There's an old joke that a new MD at Goldman is looking to hire 5 new analysts for his department.
The new MD goes to his old boss and asks, "What should I do? I have 10 resumes from 10 great candidates, who all went to Ivy League school, graduated with perfect GPAs and all interviewed very well. How do I decide who to hire?"
The old boss asks to see the pile of resumes, and gives them a quick glance. He then shuffles the pile of resumes, throws the top five in the garbage, and hands the new MD the remaining five and says, "Hire these five."
The new MD is shocked - he exclaims, "Is this how Goldman Sachs does is hiring?! It's so capricious!"
The old boss responds, "It isn't capricious. Goldman Sachs doesn't hire unlucky people - and all the resumes I threw out belong to unlucky people."
Goldman's secret to "success" in this instance is the freshly changed accounting rules (see my comment elsewhere) and in the recent past has been the patronage of ex-Goldman Sachs CEO and now treasury secretary Paulson.
Accounting rule changes that were long overdue. I know of at least one case of a mortgage firm whose loans were performing but was put under by the decline in market value of its assets.
Presumably if Goldman Sachs' success is solely due to changes in accounting rules, we will see most other financial firms follow in their footsteps.
This is most likely not fantastic news. This is most likely terribly misleading news. As noted, suspending aspects of mark-to-market undoubtedly helped their bottom line. And who knows how much of these "profits" were the result of one-time payments from the government via AIG. There is so much opacity with all banks' financial statements that trusting them seems unwise. Wells Fargo claimed they had record profits in Q1, and just today an analyst estimated that Wells actually needs at least another $50 billion. Who do you trust - people effectively talking up their own books, or independent observers who still see huge problems ahead?
Goldman Sachs is one of not many who had been behaving prudently. Next news would probably be "Chase is doing good.." or some other obvious thing brought as revelation.
Accounting regulations were changed last week [1] so that banks do not have to "mark to market" in "inactive markets" anymore. Since Goldman Sachs is now a bank holding company, they don't have to do this either. What is now a ~2B profit would probably have been a far greater loss by the old rules.
We should be careful and not equate what they have the option of doing to what they are actually doing. They in particular have been sticklers in marking to market no matter what, regardless of if they are a bank holding company or not (In the conference call this is reiterated many times).
It would not have been a far greater loss under the old rules, that much is clear from reading the balance sheet and disclosure of the relatively small size of legacy assets (the assets that would be impacted by different marking methods). Income was driven in pure trade faciliation, good old fashioned buy low and sell high in the capacity of a financial intermediary.
As you watch democracy die to thunderous applause, remember to subtract the $10 billion of government funding and the $13 billion looted from the taxpayers through AIG face-value swap repayments.
I never had bank risk-adjusted capital regulations memorized, and it is much too complicated for me to care to relearn now.
However, the addition of a new liquidity source on the balance sheet in general has no direct effect on the income statement. Borrowing money is not income. Indirectly, it will have an effect through the interest expense owed to the owner of the liability and the interest income earned from the additional cash. However, the net interest income or expense is likely to be much less than the $10 billion face value of the liability.
A caveat: I didn't read through their financial statements, and I refuse to do so unless someone will pay me.
Yes, if AIG were to go bankrupt, Goldman and others would have had to take a one-time charge to net income to account for the reduction in the value of the assets owed to them by AIG based on what they expected to be able to recover through bankruptcy court. In this, Goldman is not special, though.
I really don't understand this continued suspicion of the AIG/Goldman flowthrough.
What they did was a textbook case of how to protect yourself against a counterparty going bankrupt. It will be used as a case study one day of how to exercise prudence.
Direct from the conference call that explained their exposure:
"When AIG was rescued, Goldman Sachs had $10 billion of
exposure to the insurance company that was offset with $7.5
billion of collateral as well as credit-default swaps that would
have paid off in the event of an AIG bankruptcy, Viniar said on
the March 20 call."
So Goldman had $10 billion of insurance with AIG. As the insurance started going in their favor, as is common banking practice, they demanded collateral be pledged (treasury securities) that they could seize in the event of bankrupty. This was 7.5 billion worth of collateral in extremely safe treasury bonds. So in the event of default, Goldman would have kept the securities in lieu of getting the cash settlement. Because they did not default, AIG had the securities returned to them and they paid out cash instead (this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying). The remainder 2.5 billion was the disagreement between the parties as to where the insurance should actually be marked. So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default.
> This was 7.5 billion worth of collateral in extremely safe treasury bonds.
> this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying
Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG.
> So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default.
Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?
> What is the problem here?
The claim is that Goldman is not taking a hit from their transactions with AIG while other parties are. The above documents that Goldman is, in fact, not taking a hit from their transactions with AIG.
The only remaining question is whether other parties are taking a hit for their transactions with AIG. If they are, the question is Goldman Sachs is being treated differently.
> Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG.
If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place.
> Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?
Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole.
Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.
If what you say is true, and Goldman hedged their hedge by purchasing CDS on AIG and/or outright shorting them, it should be trivial for a prosecutor to show that they entered a contract with AIG knowing fully that it could never be satisfied (who knows, there may even be a side letter to be found somewhere to that effect...) -- making the contract void and requiring a clawback of any payment made through AIG by Treasury.
How does purchasing CDS insurance on a counterparty imply that they knew full well it could never be satisfied? If I purchase hurricane insurance on my home do I know full well a hurricane is going to destroy my house? It was a precautionary measure for an amount that was the difference between what they were owed and how much collateral was pledged. It indicates nothing of the sort that they knew full well the world was going to blow up and AIG would default
And what I say is true, there are many many public disclosures on exactly what their positions were.
> If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough.
I didn't say that it was a windfall. I said that Goldman was made whole by the US govt via AIG. If other folks are losing money in similar circumstances, it's fair to ask why Goldman is being treated differently.
And, even if everyone is being made whole, the question remains - why should the US make them whole? Why shouldn't they lose money for taking bad counter-party risks? They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly?
If I buy something that turns out to be worth less than I expected, I take the loss. Why not Goldman and other banks?
> They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion
I'll pay $7.5B for $10B.
> In either case, whether AIG was allowed to fail or not, they would have been made whole.
Maybe, maybe not, but in any event, not by the US govt.
> Why shouldn't they lose money for taking bad counter-party risks?
I don't really know how else to explain this. They shouldn't lose money for taking counter party risk...because they were willing to pay the price to insure themselves on the counter party risk. Why do you keep insisting that they need to lose money? They had 7.5 in collateral, and they insured themselves for the other 2.5 in the event they defaulted. This is the definition of protecting yourself from bad counter-party risks.
> They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly?
...because they insured themselves. Imagine someone who bought a share of Google stock and then also bought a put option on it to protect themselves. Then the stock goes down. It's like asking why that person shouldn't take the hit because they were going to keep the money if Google had gone up. Goldman doesn't take the hit because 1) they were prudently collateralized and 2) they PAID for CDS protection on the rest that was owed to them that was not collateralized. CDS is not free, of course.
If they were willing to pay the insurance and demand collateral, why should they have to take a hit at all?
> I'll pay $7.5B for $10B.
So would I, but this is obviously a mischaracterization. It's like a homeowner who defaults on their mortgage and gives a house worth 250k to the bank who lent them 500k to buy it. They are not "paying 250 for 500".
> Maybe, maybe not, but in any event, not by the US govt.
This is not really a maybe, maybe not situation. Clearly with the collateral and insurance arranagements, Goldman would not have lost money as a counterparty to AIG. If you have an explanation otherwise I would be interested to hear it.
As someone else mentioned, you should not subtract 10 billion from the income number because it is not included in the profit in the first place. It is a loan, which they pay 5% for the first 5 years and 9% for the years after that to the American taxpayer.
Additionally, 13 billion "looted" from AIG/taxpayers is a complicated issue that is being completely misinterpreted. As with a lot of transactions that involve questionable counterparties, they took collateral. So as the insurance contracts started to go into their favor, they asked for collateral to feel safer that they would be paid off even if they went bankrupt. The idea goes like, insurance is looking like it is in my favor, pledge me an asset so that I know there is a good chance I will be made whole on this. So in this case, those assets were treasury bills.
As they have stated many times, their contracts with AIG were largey collateralized. This means if they were owed 13 billion, then AIG pledged, for instance, something along the lines of 8-10 billion in treasury securities. Had AIG gone bankrupt and not been saved by the US taxpayer, they keep the treasury securities and lose a few billion, but certainly not the full amount like everyone thinks. If they are saved, which they were, then they give back the collateral and take in the cash.
I'm surprised GS wants to pay back the TARP $10billion so quickly. They are paying $500Million/yr to keep that $10Billion.
GS also "borrowed" $5Billion from Berkshire Hathaway, giving BH preferred shares for its $5Billion. The preferred shares pay 10%. So GS is paying $500Million/yr to keep that $5Billion from BH.
The BH preferred does have a 10% premium that GS must pay to retire it. But this means GS has the choice:
1) Retire $500Million/year of interest payments by giving $10Billion cash to TARP
2) Retire $500Million/year of interest payments by giving $5.5Billion cash to Berkshire Hathaway.
It makes you wonder just what is so bad about holding TARP money that it is worth $4.5Billion to buy your way out from under.
I have discovered the reason. TARP requires that until it is paid back, all sorts of other optional uses of cash are ruled out, such as pre-paying off other debt.
32 comments
[ 1.1 ms ] story [ 88.5 ms ] threadThe new MD goes to his old boss and asks, "What should I do? I have 10 resumes from 10 great candidates, who all went to Ivy League school, graduated with perfect GPAs and all interviewed very well. How do I decide who to hire?"
The old boss asks to see the pile of resumes, and gives them a quick glance. He then shuffles the pile of resumes, throws the top five in the garbage, and hands the new MD the remaining five and says, "Hire these five."
The new MD is shocked - he exclaims, "Is this how Goldman Sachs does is hiring?! It's so capricious!"
The old boss responds, "It isn't capricious. Goldman Sachs doesn't hire unlucky people - and all the resumes I threw out belong to unlucky people."
Presumably if Goldman Sachs' success is solely due to changes in accounting rules, we will see most other financial firms follow in their footsteps.
[1] http://www.reuters.com/article/governmentFilingsNews/idUSN09...
http://finance.yahoo.com/q/bs?s=GS&annual
It would not have been a far greater loss under the old rules, that much is clear from reading the balance sheet and disclosure of the relatively small size of legacy assets (the assets that would be impacted by different marking methods). Income was driven in pure trade faciliation, good old fashioned buy low and sell high in the capacity of a financial intermediary.
However, the addition of a new liquidity source on the balance sheet in general has no direct effect on the income statement. Borrowing money is not income. Indirectly, it will have an effect through the interest expense owed to the owner of the liability and the interest income earned from the additional cash. However, the net interest income or expense is likely to be much less than the $10 billion face value of the liability.
A caveat: I didn't read through their financial statements, and I refuse to do so unless someone will pay me.
Upvoted for badass mercenary attitude. You should try consulting! :D
No, but paying for their losses does mean that whatever income they do have isn't offset by said losses, and that produces profit.
Goldman's counter-party risk was subsidized by taxpayers via AIG. If doing so really was a good idea, it should have been done directly and in public.
We don't know how the AIG flow-through worked.
There have been rumors that some firms (Goldman Sachs is usually named) are getting 100% while other folks are taking a haircut.
What they did was a textbook case of how to protect yourself against a counterparty going bankrupt. It will be used as a case study one day of how to exercise prudence.
Direct from the conference call that explained their exposure:
"When AIG was rescued, Goldman Sachs had $10 billion of exposure to the insurance company that was offset with $7.5 billion of collateral as well as credit-default swaps that would have paid off in the event of an AIG bankruptcy, Viniar said on the March 20 call."
So Goldman had $10 billion of insurance with AIG. As the insurance started going in their favor, as is common banking practice, they demanded collateral be pledged (treasury securities) that they could seize in the event of bankrupty. This was 7.5 billion worth of collateral in extremely safe treasury bonds. So in the event of default, Goldman would have kept the securities in lieu of getting the cash settlement. Because they did not default, AIG had the securities returned to them and they paid out cash instead (this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying). The remainder 2.5 billion was the disagreement between the parties as to where the insurance should actually be marked. So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default.
What is the problem here?
> this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying
Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG.
> So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default.
Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?
> What is the problem here?
The claim is that Goldman is not taking a hit from their transactions with AIG while other parties are. The above documents that Goldman is, in fact, not taking a hit from their transactions with AIG.
The only remaining question is whether other parties are taking a hit for their transactions with AIG. If they are, the question is Goldman Sachs is being treated differently.
If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place.
> Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?
Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole.
Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.
And what I say is true, there are many many public disclosures on exactly what their positions were.
I didn't say that it was a windfall. I said that Goldman was made whole by the US govt via AIG. If other folks are losing money in similar circumstances, it's fair to ask why Goldman is being treated differently.
And, even if everyone is being made whole, the question remains - why should the US make them whole? Why shouldn't they lose money for taking bad counter-party risks? They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly?
If I buy something that turns out to be worth less than I expected, I take the loss. Why not Goldman and other banks?
> They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion
I'll pay $7.5B for $10B.
> In either case, whether AIG was allowed to fail or not, they would have been made whole.
Maybe, maybe not, but in any event, not by the US govt.
I don't really know how else to explain this. They shouldn't lose money for taking counter party risk...because they were willing to pay the price to insure themselves on the counter party risk. Why do you keep insisting that they need to lose money? They had 7.5 in collateral, and they insured themselves for the other 2.5 in the event they defaulted. This is the definition of protecting yourself from bad counter-party risks.
> They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly?
...because they insured themselves. Imagine someone who bought a share of Google stock and then also bought a put option on it to protect themselves. Then the stock goes down. It's like asking why that person shouldn't take the hit because they were going to keep the money if Google had gone up. Goldman doesn't take the hit because 1) they were prudently collateralized and 2) they PAID for CDS protection on the rest that was owed to them that was not collateralized. CDS is not free, of course.
If they were willing to pay the insurance and demand collateral, why should they have to take a hit at all?
> I'll pay $7.5B for $10B.
So would I, but this is obviously a mischaracterization. It's like a homeowner who defaults on their mortgage and gives a house worth 250k to the bank who lent them 500k to buy it. They are not "paying 250 for 500".
> Maybe, maybe not, but in any event, not by the US govt.
This is not really a maybe, maybe not situation. Clearly with the collateral and insurance arranagements, Goldman would not have lost money as a counterparty to AIG. If you have an explanation otherwise I would be interested to hear it.
Additionally, 13 billion "looted" from AIG/taxpayers is a complicated issue that is being completely misinterpreted. As with a lot of transactions that involve questionable counterparties, they took collateral. So as the insurance contracts started to go into their favor, they asked for collateral to feel safer that they would be paid off even if they went bankrupt. The idea goes like, insurance is looking like it is in my favor, pledge me an asset so that I know there is a good chance I will be made whole on this. So in this case, those assets were treasury bills.
As they have stated many times, their contracts with AIG were largey collateralized. This means if they were owed 13 billion, then AIG pledged, for instance, something along the lines of 8-10 billion in treasury securities. Had AIG gone bankrupt and not been saved by the US taxpayer, they keep the treasury securities and lose a few billion, but certainly not the full amount like everyone thinks. If they are saved, which they were, then they give back the collateral and take in the cash.
GS also "borrowed" $5Billion from Berkshire Hathaway, giving BH preferred shares for its $5Billion. The preferred shares pay 10%. So GS is paying $500Million/yr to keep that $5Billion from BH.
The BH preferred does have a 10% premium that GS must pay to retire it. But this means GS has the choice: 1) Retire $500Million/year of interest payments by giving $10Billion cash to TARP 2) Retire $500Million/year of interest payments by giving $5.5Billion cash to Berkshire Hathaway.
It makes you wonder just what is so bad about holding TARP money that it is worth $4.5Billion to buy your way out from under.
R: