Goldman’s hubris

By Felix Salmon
April 15, 2009

Any interest in buying shares in a highly-opaque financial institution which has been receiving billions of dollars from the US government but doesn’t want to do that any more; which is happily diluting itself in the midst of a hugely volatile and nervous market; and which generally acts in the imperious we-know-best, don’t-ask-questions tradition of all the best Ponzi artists? No? Well, you’re in good company: after the bank sold $5 billion of stock at $123 a share yesterday, the shares promptly plunged to close at $115 apiece, making everybody who participated in the offering feel like something of a schmuck.

Indeed, Goldman’s share offering yesterday is particularly distasteful in that in came fresh on the heels of Goldman’s first-quarter earnings report — a report which, according to no less an authority than BlackRock’s Peter Fisher, was mostly made up of one-off AIG-related earnings.

The AIG tale is important to keep in mind here, because the money flowing from the US government, through AIG, and ultimately to Goldman in January and February is possibly only half the story. The other half is Goldman’s famous counterparty hedging. Goldman is well known for having a more sophisticated counterparty hedging operation than any other bank; it claims — and I believe it — that all its AIG exposure was hedged. But what exactly did these famous counterparty hedges consist in? We can speculate endlessly about CCDS and the like, but there’s a rumor going around that a significant part of the hedge was a simple old-fashioned short position in AIG stock. And if that’s the case, Goldman ended up getting paid out both on the default protection it bought from AIG and on the hedges it took out against AIG being unable to make those payments. Talk about non-recurring earnings.

In the absence of much real-world primary-markets activity, Goldman’s prop desks are working hard to keep the firm’s profits up: according to my colleague Jonathan Ford, the value of Goldman’s principal equity trades in the first quarter principal equity program trades in the latest weekly data was an impressive 4.2 times the business it did for customers. In other words, Goldman is reverting to being the overgrown hedge fund which we thought was being quietly wound down when it became a bank holding company.

So yes, on the one hand the government has no business supporting a systemically-highly-risky hedge fund like Goldman Sachs with TARP money and bank charters. At the same time, Goldman has no business saying “thank you very much” for the financial-system bailout, but politely trying to decline participation in it by handing back the TARP funds. Like it or not, Goldman is a central part of the financial system, which means that it’s a central part of any bailout strategy. It can’t unilaterally say no to that, and I hope that it gets slapped down by Treasury as definitively as it was slapped down by the stock market yesterday.


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Felix, that’s not what Peter Fisher said. He actually said “some of those profits for some of the [financial services] industry may simply have been from closing out AIG exposures.” He also declares that he does not know if that is the case.

That’s quite different to the words you put in his mouth.

Also, how do you square his remarks, which he admits lack any especial insight, with Goldman CFO David Viniar’s claim that there was virtually no effect from AIG in Q1 because most of any benefit flowed through last year?

Now, doesn’t mean nothing happened – and I haven’t read between the lines of what he said (have just requested a transcript, though).

Also, where’s the juice on JF’s claim on equity prop trading vs client?

Posted by Murray | Report as abusive

Good job Felix! Keep moving your flashlight in these murky waters – It’s both useful and entertaining.

Posted by YR | Report as abusive

no way any too big to fail bank or ivestment bank should be allowed to pay back tarp funds. taxpayers should earn the dividends from all $ injections until no more injections are required for any institutions. if that renders goldman big enough to fail instead of too big to fail so be it.

Posted by oops | Report as abusive

“according to my colleague Jonathan Ford, the value of Goldman’s principal equity trades in the first quarter was an impressive 4.2 times the business it did for customers”

I would also like to know the source info for this. According to the earnings statement, principal equity trading generated $1.027bn while commissions generated $974m.

Posted by Ginger Yellow | Report as abusive

I noticed that the sole underwriter for the Goldman offering was Goldman. I wonder whether it was done on a guaranteed or a best-efforts basis.

“I hope that it gets slapped down by Treasury as definitively as it was slapped down by the stock market yesterday.”

I hope to someday fly, and its just as likely!

Posted by Brian | Report as abusive

Look, Goldman is not a bank. It is a gambling casino of the most vicious kind.

Regulated gambling casinos have known rules; you walk in there willingly to gamble your money and if you loose, hey the nice environment and great looking ladies serving you drinks gave you a good time.

The likes of Goldman take your tax money surreptitiously, gamble on things nobody, sometime not even them, knows. If they make money you loose; when they loose money you loose. They screwed the economy you lost your job; they ride the economy on the upside and you lost your shirt. It is called ‘investment banging’ – they bang your investments.

Posted by The Real Deal | Report as abusive

I think it is high time to call in the Navy Seals on all these guys…

Posted by J | Report as abusive

you dont understand a thing.

1) did you listen to the conference call? AIG trades were netted out in 4Q08 and had no impact on 1Q09

2) principal program trading has nothing to do with prop. when a firm takes a trade on prinipal, it means the firm buys the shares from a customer, facilitating the trade, and then sells them, rather than simply clearing them. hence, it takes the trade on principal as there is risk on their books for a moment. these are different than agency trades and have nothing to do with prop trading

3) its trading revenues came from dominance in interest rate swap markets, for example, which are vanilla securities.

4) if you actually read the press release and financials, you would see that they lost money in their “hedge fund” unit, principal strategies.

5) no, you cannot hedge counterparty risk by shorting the stock. these were cash flow trades in which AIG was the counterparty, and interest rate swaps were likely used to hedge those cash flows. Any collateral backing these trades was hedged with matching collateral hedging instruments.

I could go on.

please educate yourself before you go off spewing insipid commentary upon the masses. you dont help these psychological state of the markets. what are your qualifications again?

Posted by gk | Report as abusive

gk, not one of your points was valid. Do you work for GS?

GS completely ignored and did not report any December numbers. Their year ended Nov 30 and the new accounting year begins Jan 1. Get educated before you spew.

Posted by rc | Report as abusive

Why don’t you get your hand out of the next guy’s pocket and actually work for a living? Obviously, you are an advocate of sloth.

Posted by JB | Report as abusive


Posted by JB | Report as abusive

It’s interesting to observe the almost irrational emotions exibited by many anti-GS bloggers. Hope you’re not money managers, your emotion will get in the way. Maybe that’s why GS stocks continue to surprise on the upside, too many shorts around.

Posted by topcat616 | Report as abusive

No one now should question why it is necessary for government to play a heavy hand with Wall Street. Time and time again we are reminded that Wall Street simply cannot make decisions that are for the public good despite the fact that it was the public good that assured its solvency. I am not asking for socialism, I’m asking for business men and women at these institutions to do what is right for our country as a whole instead of trying to figure out how to line their own pockets in every expeditious method they can concieve of. Felix is correct, if Goldman is not willing to play its part in healing our financial system perhaps it would prefer the hand of government…once again giving the Ayn Rand Institute…yawn…something else to complain about.

Posted by ct | Report as abusive

Trust me, if GS didn’t make any money in the 1st quarter, this blog won’t even happen. Or, if Bank of America announces a shocking multi-billion profit quarter, there will be an even more heated anti-BAC blog. Bottom line – don’t make too much money, either as a company or as an individual, until this whole storm blows over.

Posted by topcat616 | Report as abusive

Why is it that so many people assume that GS must act on behalf of the US? They are a business, they operate to make a profit. They just so happen to pay taxes in the US (among other places). They are in the business of making money, not playing government.

It was the government that decided intervention was neccessary. Years of looking the other way as Freddie and Fannie faltered was the predecessor to Bear and Lehman, not to mention the govt playing matchmaker with other troubled companies.

Perhaps if the TARP funds weren’t forced onto banks and THEN the details given, GS’s desire to get off the hook quickly would be open to interpretation. Now the headlines read of how paying back TARP will weaken the views on the other banks that took funds. Finally we have our new bad guy to wave our finger at. When did paying down debt become a bad thing? Washington has tried to coordinate this entire process and all the while we continue to search for a short term knee-jerk solution to a problem which is not as simple as removing a splinter.

Perhaps instead of “finding the bad guy” we should look forward to ways to prevent problems surrounding the next inevitable “collapse”, this time when social security payouts and failed 401k are not enough to prevent the baby boomers from suffering at the hands of a broken health care system.

Posted by Rich | Report as abusive

The more I read financial journalism these days more I get convinced that probably the traders who did not know their fundamentals are entering this profession. Not one thing in this article is based on fact, all hearsay and rumour. I do not even want to commment on reader’s comments.

Posted by ASJ | Report as abusive

There’s enough ignorance on this board to fill an ark.

Posted by Nucks | Report as abusive

ASJ, I agree with you. Nobody here really knows what the f*%k they’re talking about. All we know for sure out of all of this is that greed has become a primal instinct among humans (perhaps trumping survival). Another thing we know for sure is that all of us are getting screwed because of a relatively few idiots making bad decisions. We’re all going to suffer for some time to come. What we choose to do in the coming months will determine how this country recovers. I wonder if we still have what it takes? Watching Credit Card companies raising interest rates by 50%, when they’re getting free money from the Fed, and companies like GS chomping at the bit to getting back into being an idiot factory, is disgusting.

Posted by FedUp | Report as abusive

I’ve just come to the conclusion that GS and the rest of “them” are going to win no matter what…..They’ve already proven that…..Unfortunately for DECENT WORKING AMERICANS,…..this financial debacle will only make the “SURVIVORS” bigger, stronger, faster…..WHAT DIDN’T KILL THEM IS MAKING THEM STRONGER….So what am I going to do about it….Hell I’m buying financial services stocks……I’m not stupid enough to think I or anyone else can beat them at the game they write the rules for. The only thing I can say, is that I’m NOT buying Goldman stock… but I’m loading up on the others who will be taken along up the ladder……LOCK AND LOAD PEOPLE!!!

Posted by L Marceau | Report as abusive

“There’s enough ignorance on this board to fill an ark.”

Then how does one who’s trying to learn this stuff discover the truth? send info to mears99 at

Posted by Mears | Report as abusive

Yeah, they want to return the funds, so that they can keep using the crazy business model that crippled our financial system. These people have no ethics. They are great manipulators of facts. I wonder if they are just really concern about the government stress test results and the capital raise is just a way for them to be a step early from the other banks at raising funds to keep their businesses up or to take more infusion from the government which with all the strings attached it is not in the best interest of greed.
Like they say Pigs get fat, hogs get slaughter and GS is for sure heading that way.

Posted by Joseph | Report as abusive

this might be the worst post ever written. reuters should be embarassed by this steaming pile of dung. hey, but things are looking up…if this idiot can get a job spewing baseless jabber, the media content business is in sorry shape…and should be prepared to be annhilated by google and every other distributor with scale.

Posted by anon | Report as abusive

Goldman Sachs seems to be gaming the system, with a wink and a shrug from the government and treasury. A few weeks ago, I remixed a few of the iconic logos of financial corps:

Simon Johnson, who knows his stuff, is also of the opinion that Goldman is throwing its weight around and should get smacked down by Treasury. The people commenting here are clearly either for laissez-faire or for a new accountability in the financial sector. Given the practically oligarchical powers they have demonstrated to frightening effect, I hope the masters of the universe get the bleep kicked out of them.

Management of GS seeks bonuses and higher pay by diluting other shareholders. Thats the main reason they want to escape TARP. I ges they booked some profit on this shere issu as well. Did they short their own shares for the bigger profit?
By the way, who would like to own shares of the guy who makes money in casino?

Posted by titas | Report as abusive

This is how this whole fraudulent system works; call it Ponzi, call it Goldman Sucks.. It is the same.

Heads you lose, tails you lose.. Who wins in this zero sum game?? Filthy conmen dressed in banker suits at Wall Street..It is time to reboot the whole damned system that cheats the poor to give to the wealthy, so that they can hide their ill-gotten tax-exempt bonuses in their luxurious tax havens.

Posted by patriot3438 | Report as abusive

How many of the anti-felix posts here originate from GS, I wonder? For an organisation currently litigating at great cost against bloggers, assigning some junior to flooding blogs with disinformation would be a simple, but effective deflection technique

Posted by Mike | Report as abusive

Slapped down from $123 to $115? Yes, but it has rallied from $52, while other banking stocks floundered. I can say from personal experience that GS was cutting leverage and building its cash reserves ‘months’ before other investments banks prior to the worst of the financial crisis last year. And they were first back into the waters while spreads were at their widest. Over-grown hedge fund or bank holding company, but they clearly have some sharp prop traders. Felix, you’re simply not in their league.

Posted by MrBill, Eurasia | Report as abusive

After upwards of $US1 trillion of losses and counting, there are still apologists for the likes of GS. I just walk right by and don’t look back (concerning the stuff GS et al want to sell us in reporting seasons).

Posted by cretinoid | Report as abusive

What truth? What facts?
The truth never escaped the tight lips of these financial gurus – - whether employed by our government or GS or any other chosen powerful entity, e.g. “Fed”, etc. So called “facts” are just stories that the same people are feeding to us in various forms and expecting us to believe them as being truthful and factual, yet, backed-up with a totally obscured and non-transparent evidence created by their self-developed/self-serving ‘official’ accounting system. Yes, they are the financial gurus but also gurus of the art of disinformation. Hence, no wonder we have so many people expressing, directly or indirectly, a total confusion that is so clearly portrayed through the many writings of diverse opinions everywhere, including here!

The traditional Banking Business in the US is right royally screwed. Quantitative easing and low Interest rates which all Economists and Bankers know,cannot go together. Banks cannot currently earn Profits from traditional lending business as rates are too low to provide a decent spread. The only avenue open for Profits is the high Risk business of Speculation. Even though it was rampant speculation that burnt the Banks this is what they will continue to do. They will concentrate on Commodity and Equity Markets which are quite shallow and give big swings. Institutions and local Operators will form informal Cartels so get ready for – Pump and Dump. Small Traders who rely on Technicals to eke a living will in most likelihood get wiped out.
All the Billions and Trillions of Taxpayers money is now firmly in the hand of Speculators. The Casinos of Las Vegas have now moved to Wall Street as CASH is available there. Welcome to the Year of Speculation !!

Posted by F.Daruwala | Report as abusive

Empty the prisons and fill them with politicians, bankers and CEOs.

Posted by Anubis | Report as abusive

The Real Trade Behind Re-Liquidating Balance Sheets (or where the TARP money is being deployed)

For the last year there have been substantial write-downs among all of the major financial institutions due to “toxic assets.” The premise behind the TARP (and various other alphabet soup programs) has been to ease the toxic assets off the books, or provide the financial institutions with the ability to remain properly capitalized and loan money to businesses. It is interesting that in today’s WSJ “TARP Cash Isn’t Moving Forward.” Where is it going?

GS, JPM, WFC et al are all reporting surprising earnings. Even in early March when the equity markets turned the CEOs of BAC, C, and JPM were promoting the story that they were making money and that times were not so dire for them. What did they know? They knew that the economy was continuing to get worse, asset values in real-estate, commodities, and other hard assets were continuing to deteriorate. They also knew that they were getting large sums of money from the government, easy access to the Fed window; trial balloons had been floated regarding “quantitative easing,” and “unconventional easing.” The Fed can only lower the interest rate so far, i.e. zero, but they can create an environment where by expanding the Fed balance sheet the effective rate drops below zero. It has been forecast that in order to make the policy appropriately easy that the “Taylor Rule” funds rate need to be at -8%, which would mean the Fed balance sheet would need to expand by as much as $10 trillion. The Fed expands their balance sheet by purchasing Treasuries of varying maturity.

This unconventional easing creates the opportunity for banks to releverage in the Treasury mark and arbitrage the spread by purchasing 5yr, 7yr, and 10yr Treasury Notes at yields ranging as high as 2.75%. As a straight cash trade this would be a good use of the TARP money; $5 Billion would earn $137.5 million over the course of a year. But this is where the creative folks of Wall Street earn their keep, they decide to purchase the 10 yr.
Treasury for example on margin and finance the transaction in the over night / term repo market at 25 bps (.25%). This results in a positive carry of 2.50%. Now a large financial institution such as C, GS, MS, BAC could possibly leverage this transaction 50:1, 100:1, and 200:1. In this example let’s take the more conservative number of 50:1; this means for every $1 Billion in 10 yr. notes they buy at a yield of 2.75% they need put up (in repo terms this is called a “haircut) 2% or $20 Million. In theory every $1 Billion in TARP money that goes into this trade, the banks could purchase $50 Billion in 10 year US Treasury notes. This trade creates a positive carry of 250 bps (2.50%) (Yield-cost to carry) or $1.25 billion in income over the course of a year by leveraging just $1 Billion. Not a bad ROI. So for every $5 Billion ($250 Billion in T-Notes) of TARP money in this trade, the banks create $6.25 Billion; not a bad way to reliquidate the balance sheet.

The risk in this trade is substantial, and is similar to what creating the mess in the first place. Using margin through the Repo market means that if the Treasury Notes were to move against the trade by more than 2%, the trade would wipe out the TARP money; and moves above that threshold would eat into the banks’ capital once again. The risk is mitigated by the Feds unconventional easing through the purchase of Treasury Notes along the yield spectrum. If they sense the market is moving against the banks, they print more money and buy more bonds keeping prices at a steady level. If the Fed really wanted to create liquidity on the balance sheet of the banks they could drive the prices of the 10 yr Note up (lower yield) by 3pts; prices would go from 100 to 103 (yields would drop by approx. 30 bps to 2.45%. This would be the turbo-charged version of Fed helping the banks; the carry would result in $6.25 Billion per year, but the principal increase would result in a profit of $7.5 Billion; that’s a total profit of $13.75 Billion over a 1 year period on $5 Billion in TARP money. Perhaps it is becoming clearer why the banks are not lending, their return is far better in the Fed’s arena.

How can one know if this is really taking place? Let’s look at one of the major Wall Street bank’s recent 8 K filed this week. The average daily VaR (Value at risk jumped from 197 in the previous quarter to 240 with the increase in the interest rate sector going from 178 to 218. This means the bank believes it could lose $240 million in a day based on its risk model. This same bank showed total revenues from Trading and principal investments and Interest Income of $10 Billion, with interest expense of $2.4 Billion. This bank in particular has had the use of $10 Billion in TARP funds.

This trade and solution to build back banks’ balance sheets in very creative on the part of the Fed and the Treasury, for there is no way to fill the black hole of toxic assets by just taking them off the balance sheets, the hole can be filled by creating fresh $s to replace the losses. How long might this take? How long might this trade go on?

There is risk in the trade. Can the government through its unconventional easing support the prices in the Treasury Note market? The ultimate risks also involves the U.S. Tax payer for the positive carry that exists in the trade increase the amount of the Budget deficit over time. Effectively the leverage works in favor of the banks and Wall Street by creating a special trade where they are given money (TARP) for a trade, then allowed financing the trade with the Fed for next to nothing, and having the Fed support the prices of securities they are leveraging by expanding the Fed balance sheet. In other words, I give you a $1, you buy $50 of government debt and finance it with a positive carry of 2.50% for one year, and the government basically guarantees to buy the paper back at the price you paid or better (maybe they want to make you feel even better). At the end of one year your $1 has become $2.25 if the government just buys the debt back at what you paid. But let’s say the paper improves in price and yield drops (for everyone wants in on this trade) by 30bps; the government buys the paper you purchased at $1 ($50 total) for $1.03 ($51.50) your $1 has now become $3.75. I like this trade! So do the banks with your money! What could go wrong? The Fed may not be able to keep prices at current levels by expanding their balance sheet (ultimately our children’s debt), and at some point in time when everyone has the trade in place and it needs to be unwound there will be too many rushing for the exit. Look at what happened with the Yen carry trade and how it kept the value up as everyone looked to unwind.

Meanwhile this creative liquidity could bode well for all of the financial stocks for some period. This could super charge all of the markets.

The only stress test I want the US government to release is what these recent bank earnings would have been under the old accounting rules. Anything else is just more bullshit the US gov is feeding into the market

Posted by gd | Report as abusive

Goldman, Citi, BofA, Barclays, etc rejoice a bank bubble built on the back of the taxpayers in a double generous handout of a couple trillion dollars….privatization of profits and socialization of debt…

At least we had the populist circus of the 160 million bucks worth of bonus for AIG that took the headlines (instead of the $12.5 billion Goldman pocketed from the ‘AIG second bailout’, etc).

….who will bailout the banks for the CDS due for settlement by 30th June, yet another TARP ?!!! or just a bubble burst yet again ?!!

The TARP money should had been used to support the (remaining) viable banks or setup banks with clean balance sheet with mixed state and private funding(instead of settling the debts from derivative gambling), keep the interest rates at a level that made sense for banks to keep lending and keep businesses running (credit lines open).

This financial coup remains the biggest scam in the history of the mankind.

Posted by McChavelli | Report as abusive

I’m no finance guru but I know a good screwing when I feel one. I’m in the camp that believes wall streeters are trying to make all the money they can as quick as they can before the truth and effects of thier greed is realized by the havenots of the U.S. If the banks on wallstreet still have 10 trillion$ of loses yet to fall, they will probably have succeeded in destroying our whole economy for a long time. I thought congress would use the anti-trust laws to break up these gambling establishments but we don’t hear any of that talk. I could give a crap if they make money but when all of wall street is gambling with borrowed money, sooner or later greed will always make them lose. 10 million or more people will be out of work because of bankers and wallstreet is stil playing the same, get filthy rich as quick as I can, no matter what. They better wake up. As the union movement in America starts getting momentum we will see people taking out ,or blaming, thier problems on those who profited and then destroyed thier families and lives. Everything in this life has cause and effect. Europe is a good example of what will happen when the stimulas already injected doesn’t work because the big banks once again need 10 Trillon$ or the world will crash again. Mike

Posted by Mike.W. | Report as abusive

In the words of ole Andrew Jackson,

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”

– Andrew Jackson
(1767-1845) 7th US President  /Andrew.Jackson.Quote.4F92

Posted by gunlock | Report as abusive

In Andrew Jacksons words….

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”

– Andrew Jackson
(1767-1845) 7th US President  /Andrew.Jackson.Quote.4F92

Posted by gunlock | Report as abusive

I enjoyed Ben’s explanation of the recent bank earnings announcements and where to look for the support. Most banks are pointing to their trading divisions as the source of their earnings with the exception of the one time gain from the sale of assets or the gains made by accounting for the changes in the assets they are holding (mortgages).

I still would like to know this: if the banks can reprice what is essentially my debt on their books (an asset) to what it will ultimately pay, why can’t I reprice my mortgage (an asset) for refinancing purposes to what my property will be worth in 30 years?

As Ben said, this could go on until/if the fed were ever to lose control of the yield curve. The risk is the longer it goes on the more the yield curve will price in inflation which is where the fed and the banks get the squeeze. Borrow short and lend long..not bad when you do this spread and the counterparty (taxpayer) who is the same on both sides of your trade…good for you, bad for the counterparty. In the normal course of business this entity would go bankrupt.

Posted by ct | Report as abusive