will accrue at the coupon rate on any deferred distributions on the underlying bond: see page s-13. Deferral is not an option for a senior bond. In order to defer payments on a junior bond the issuer would first have to eliminate dividend payments on the more junior securities to the junior bond, which would mean the common and equity preferred stock.

This is a link to historical Libor 3 month Libor rates:LIBOR Rates History (Historical)

This is a link to historical 3 month T BiLL rates since 1982:

This is not an easy problem. You will need to make certain assumptions about the future. What will the average 3 month T Bill and Libor rates be over the next 24 or 25 years? The only way to make an assumption is to assume the future will bear some similarity to the past when examined over such a long period of time. While others may disagree, I would assume that the average 3 month Libor over a 25 year period would exceed the 3 month Treasury bill by .4% to .6% based on historical spreads. So, for me, .85% above 3 month Libor will give me more than .9% over a 3 month T bill over time. Then what would I use as the average rate for these short term rates over a 25 year stretch of time? I obviously would not look to the present, abnormally low rates, currently hovering near zero. It would not be rational to use the present as a benchmark for the future course of events over the next 25 years. I would look to past, which has the only hard information to make this kind of prediction, understanding that the near term will be abnormally low and that some later years will be abnormally high. One of my readers came up with 4.52% on the T Bill and 5.02% on the Libor. I could use those numbers or a more conservative assumption, 3.5% on the T bill and 3.9% on the Libor, run the calculations both ways, remembering the past may not be prologue, but I want to at least try and make the best decision now about the future with the known variables and information.

This is the link to the subsequent post discussing my analysis: Analysis of Prior Question about Goldman Sach's Floaters

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