Thursday, November 19, 2009

Fear and loathing of the plutocracy 2

Strangely we haven't heard much recently about impending gigantic Goldman bonuses. Once the issue hits the news radar again, I hope to see some detailed analyses of how, exactly, Goldman made its recent record profits.

At the link below you will find an analysis of Goldman's prop trading numbers for 2008 (not a good year), using the public records of its charitable Goldman Sachs Foundation. Thanks to a reader for sending this. I don't know how reliable this method is -- it all depends on whether GSF's records reflect the firm's overall trading pattern.

Zerohedge: ... Sometimes no capital is allocated to excluded strategies, but usually, and especially for product agnostic funds such as Goldman, each entity will be allowed its pro rata share based on the "fungible" capital that makes up the firm's entire Assets Under Management. Therefore, the GS Foundation ("GSF"), with its $270 million of capital at the beginning of 2008, would likely get its pro rata allocation as a percentage of the total capital backing the Goldman hedge fund (which can come from such places as Goldman Sachs Asset Management, and Goldman Sachs & Co., which in turn gets it funding via such taxpayer conduits as the Fed's repo operations and the Discount Window). So if Goldman for example had access to total capital of $50 billion last year (roughly), each trade, when allocated to GSF, would account for about half a percent (0.5%), absent special treatment, of the total capital invested or disposed. As an example, if Goldman were to trade $100 million notional in 10 year Index Swaps, GSF would thus be allocated about $500,000 of the trade.

Why is all this relevant?

Were one to comb through GSF's tax filings, one would uncover in 2007 over 500 pages worth of single-spaced trades, and over 200 in 2008, across absolutely every single asset class: equities, indices, futures, fixed income, currencies, credit swaps, IR swaps, FX, private equity, hedge fund investment, you name it (oddly absent are CDS trades). And this is in 2007 alone. These are a one-for-one proxy of absolutely every single trade that Goldman executed in its capacity as a prop trader in the last two years. The only question is what is the proration multiple to determine what the appropriate P&L for the entire firm would have been based on any one single trade allocated to GSF, and subsequently, disclosed in the foundation's tax forms.

... Yet what is obvious no matter how the data set is sliced and diced, is that the firm was bleeding money across virtually all prop-traded groups in 2008. Is it any wonder that the firm's only source of revenue is courtesy of i) the near-vertical treasury curve (thank you taxpayers) and ii) the ability to demand usurious margins on Fixed Income and other products from clients trading in bulk who have no other middleman choices.


gs said...

...the ability to demand usurious margins on Fixed Income and other products from clients trading in bulk who have no other middleman choices.

IMO those margins will plunge to zero or less if a competitor to the monopoly has the temerity to appear.

It's my impression that other financial products are dominated by one or few market makers.

Like some zerohedge commenters, I think this sort of thing deserves antitrust scrutiny--but with a caveat against unintended consequences of corrective actions.

Ian Smith said...

You've confused plutocracy with Judocracy.

Perhaps the goyim will grow tired of seeking "tolerance" with "fear and trembling" and accept their nature.

LondonYoung said...

"clients trading in bulk who have no other middleman choices" I haven't seen any report that there are products over which GS has a monopoly, has anyone else? And if a steep UST yield curve represents free money, why don't we all just buy UST futures and watch ourselves get wealthy?

Do these statements make sense to anyone?

Paul Yarbles said...

Jesus, what's next, defending child molesters?

Yeah, my uncle is the head of the NY Fed, my brother is Treasury Secretary, and the rest of my family are my regulators. I'm already sitting on a shitload of ill-gotten money but I seem to be able to get loans of arbitrairly high amounts at interest rates much lower than most others whenever I want them. When I fuck up, you suckers are there to bail me out directly or indirectly. I take your money, give myself a pat on the back and a billion dollars, and laugh at you. Suckers.

These guys are nothing but a well-connected mafia. Talk about social good. The only social good here would be to destroy their rule.

Ian Smith said...

You aren't a native Londoner LondonYoung. I know because a native would have use "rich" where you used "wealthy".

Which UST futures to go long on? Which to short? Short the 2 y go long the 15-30 y? Unless you're rich you'll need to do a spread or the margin and volatility will eat you up.

LondonYoung said...

Indeed, not at all native.
On the UST futures, the idea is that if a steep yield curve is profitable, then treasury futures should give you the 30's/3-month spread. The 30's 2's spread would give you a lot less "curve". However, my point is that I expect neither of these trades to work. ZeroHedge's thinking is based on accrual accounting only, which isn't real profit and loss ...

gs said...

I concede that "Tyler Durden" produces no evidence for his interpretation of Goldman's recent profits. We'll probably have to wait for the foundation's 2009 tax returns.

The linked Zero Hedge piece (15 Nov) ends with "Tomorrow we will analyze why VWAP has cost many asset managers hundreds of millions of dollars, and once and for all provide a quantification of the ever increasing cost of High Frequency Trading." Since my eyes aren't what they used to be, I'll say only that I couldn't find the promised VWAP/HFT analysis and would appreciate a link if anyone has seen it.
I continue to think that a single-vendor product, be it exotic derivatives or turnips, warrants regulatory...awareness.

LondonYoung said...

I have to agree with you, gs, that managers who enter into single-dealer counterparty OTC contracts should be constrained at the highest possible standard. My libertarian sentiments don't mind what people do when directly managing their own money, but their delegates need to be watched.

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