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.

Carlos Slim in the New Yorker

There's a great profile of Carlos Slim in the New Yorker this week. Slim is one of the richest men in the world and recently took a big stake in the financially troubled New York Times. Unfortunately, the online version is subscriber only. Here is a brief summary of the article (excerpts from the summary below).

There are a lot of similarities between Slim and Warren Buffet: early interest in investing and business, modest lifestyle, patriotic nationalism, humility, even a Graham and Dodd value style of investing in distressed assets. Slim taught linear programming while still an engineering student at UNAM (Autonomous National University of Mexico) and discovered compound interest at age 10. (He learned that at a 10 percent annual rate of return his money would double in 7 years, not 10 :-)

Near the end of the article the writer describes a meeting between Slim and one of his most visible critics, Denise Dresser, a Princeton-trained academic (Instituto Tecnológico Autónomo de México) and political analyst. I suspect a look through Dresser's work might be of interest for those who want to disentangle the political economy of Mexico.

... The foundation of his empire is Telmex, the telecommunications company, which he acquired in 1990, and the cell-phone business, América Móvil, which is now the third-largest company in Latin America. Although Slim has often been described as a merciless predator, he has never been caught in one of the scandals that periodically spill onto the front pages of Mexican newspapers. His nationalism, humility, and relatively modest personal habits stand as a kind of rebuke to the image that Mexicans typically have of their oligarchs. Tells about Slim’s father, Khalil, who emigrated to Mexico from Lebanon and became a successful merchant. Describes Slim’s childhood and his early interest in numbers and money. He invested from a youthful age and abandoned engineering to go into business. Discusses Slim’s visit to the 1964 World’s Fair and its influence on his interest in technology. Writer gives a brief history of the Times’s recent economic difficulties and considers why Slim would be interested in the paper. Also tells about David Geffen’s bid for the Times. Writer chronicles the growth of Slim’s business holdings from the mid-sixties to his acquisition of Telmex. Slim has often used recessions as an opportunity to buy businesses at reduced prices. Writer interviews Randall Stephenson [current AT&T CEO], who worked for Slim in the nineties. “He’s probably the most intelligent businessman I’ve met,” Stephenson says. ...