Goldman’s real estate gambit

July 28, 2009

Matthew Goldstein.jpgIs history repeating itself at Goldman Sachs?

In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.

This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions — forcing those foolhardy speculators to pay the price when the subprime market blew up.

And much to everyone else’s chagrin, Goldman even made money off the housing meltdown when some of its hedges — specifically a bet that a subprime mortgage index would plunge — paid off handsomely.

It appears Goldman is following a similar script with U.S. commercial real estate, the next big asset class that many believe is on the verge of disaster.

Goldman recently reported owning $6.4 billion in commercial mortgage loans. It also is holding some $1.6 billion in commercial mortgage-backed securities, or CMBS. That’s a big retreat from where it was just two years ago.

And in a sure sign that Goldman expects a good number of commercial real estate borrowers to default, the firm says it marked down the overall value of its commercial mortgages portfolio by nearly 50 percent.

By contrast, regional banks, many of which have disproportionately high exposures to commercial real estate, are being far less aggressive than Goldman in marking down their respective portfolios.

But Goldman, with a $950 billion balance sheet, can afford to take the lead in marking down loans and indirectly putting pressure on other lenders to follow suit, because its overall exposure to commercial mortgages is relatively light.

Goldman used to have a rather large footprint in the commercial real estate market, with some $16.27 billion in loans and $2.75 billion in CMBS on its books in late 2007. That year, Goldman ranked seventh in bundling commercial mortgages into securities, churning out $15.1 billion in so-called CMBS, according to Thomson Reuters.

By the end of 2008, Goldman managed to whittle its total commercial mortgage portfolio down to a less imposing $10.9 billion.

Goldman says in a regulatory filing that it was able to rid itself of a good deal of its “long positions” in commercial mortgages and CMBS through “dispositions,” or sales of mortgages to other institutions and investors.

No doubt, Goldman also bundled some of it commercial mortgages into the nine CMBS deals it brought to market in 2007.

To be sure, Goldman has taken more hits on commercial mortgages than it did with residential real estate. The firm has taken at least $3.5 billion in write-downs. But Goldman has been able to easily absorb those losses by posting strong trading gains in bonds, stocks and commodities.

And there’s the possibility that Goldman’s strategy for hedging its remaining exposure to commercial real estate could pay dividends if the market collapses. Just as it did with residential real estate, Goldman says in regulatory filings that it relies on “cash instruments as well as derivatives” to reduce some of the firm’s commercial mortgage exposure.

It should come as no surprise that Goldman won’t talk about its hedging strategy. So there’s no way to determine whether Goldman traders are betting that an index that serves as a derivative trade on the CMBS market will plunge, just as the one that tracked the subprime-backed securities market did.

So far, the main Markit indexes for tracking the performance of the highest-rated CMBS are off just 10 to 13 points from their respective par values. By comparison, the most widely followed Markit index for tracking the performance of subprime-backed debt dropped by more than 80 points at its nadir.

Right now, the odds of subprime-like collapse in CMBS valuations appear long and that’s not good news for anyone selling the index short. But further declines would appear likely given the deep haircut Goldman has taken on its own portfolio of commercial mortgages.

No matter what, it would appear Goldman is in a better position than most banks to weather a further slide in the commercial mortgage market. It could even benefit if the market improves and Goldman gets to write up the value of some of the mortgages it’s marked down.

And, if lightning strikes twice, Goldman might even profit while others feel only pain..

(Editing by Martin Langfield)


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Is Goldman in the investment business or the gambling business ??

Second question, Why does this all smell funny ??

Posted by rayman in CA | Report as abusive

What kind of hard-on does this writer have for Goldman? He’s all hot and sweaty about Goldman’s profit in Q2 this year that he forgets that the company had to be bailed out by the U.S. government, nye 3 Q’s ago!

Now he’s reflective, dark and gloomy about commercial real estate markets, sitting there in his quoffe apartment down the street from his “wizards of oz”. Matthew, Matthew. Ha! He simply can’t stand the fact that a part of him died last autumn with the wizards. So he praises them, strokes them and licking his and their collective wounds with his pen, hopes and writes of a crash in another market. And he hopes that might ease his pain.

The price drops in CRE have already been priced into the CMBS/CMBX markets, and have actually rallied off their bottoms. CRE lags the economy so people have been short this sector since cracks started forming in the residentail sector. Goldman actually published a paper in late 2007 citing the ability to use the CMBX market (CMBS derrivatives) to express a macro short view on CRE. This index had a HUGE pluge and has recently rallied along with the cash market. Goldman has also started putting together some re-REMIC deals, which helps to get some cash bonds off their books.

Posted by PJC | Report as abusive

More like scheme replication than just history repeating itself. If Goldman and other investment bank traders can conceive, design and roll out Markit’s subprime ABX index, personally selecting RMBS deals for inclusion in ABX series with full insider knowledge subsidiary servicers were actively engaged in mortgage servicing fraud, manufacturing bogus defaults for lucrative CDS payouts they can certainly do it again with CMBS in Markit’s CMBX indices. There are no firewalls between trading desks and servicers. Each knows what the other is doing and takes full advantage of their complicity. A
large chunk of recently disclosed GS profits were directly tied to this scheme. No small wonder Department of Justice investigation into Markit consortium’s practices is probing how components of Markit indices are selected. In 2007 a Forbes commentator tactfully described how these index
components were chosen:
“These firms meet informally with Goldman Sachs’ managing director, Brad Levy, currently serving as acting director of CDS Index. They decide what fixed-income asset class may have reached its peak and requires an outlet for liquidity and the dispersion of risk.” -chronicles-indexes-oped-cz_rl_0807croes us.html

When you own the casino, you get to stack the deck and rig the game. Markit is owned by JPMorgan with at least 1.67 million ordinary voting shares out of a total of 14.38 million,according to filings at U.K. Companies House. Bank of America Corp. is the second-largest,
with more than 1.52 million shares held through its own units and those acquired in its purchase of Merrill Lynch & Co. last year. Royal Bank of Scotland Group Plc owns at least 1.35 million shares after its purchase of ABN Amro Holdings NV, while Goldman Sachs Group Inc. has about 1.11 million shares, the filings show. Perhaps DOJ will see how this scheme ultimately brought down the house robbing millions of homeowners in the process.

Posted by Blossom | Report as abusive

RIGHT ON BLOSSOM!!!! Right on Matthew. The whole Goldman thing — bailouts, elimination of Lehman, ad nauseum just plain STINKS!!

Posted by righton | Report as abusive

They are in the spin business, selling prepackaged goods.

Posted by loannetter | Report as abusive

blah, blah, blah…. are we capitalist or not. Goldman, as good capitalist, is taking advantage of an opportunity as is presents itself. As always someone loses, when someone wins. Let’s reward the losers since the losers need money. Goldman has to be kicking itself now since it went public in 1999. If they were private we wouldn’t talking here. And there are 100 private companies doing well since they don’t have to say what they are doing. Does Goldman have an unfair advantage? I would say yes, since they accumlulate the best talent in the world. For this they should be rewarded.

Posted by me | Report as abusive

If Goldman thinks the Commercial Real Estate Market is going to correct, people should be listening. Goldman seems to operate a notch above other investment firms.

Government Sacks is evil and must be stopped at ALL costs!

Posted by Art | Report as abusive

Interestingly, GS warned us the first time around, though few outside the bubble blogging community noticed. The truth is out there, and for this one the smoking gun is still online …

“Goldman-Sachs Say Home Prices To Drop”, The Chattanoogan, July 29, 2006(!)

눈의 생각…

Goldman’s real estate gambit – 서브프라임 모기지 다음은 이제 상업용 부동산 모기지의 차례인걸까?…

Goldman pretty much knows what’s really happening. Thanks for sharing this. I also know a real estate coach who could also help many in the real estate industry make money despite the current crisis.

[...] Goldman Sachs (GS) has backed away from commercial real estate.  (Matthew Goldstein) [...]

Subject: This coming from a PRIVATE COMPANY

(The FED) which violates our constitution now gives

orders to other private

businesses on what they can or cannot do.


Please , distribute

Amazing the Fed is slowly but surely eliminating the

S*&*Ls ,The Independent Loan Broker *&* now say

Loan Brokers (Like that will work for (BoA – Chase-

JPMorgan-Wells Fargo) *&* any Left over Mortgage Brokers

can not make (Yield Spreads)

This coming from a PRIVATE COMPANY (The FED) which

violates our constitution now gives orders to other

private businesses on what they can or cannot do.

We ,are back to the OLD SERFDOM of Europe ***(SLAVES)

***To the Elites who rig Presidential Elections and

Everything else?

WHY are we doing this to one another ?

Are Americans this “STUPID

This is A Financial WAR with Goldman and the FED

elimenating all competition (PERIOD)

This is not Capitialism -If anything its’ Facism

Posted by Mike | Report as abusive

I am a ordinary man compared to ohers.
This is another real estate gambit plan for wooing customers for running of their business empires.
Please careful of every good and bad of this company,then do the rests.
Please wait for few months for any direct venture on any future investments.
good for future.
Needless to say that what happened to previous so called known real estate companies,loans for high rates,mis-placed investments to some unproductive,less profit units.
All these bad companies are closed or in bail out packages states.
i have a high regard on many companies.
Now,i started for second thoughts of those companies.
Always,government investments,deposit in government financial institutions are very safe.
Luckily,i am in India.Our money are safe in government controlled banks,mutual funds,post offices saving accounts.
we have not lost even a single dollar in government hands,
Please understand that,my inner mind always America and Americans.
i want every American should be back to main steam of life.
Thats why, i am writing some good things through this a clear economic map to all.

The really sad thing about the CRE problem which is about to blow up, is that the regulators are being as incompetent as they were over subprime. Don’t the regulator know that banks are keeping REITs and the CRE afloat by not enforcing their loan covenants. Why you ask so they don’t have to write off these loans on their own books. So how long are the regulators goin to allow this cosy relationship to continue. Probably till naive investors loss about 80% of of the coming capital raisings in this industry.

Posted by gd | Report as abusive

They are possibly one of the greatest capitalists in the world, they have hardly ever faltered and seem to never miss an opportunity. I agree that some underhand tactics may have been used, but what big capitalist company hasn’t?

[...] Sachs (GS), as I’ve pointed out before, has done a good job reducing its exposure to commerical mortgages by selling off potentially [...]

One month later this is starting to look prophetic.

The main problem I have with the fantastic analysis coming out of the kids that Reuters has hired in the last year or so it that reading it all is sucking up increasing masses of time.

Posted by ARJTurgot | Report as abusive

PLEASE, PLEASE don’t say “haircut”. It’s just a stupid thing to say. In fact, I always feel depressed when I hear it. That’s because it reminds me of a particulalry stupid man who says many stupid things – and our liberal media, who hang adoringly on his every stupid word.

Posted by doug | Report as abusive

[...] 6)  Goldman Sachs is the key component of the oligarchy that controls the US Government and sucks the blood of the American taxpayer for profit.   Now they are planning to repeat their clever pillage of residential housing in the commercial sector. [...]

[...] Unlike other regional banks which have substantial exposures to the commercial real estate market, Goldman Sachs Group has been able to cut down its exposure to commercial mortgage loans and commerci…. [...]

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