J.C. Penney And Goldman: Lies, Scams, And Rip-Offs

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Why would anyone buy this crap? No, not the clothes in J.C. Penney’s stores – which practically no one is buying – but the shares it just sold.

It desperately needed to raise capital because it’s bleeding cash and won’t be around much longer without lots of new cash to bleed. Sales plunged 26.8% over the last three years, leading to over $1.6 billion in net losses over the last four quarters, and to a CEO revolving door.

Without any credible plan in sight to stop the bleeding, or even just slow the bleeding, and even less chance of a real recovery in an already tough retail environment, JCP tried to delay the inevitable – at a horrendous expense to the existing stockholders.

It hired Goldman Sachs as underwriter – snake-oil salesman would be a more appropriate term – and offered to sell 84 million shares at $9.65 per share and granted Goldman a 30-day option to buy up to 12.6 million more shares, for a total of 96.6 million shares. The deal would raise up to $932 million.

Existing shareholders, likely including one or more funds in your 401(k) or other retirement device, have watched the price plunge from over $40 per share in 2012, when the Fed-bedazzled stock market was still buying JCP’s incredible hype that it offered, instead of jeans, at the price of two for one. It’s changing hands at $9.52 $8.98 at this moment, down 8.6% 13.8% from yesterday’s pre-announcement close.

So, these hapless existing shareholders watched helplessly as their ownership of the company, spread over 220.6 million shares before the event, was cut overnight by up to 44% (if the over-allotment is sold in full). But of course, bankruptcy would be even more expensive to existing shareholders.

And those souls who bought the new shares that Goldman hawked at $9.65? They lost about 7% in the course of a few hours.

To top it off, earlier yesterday, while the final touches of rouge, eye-shadows, and lipstick were being put on this deal in all secrecy, CEO Myron E. Ullman III, in this job (again) since April, tried to bamboozle existing stockholders into hanging on to this crap rather than dumping it wholesale just before the deal, which would have been a fiasco for him. So he assured them that he didn’t foresee a situation this year where “we’d need to raise liquidity.”

That was just hours before they did raise liquidity. Up to nearly $1 billion of it. Lies, scams, and rip-offs – the daily bread of the stock market. But thankfully, it’s out of sight for most people, as this type of putrefaction takes place buried deeply inside some hygienic looking fund where it’s covered up by an endless rally, nurtured along, not by improvements in sales and earnings and other fundamentals, which have been dreary, but by the Fed’s drunken money printing.

It could be an aberration. Or it could be the first visible crack in the insane leveraged buyout craze that has spread across the country: Goldman, JPMorgan, and Bank of America could get hit with a loss of up to $156 million on the $780 million in junk debt they pledged to sell to fund the buyout of teen-fashion retailer rue21. With consequences for investors. Read… First Cracks (And Losses) In The Insane LBO Craze

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