Goldman Sachs datapoint of the day

April 24, 2009

Tyler at Zero Hedge has been rooting around in NYSE statistics, and finds that Goldman Sachs traded over 1 billion shares for its own account last week — more than half the principal program trading from NYSE member firms, and more than 20% of all program trading on the exchange. My feeling is that this is a function of the decline of big liquid hedge funds with essentially unlimited funding capacity: Goldman is stepping in to take advantage of the lack of liquidity in the non-bank financial sector.

But how can Goldman take advantage of that lack of liquidity in the hedge-fund world? Just because it has access to unlimited government liquidity itself. Essentially, the US taxpayer is lending at extremely low rates to the world’s largest hedge fund, even as the world’s largest hedge fund is trying to extricate itself from any responsibility to the US taxpayer by repaying TARP funds.

According to Jon Unia, Goldman has made $600 million over the past four months just from the fact that the government has guaranteed a large chunk of the company’s debt — I think that’s the difference between Goldman’s funding costs with the guarantee and the amount it would have had to pay without it. That money alone makes the difference between Goldman making a profit and making a loss. If you add in the pretty artificial profits they’re getting from their NYSE program trading activities, I’m sure the hidden subsidy to Goldman Sachs gets even bigger. And that’s not even counting all the money funneled to Goldman via AIG.

Goldman Sachs claims to be a bastion of free-market capitalism. But that’s not how it’s making its money these days.

Update: Goldman Sachs spokesman Ed Canaday responds:

The NYSE report that Zero Hedge discussed shows Goldman Sachs trading over 1 billion shares in the principal program trading category. What the table doesn’t show, but a deeper look at the numbers reveals is that the vast majority of this total is trades by our quantitative trading desk. This desk is participating in a relatively new NYSE program called Supplemental Liquidity Providers. The NYSE started the program to attract liquidity to the exchange. As an SLP, this the desk makes markets in NYSE stocks. They often do high-frequency trading (which is simply auto-quote market making) where they send out hundreds of “baskets” of stocks at one time. Program trading, as defined by the NYSE report is any strategy that sends out a “basket” of 15+ stocks at one time. I am happy to discuss this with you if that description doesn’t make sense.

On another part of the post, you reference the FDIC-guaranteed debt program (aka the TLGP). I don’t understand how it is the US taxpayer who is essentially lending to GS and the other banks since the FDIC and this program are funded by the banks themselves. I also have difficulty understanding the $600 million savings that is sourced to Jon Unia. Do you know how he arrived at this number?

No, I don’t know where Unia gets his $600 million number, but I don’t believe for a minute that the TLGP guarantees are coming at anything approaching a market rate — not with bank CDS spreads where they are. There’s an implicit subsidy from taxpayers insofar as FDIC guarantees are vastly cheaper than any private-sector insurer would charge for the same service.


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