Goldman’s derivatives puzzle

June 25, 2009

Earlier today I posted an item saying that Goldman Sachs is hard as ever to figure out, based on the kind of information (or lack thereof) that it publishes about its operations.  I focused on a little-known Goldman real estate management company called Archon Group.

And now comes derivatives guru Janet Tavakoli with a nice followup, noting that Goldman offers few details in regulatory filings about its derviatives business, despite having some big exposure to those often complex investment contracts.

In a note to clients, Tavakoli notes that Goldman now ranks as the US bank with the fourth greatest notional value of derivatives at $30 trillion. But using an Office of the Comptroller of the Currency formula, she says Goldman has a far higher total credit exposure to capital ratio than JPMorgan Chase, Bank of America or Citigroup–the three banks with higher notional exposure.

And Goldman’s potential exposure isn’t just a little bit larger than its peers–it’s way, way larger. The OCC ratio for Goldman is 1,056, compared to smaller ratios of 179 for BofA, 278 for Citi and 382 for JPMorgan.

Tavakoli is not sure why there’s such a big discrepancy and says some of Goldman’s exposure could be offset with “collateral calls,” such as the kind the bank famously had with AIG. It doesn’t appear the OCC takes collateral calls into consideration in formulating its ratio. But guess what? Goldman provides little information in its regulatory filings to determine just how hedged, or limited its exposure to derivatives really is.

Says Tavakoli: “Goldman’s reporting on derviatives is very light, however. Goldman Sach’s 10K provides only a brief discussion of interest rate swaps used with variable interest entities and qualified special purpose entities.”

Maybe Goldman should start paying the lawyers who prepare its regulatory by the word. If that were to happen, maybe we’d start getting some fuller disclosure on all these important issues.

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