Sunday, November 18, 2007

Goldman OK?

According to the Times, Goldman unloaded their subprime exposure:

NYTimes: ... Late last year, as the markets roared along, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting in his meticulous 30th-floor office in Lower Manhattan.

At that point, the holdings of Goldman’s mortgage desk were down somewhat, but the notoriously nervous Mr. Viniar was worried about bigger problems. After reviewing the full portfolio with other executives, his message was clear: the bank should reduce its stockpile of mortgages and mortgage-related securities and buy expensive insurance as protection against further losses, a person briefed on the meeting said.

With its mix of swagger and contrary thinking, it was just the kind of bet that has long defined Goldman’s hard-nosed, go-it-alone style.

Most of the firm’s competitors, meanwhile, with the exception of the more specialized Lehman Brothers, appeared to barrel headlong into the mortgage markets. They kept packaging and trading complex securities for high fees without protecting themselves against the positions they were buying.

Even Goldman, which saw the problems coming, continued to package risky mortgages to sell to investors. Some of those investors took losses on those securities, while Goldman’s hedges were profitable.

When the credit markets seized up in late July, Goldman was in the enviable position of having offloaded the toxic products that Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, among others, had kept buying.

“If you look at their profitability through a period of intense credit and mortgage market turmoil,” said Guy Moszkowski, an analyst at Merrill Lynch who covers the investment banks, “you’d have to give them an A-plus.”

This contrast in performance has been hard for competitors to swallow. The bank that seems to have a hand in so many deals and products and regions made more money in the boom and, at least so far, has managed to keep making money through the bust.

In turn, Goldman’s stock has significantly outperformed its peers. At the end of last week it was up about 13 percent for the year, compared with a drop of almost 14 percent for the XBD, the broker-dealer index that includes the leading Wall Street banks. Merrill Lynch, Bear Stearns and Citigroup are down almost 40 percent this year.

...At Goldman, the controller’s office — the group responsible for valuing the firm’s huge positions — has 1,100 people, including 20 Ph.D.’s. If there is a dispute, the controller is always deemed right unless the trading desk can make a convincing case for an alternate valuation. The bank says risk managers swap jobs with traders and bankers over a career and can be paid the same multimillion-dollar salaries as investment bankers.

“The risk controllers are taken very seriously,” Mr. Moszkowski said. “They have a level of authority and power that is, on balance, equivalent to the people running the cash registers. It’s not as clear that that happens everywhere.” ...


Anonymous said...

Goldman Sachs Group Inc. said on or about October 12 of this year that they had $72.05 billion of level 3 holdings.

In terms of percentages, their level 3 assets, which trade so little that there is very little if any reliable market price for them, were about 7% of total assets. Their presumed value is based upon models.

This was reported at the excellent blog "Big Picture", (Ritholtz).

Of greater concern is nearly half trillion of level 2 which trades very infrequently compared with level 1 holdings. I fear the system will unravel as inter lacing commitments are strained.

I could be wrong. Besides , the Fed could flood the system with liquidity and bail outs and float all boats. Yikes Wiemar republic part two!

I can not predict how this plays out but it looks real bad, and makes me like FDIC insurance, or treasuries or Money Market funds that ONLY invest in CDs and treasuries. (Ncua insured credit Unions good too)

However the problem with any of these strategies is that if there is a shock to the system...the dollar takes a hit.

I confess the NY Times story certainly makes one think GS is a better bet than Citi, WaMu, Morgan Lehman, Bear, or Merrill.

I believe that Roubini or a blogger who posted there ( I'm checking) noted Goldman had a 185% level 3 to equities ratio...(comparatively high)...I'll look for the reference on this.

But in any case,I don't like much of anything right now.

Mike S.

Steve Hsu said...

Can you tell anything from just counting level 2/3 assets? They might have trades on that hedge out all of that exposure. The article hints at that -- "expensive insurance"!

I agree -- the big threat is a run on the dollar.

Anonymous said...


I think the big question is not how well Goldman is hedged (vs the other brokers), but what will happen to the big mortgage originators.

Countrywide looks half-dead and Fannie and Freddie will be really interesting to watch. If one of those goes under the fallout cannot be hedged in my opinion.

Anonymous said...

The NY Times link seems to be null. The article is here.

Steve Hsu said...

Thanks -- link is fixed.

Anonymous said...

Level 2 to level 3 assett ratio seems less important to me in this environment then level 2 and 3 combined in ratio to level 1.

As for hedging...i.e. insurance? It all depends on how wide spread the problem or crisis becomes doesn't it! If one house or a neighborhood burns down there is still plenty of insurance...but if all catches fire with what is there left to pay?

What kind of hedging or insurance would one have taken out in before was nearly a world wide event.

So the question becomes three-fold:

1. will the Canadian dollar the loonie...oh yeah that inspires confidence (;-) remain strong in the face of a US dollar plunge? or

2. Will the Yuan and the Yen hold up if export trade to US plummets? (can they stimulate domestic consumption to compensate) and

3. Have the Asian Tigers otherwise uncoupled their economies from the west.?

I "guesstimate" answer to all three question, is, no, in the short term (1 or 2 years)...and in the long term the answer to all three questions is yes!

Mike S.

Anonymous said...

Suggested Reading:

Robert Lenzner's article in

the money quote is really the last paragraph, but even if all the terminology isn't familiar the entire article is informative for the overall tone at a minimum.

good luck...(we are all gonna need it)

mike s

Anonymous said...

from blog at calculatedrisk

hat tip; gina landa's post

Equity base: $128 billion
Level three assets: $134.8 billion
Level 3 to equity ratio: 105%

Goldman Sachs
Equity base: $39 billion
Level 3 assets: $72 billion
Level 3 to equity ratio: 185%

Morgan Stanley
Equity base: $35 billion
Level three assets: $88 billion
Level 3 to equity ratio: 251%

Bear Stearns
Equity base: $13 billion
Level three assets: $20 billion
Level 3 to equity ratio: 154%

Lehman Brothers
Equity base: $22 billion
Level three assets: $35 billion
Level 3 to equity ratio: 159%

Merrill Lynch
Equity base: $42 billion
Level 3 assets: $35 billion
Level 3 to equity ratio: 38%

good luck
mike s

Anonymous said...

I for one am relieved to hear that the Goldman bonus pool has survived intact. What would christmas be without stories of multimillion bonuses paid to investment bankers?

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