Chart of the day: Goldman VaR

By Felix Salmon
July 15, 2009
WSJ reported at the time that the banks were “taking steps to reduce their leverage”: It had become increasingly clear to Fed officials in recent days that the investment-banking model couldn't function in these markets… … The annotation is mine: var.tiff I guess Goldman Sachs worked out how to generate profit growth in a world that no longer tolerates high leverage.

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Remember September, when Goldman Sachs and Morgan Stanley became bank holding companies? The WSJ reported at the time that the banks were “taking steps to reduce their leverage”:

It had become increasingly clear to Fed officials in recent days that the investment-banking model couldn’t function in these markets…

Goldman — and to a lesser extent, Morgan Stanley — has maneuvered through the credit crisis better than other investment banks. But its business model, which relies on short-term funding, is under attack. Some stockholders worry that its strategy of making big investments with borrowed money will go wrong someday, which would make it more difficult for the firm to get favorable borrowing terms…

The most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage.

Now my colleague John Kemp has published a wonderful little chartbook of Goldman’s value-at-risk, which includes this. The annotation is mine:

var.tiff

I guess Goldman Sachs worked out how to generate profit growth in a world that no longer tolerates high leverage. It just increased the amount of capital it puts at risk every day.

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