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A Detailed Look At Goldman's CDS Holdings And How CDS Trading Has Become The Squid's Multi-Billion Cash Cow
One of the more useful information items in Goldman's periodic filings is granular disclosure on the firm's CDS holdings, and specifically segregated data by maturity bucket and by spread as pertains to "maximum payout and notional amount of written credit derivatives." In essence, due to the firm's monopoly in CDS inventory and, therefore, trading, this is the squid's beating heart: between buying and selling (hopefully offsetting positions) CDS in billions of dollars worth of notional daily, and being able to capitalize on wide spreads, courtesy of the extinction of such traditional competitors as Bear and Lehman, the firm will continue to make hundreds of millions in profits every day, month and quarter, due to its newly found monopolist exposure when it comes to trading CDS, both as principal and as agent.
A little background on why CDS is the primary cash cow in Goldman's sales and trading repertoire.
A Goldman CDS flow trader will traditionally make markets, for example in company XYZ, where he will give the (5 year) market as 500/530 bps, meaning buyers will put on new CDS at a spread of 530, while sellers will offload and/or short positions at 500 bps. By running traditionally balanced books, Goldman's flow trader is able to extract a 30 bps spread on any block of matched buys and sells. On $1 billion of notional traded CDS (which is much less than the firm does daily), with a DV01 of about $400k, if Goldman can unwind its CDS book daily to natural buyers and sellers, it can make $12 million simply by taking advantage of the spread ($400k (DV01) x 30 bps). At an average CDS block trade size of $25 million, Goldman's hundreds of salespeople need to just call up 40 accounts to trade in size and make the firm a risk-free $12 million. In days of volatility, Goldman can easily trade over $10 billion in notional equivalent. Again assuming a 30 bps spread, which the 85 Broad firm has basically guaranteed itself for life, courtesy of monopolizing the CDS market with just itself, and JPMorgan providing any relevant CDS inventory, Goldman can easily make $120 million daily, merely from trading CDS on a risk free agency basis.
This analysis does not even include Goldman's prop operation, which as we have discussed prior, at least in the CDS world, has its traders/analysts sitting feet if not inches away from the flow guys who scream all day long what the Fidelitys and the Putnams of the world are about to trade (and we are talking size: $100MM blocks or more) as trader X tries to find trader Y who may have a matched natural opposite interest. As this screaming match continues, prop trader Z quietly puts on a $10-20MM or more million position, frontrunning whoever may be the large block trader about to execute, without actively moving the market. Once the elephant prints, Goldman's flow guys have locked in the spread, while the prop trader now has a heavy tape to serve as a tailwind. In such a way, combining prop and flow, Goldman is able to make millions and millions daily, without any notable risky exposure: it all is a function of Goldman having i) the largest CDS inventory, ii) the best and largest client accounts, iii) the most liberal seating chart on its trading floor, and iv) nobody who is willing to not take Goldman markets: after all where else would you go?
Sometimes there will be quirks: like when the firm has net notional exposure to a firm like AIG, which may or may not be able to fund tens of billions worth of margin calls, thereby skewering Goldman, which is forced to eat the loss. Of course, in those instances people like Tim Geithner step in and bail out the counterparty so that things at Goldman can continue running as smoothly as always, and the firm can go back to making hundreds of millions in virtually risk free trades daily (and that even excludes the perpetually Fed backstopped balance sheet: this aspect of its risk free business is merely a function of its near-monopolistic dominance of the CDS market: nothing more fancy).
Another time when things get problematic is when Goldman is running an unmatched book: in other words when it has sold more CDS than it has bought, a disbalance from a purely P&L point of view, or when it has sold less than it has bought, a risk from a counterparty perspective.
The last is precisely what happened to Goldman as it transitioned from last year and headed into 2009. As the charts below demonstrate the company materially tightened its overall sold CDS exposure, in other words the gross maximum payout it may have been on the hook for at any given moment.
What is obvious is that the firm has collapsed its total CDS exposure by 25% since Q4 2008 (is that November or December? We are not sure which month Goldman prefers: as readers will recall December is the orphan month in which the firm jettisoned all its credit ($1.5 billion) and currency ($2.3 billion) losses). The current CDS total exposure is roughly $2.8 trillion (max loss if all the companies that Goldman has written protection on file tomorrow). Of course this is netted by CDS purchases, which should net out. More on this in a second. Also curious is that the one segment where the firm has collapsed its risk exposure the most is in the 250-1000 bps sector, while it has actually grown its exposure in the 0-250 bps segment. This of course could also be due to the fact that names which were previously trading point up front are now back to double digits spreads, courtesy of the Fed's $23 trillion in excess liquidity propping up all risk assets.
Another view of the data indicates that Goldman, just like the US government, has considerably reduced its term exposure, with the 0-12 month tenor category having grown from $230 billion to $300 billion.
The inverse trend is evident in both the 1-5 year and 5+ tenor holdings, with reductions in exposure across the board.
Yet on a notional basis, things are not quite as bleak, and it appears that Goldman has learned its lesson: while at Q4 2008 the firm had a net liability arising from the carrying value of its written CDS of almost half a trillion, or $460 billion to be precise(that would mean its net exposure if all counterparties failed, would leave the company scrambling to get first row seats before Bernanke's printing press and praying it could print $460 billion worth of worthless dollars in one day), that number has since collapsed to a liability of merely $82 billion. Yet even that number is staggering, and begs the questions of what will happen to Goldman if we have another Lehman event at some point when the Fed's printing presses finally blow a fuse, and, more importantly, just what is the exposure of the other major CDS trading power houses which have likely not been as prudent in managing their credit derivative exposure. Zero Hedge will next analyze disclosed CDS exposures at JPM, DB and some of the other left over CDS trading desks. Luckily, with Lehman and Bear no longer out there (providing a happy Goldman with limitless Fixed Income monopoly powers), our task will be much easier.
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And this is why im long GS. Have been long GS from 100-120.
I'm sure you were fully aware of this when you went long...
What i was aware of at the time i bought GS was that one Friedman was a executive on GS and also a board member of the NYFED. I also knew that AIG was bailed out giving GS a huge payout. I also knew that Lehman and Bear were gone, Citi was weakened, Merrill was also toast. So with GS, MS, and JPM the last large IBanks left why wouldnt buy the squid.
sadly, that's what i've learned from reading this website. GS is the government's proxy in the market. buy it, and wide the warm fuzzy wave. Watch the markets soar, the rich recover, and bask in the new american dream: wealth by proxy.
oh, and hedge it with gold for when the Great Collapse comes...
part of the problem
congrat-u-fucking-lations
tick tock, tick tock.
if and when we get an event(s), I don't think the American taxpayer will allow bailout of the squid. they will have to rely on the backdoor fed assistance and now that it has been exposed, that is no guarantee.
tbtf must end and the sooner, the better, the less risk for the american citizen.
excellent analysis ZH...thank you for the outstanding effort!
and, for pete's sakes people, click on the cof ads.
dh: u know what ads i get:
Solar Energy Charity. www.solar-aid.org
Help Relieve Poverty Through The Provision of Solar Energy
Lizzy36,
Clear out the browser cache. The NSA sees you've been visiting them thar environmental web sites and they assume you like Solar.
Clear the cache and re-boot while sternly warning your computer if it doesn't behave, you'll shut it down overnight and it won't be able to play on those porn er.........environmental sites while you sleep.
awww.. You wanna take all the fun away from botnation? heh
Be careful about caring about the environment. Al Gore will come and manipulate you. He comes in the smog. Mostly. Mostly....
We just got CIT Group. Granted it's no Lehman, but still...
"Don't think the American taxpayer will allow ...?"
You say that as if the taxpayer had any choice in the matter.
They bailed out GS once through AIG. They can do it again as many times as necessary.
TD, thanks for this. What I don't understand though is who will terminally be on the other side of GS's trades? How can the funds that come in to buy single name & index CDS expect to make money (most of them are speculators) when GS quotes 10 to 20 bps markets on this paper? It would seem to me the spreads would have to come in dramatically & GS would have to do more than just collecting bid/offer. Other market participants would get wise to the GS monopoly rather quickly I would think.
The majority of the notional in CDS is traded in the indicies where the markets are only .25bps wide. Second to the indicies are single name investment grade CDS where the markets are 5-7bps wide in most namee. Single Name High yield is where you see 20-30bps markets but many of those names trade above 600bps so it would make sense for the market to be that wide, but the notional done in high yield is about a 5th of the notional done in investment grade.
He who sucks the taxpayer's money the fastest wins.
Man, that's some freakingly good analysis... and I surely hope this is passed on to others of influence.
At the very least, GS doesn't need a bank charter, or the benefit of getting credit from the Fed window at 0%.
At the most, one would think a regulator should break open the Sherman Antitrust act and see how that might apply to Goldman's CDS business... and act accordingly.
I'd take the very least, and of course, hope for the very most.
Can't do it. Wouldn't be prudent. The whole XYZ system would collapse into a black hole. But isn't that always true with these monopoly guys...
All that Lloyd Blankfein would need is a monocle, and we would be playing Monopoly in real-time.
And if you turned this into Reality TV, perhaps the huddled masses here in the U.S. might take notice.
Agreed, big time.
assetman is one of my favorite commenters on zh.
Agree. Cuts to the chase.
DH is one of mine too. Even if he does leave earworms wiggling about the place. On the NY dead thread, I left you a gift.
He he.
Assetman has more dignity than to do a thing like that...
A dead head is on thin ice with zombies. All I gotta say on the matter. Glass houses and stones. All that.
Goldman is the dominant market maker in CDS, no doubt, and an active proprietary trader as well. The assertions about the "advantageous seating chart" are simply not true. How do I know? Because I worked at GS for ten years, and sat in seats where I would know.
Bottom line, Goldman Sachs is the dominant and most effective player in near every on of the markets they serve. And they operate with a high level of integrity. I know you won't "believe me", and that's fine; I would not expect anyone to believe me; jealousy and envy are very powerful, though destructive, emotions and behind most populist rages.
Full Disclosure: long 75,000 GS
Anon, register on the site (ie: become a name fag) and that will add just a tiny, twincy bit of "believe me" to your posts. At least people can track what you do and look for inconsistency among your postings.
Recommended name : GSandMe
mood = helpful
TJ3
Why not just throw 10% of your trading account into GS. You know that this biatch is going to + $250 so why noyt profit off the squid.
good question, life's a bitch, ain't it.
and yes, I missed the rally.
must be why gs encourages its executives to use vm instead of email. cause they don't want anyone to "read about their integrity".
*vm remains on their system for a week and then is gone forever.
wow ZH a populist website. so u have read a lot of tyler and marla's work?
ZH is not a populist web site. However, the constant assertions of securities fraud and market manipulation by GS, w/o real evidence, and painting GS employees as "banksters", is classic populism.
I would also like to add my concern that rabid GS "bashing" might be veiled anti-semitism. I hope not, and I do not ascribe motives to TD's posts.
But "Goldman Sachs" is a euphamism for "jewish bankers". Anyone that has studied Europe and Germany in the 1930s understands what I am talking aout.
??
I hope youre fucking kidding. You guys and your constant 'hey watch out i can smell the anti semitism' is getting really fucking old. Grow up, and get your nose out of your ass.
Whoa, I only accused GS of killing puppies with claw hammers. So is being jewish worse than animal cruelty?
Yeah, throw that in for what it's worth to muddy the waters, why don't you?
Except for your own paranoia, no one alluded to anything remotely anti-semitic. But keep creating distractions and OT comments.
And if someone did use the means provided at this site and report it.
Perhaps then. But there are plenty of WASP's and a few Catholics (that bribed ther way in) there now. So pulling the anti-semite card is lame.
Oh PUH-LEEZE. No one makes that stupid association any more.
Half of us are Jewish anyway.
Fucking weak, you picked the wrong website. Go to a mainstream website of non-thinkers for that diatribe.
Now for your logic lesson, I will simply illuminate using reasoning not emotion:
If someone was stealing your money or assaulting your children, would you really care what their background was? If it was coordinated stealing or coordinated assault of your children, you might want to find out what the crooks or pedophiles had in common so you could immediately stop them. To say all Jewish people are crooks or all Catholics are pedophiles is a fallacy of logic from the part to the whole.
When Madoff was fingered as a crook, he hid behind the Jewish people and used them as a red shield against the accusations by stating the individual making the claim was against all Jewish people and an anti-semite. When accusations came out about priests, the catholic church at first resisted calls for investigations, moved the pedophiles to different churches, and in some cases attacked the accusers as well.
Sun Tzu would be proud: "When weak act strong", but more importantly "When strong act weak". The victors are playing a card of calling themselves victims - in poker call the bluff and let your opponent fold. With 2% of the population taking on the majority of the finance & media leadership positions, the empirical evidence actually points to the reality of the opposite of anti-semitism due to over representation, perhaps we could call it anti-gentile or anti-american. In other words, while the media promotes diversity the leadership positions in finance and the media are anything but diverse.
Our pitchforks are equal opportunity, punish the horse thieves according to their deeds regardless of their background, connections, or cries of being anti-anything. To say no Jewish people are crooks or no Catholic people are pedophiles is false and ignorant. The only thing we are anti is pasta, crooks, and weak arguments appealing to emotion on this site.
We are pro-meritocracy, pro-liberty, pro-equal opportunity, pro-truth and there has been signifcant site coverage of other TBTF's but none with so many tentacles into the government. If you steal, you shouldn't use the broader Jewish people, the government, or anything else as a shield from evil deeds - in an ideal world the punishment should fit the crime without appealing to emotion. Most of the people here are objective and not pro-Jewish or anti-Jewish - I just hope the same thing can be said for Jewish people on the question of pro-diversity or ethnocentrism.
funny i thought "Goldman Sachs" was a euphemism for the anal suppositories that have been rumored to get implanted in all you boys during some bizarre homoerotic initiation ceremony in the bowels of 85 broad. silly me.
see you at 1 3/4. don't forget to bring your 75k sheets of paper -- they'll make a spectacular fire.
Wow, aaah, wow. Wow. And to think for a moment I was considering your posts as possibly credible. Thanks for showing your colors. Book'm Danno!
We will have peace when the power of love overcomes the love of power.
hallelujah
Apocalypse Now,
Loved your logic.
Millions of us mortals do not see the beautiful sunrise or sunset, though we have heard how heautiful they are. We are too occupied with our daily chores or social events to stop a moment to gaze and give praise to the "Give of all."
Why did the dominant and most effective player in near every one of the markets need to suckle like little fucking bitches from the government tit?
And who said that GS did, aside from you, Matt Taibi and Max Keiser? Based on what evidence?
TARP? that money was forced on GS (and JPM) by Hank so as to obfuscate the banks that needed government capital, e.g. C, BAC, MS, from those that did not, e.g. GS, JPM.
AIG? Goldman was fully hedged on its exposure to AIG. The government bailing out AIG was to prevent a collapse of the financial system, including AIG, GS, JPM, MS, C, BAC, DB, YOU, ME, TD and everyone else on the planet. It was not about "bailing out GS"; and to suggest otherwise demonstrates a lack of knowledge of the structures that were in place. Did the AIG bailout "save" GS? Sure, and everything else you and I hold dear.
Goldman did not make one thin dime off the "$18 billion", because they had offsetting positions.
You say GS didn't need govt capital, then go on to say GS would have failed without AIG getting bailed out? I'm sorry, but something seems very inconsistent with your argument.
And yes, although we would all be in a world of poop if not for the bailout, I'd rather be sitting in it with the guys who are responsible for it then watch them profit handsomely off of it.
well, your post shows you have little understanding of the situation(s) so i'm wasting my time responding. but here goes...
GS did not need government capital (TARP), that is correct. GS was forced to take it, along with JPM, so as to obfuscate the banks that needed capital from those that did not.
The AIG bailout is unrelated to TARP. Had AIG failed, GS would have failed, and it would have failed regardless of whether it had TARP capital or not. And the same is true of JPM, BAC, MS, RBC, WFC, DB, YOU, ME, ETC... Bailing out AIG saved everyone from a deflationary depression thatwould have destroyed your standard of living and future, and everyone else in the Western world.
Like I said, it was just as much a bailout of you as it was a bailout of GS. AIG fucked up. Hank did what he had to do. He saved your ass and you don't even realize it.
Whatever,...
They might not have needed TARP, but they needed govt capital to survive, that's my point. If the govt didnt give TARP to the banks that needed it, GS would have been toast in that scenario as well.
And your argument that they were fully hedged on AIG makes it sound like they shouldnt be partially blamed for AIG's failure? They had to know that in a scenario where a company like AIG couldn't pay them back that the world financial system would melt. It's not a crime, unless outright stupidity is.
Ex-GS employees would be the first to starve in a post financial crash world.
Ahh.. Now it becomes ever more clear. Goldman does not need to be a Bank Holding Company or require the access to the various programs and guarantees offered by the fed, fdic and other government agencies.
Great! When is Goldman going to return its license as not needed?
Awww, they're in it for altruistic reasons. Pssssf!
There are many, many better ways he could have done it though, one for example:
As an investor of last resort the government could have taken over the bulge/money center world, fired the top 50-100 leaders of each company, wiped out the equity holders, forced the debt holders to endue pain and convert to equity and leave the vast majority of the equity in the hands of the taxpayer. A sliver of equity could have been set aside for employees to align incentives. If/when an institution got back to profitability it could be IPOed back into the pubic market with the preponderance of profits accruing to the taxpayer not on the whole a bunch of over-privileged nepotistically advantaged Manhattanites that should have been fired and remained unemployable for causing the debacle in the first place.
In this case all the tickers you mention would have been zeros. YOU I don’t know as you may have owned a bunch that crap, but ME as the taxpayer not owning any prior to the debacle and now owning some from off the bottom in the fall of ’08 would be sitting in a much better place. We may have even got a bailout plan crafted around the idea of making banks lend vs. ramping up the prop books to dine furthermore at taxpayer expense.
Yes Hank “saved” the system, just like you can “save’’ yourself from chipped toenail by cutting off your leg with a steak knife. He rearranged what was left of the system in a criminal self and former peer serving fashion that is obvious and dangerous to the body surviving into the future. This is on one hand via increased populist anger in an environment quite unfavorable to the typical person, and on the other with a precarious over concentration of power, wealth and influence in a shrunken financial services oligopoly led by a bunch of fools who couldn’t see the last crisis coming.
There are many, many better ways he could have done it though, one for example:
As an investor of last resort the government could have taken over the bulge/money center world, fired the top 50-100 leaders of each company, wiped out the equity holders, forced the debt holders to endue pain and convert to equity and leave the vast majority of the equity in the hands of the taxpayer. A sliver of equity could have been set aside for employees to align incentives. If/when an institution got back to profitability it could be IPOed back into the pubic market with the preponderance of profits accruing to the taxpayer not on the whole a bunch of over-privileged nepotistically advantaged Manhattanites that should have been fired and remained unemployable for causing the debacle in the first place.
In this case all the tickers you mention would have been zeros. YOU I don’t know as you may have owned a bunch that crap, but ME as the taxpayer not owning any prior to the debacle and now owning some from off the bottom in the fall of ’08 would be sitting in a much better place. We may have even got a bailout plan crafted around the idea of making banks lend vs. ramping up the prop books to dine furthermore at taxpayer expense.
Yes Hank “saved” the system, just like you can “save’’ yourself from chipped toenail by cutting off your leg with a steak knife. He rearranged what was left of the system in a criminal self and former peer serving fashion that is obvious and dangerous to the body surviving into the future. This is on one hand via increased populist anger in an environment quite unfavorable to the typical person, and on the other with a precarious over concentration of power, wealth and influence in a shrunken financial services oligopoly led by a bunch of fools who couldn’t see the last crisis coming.
Propaganda alert! Propaganda alert!
"it was just as much a bailout of you as it was a bailout of GS"
utter nonsense
"Bailing out AIG saved everyone from a deflationary depression that would have destroyed your standard of living and future, and everyone else in the Western world."
You mean like the one we are all living in now ?
How little you understand of the undertow that at this moment is building. Another 512,000 working Americans this month don't really give a Rats ass what Hank has done or will do. No they just want to stop being afraid of where there next meal is coming from. Do You know what its like to be homeless, yet educated, trained,hardworking but expendable - a Number
What is it with you Americans - It takes another country to bomb your Navy before you get of your fat Ass.
Hank Paulson likes snakes because he is the son of one.
GS benifited from the bailouts. All of the banks bailed out benifited from the bailout. What kind of lunatic would argue that an orginization that recieves 100's of billions dollars directly and indirctly from the government, as well as 0% or near 0% interest loans from the Fed did not need it and didn't do so at the expense of others? Being that the government gave that money to them through taxes, either through inflation or income taxes which is just a form of redistrabution of wealth from my money, my work, to GS and you have the balls to defend them.
FUCK YOU!
There are many, many better ways he could have done it though, one for example:
As an investor of last resort the government could have taken over the bulge/money center world, fired the top 50-100 leaders of each company, wiped out the equity holders, forced the debt holders to endue pain and convert to equity and leave the vast majority of the equity in the hands of the taxpayer. A sliver of equity could have been set aside for employees to align incentives. If/when an institution got back to profitability it could be IPOed back into the pubic market with the preponderance of profits accruing to the taxpayer not on the whole a bunch of over-privileged nepotistically advantaged Manhattanites that should have been fired and remained unemployable for causing the debacle in the first place.
In this case all the tickers you mention would have been zeros. YOU I don’t know as you may have owned a bunch that crap, but ME as the taxpayer not owning any prior to the debacle and now owning some from off the bottom in the fall of ’08 would be sitting in a much better place. We may have even got a bailout plan crafted around the idea of making banks lend vs. ramping up the prop books to dine furthermore at taxpayer expense.
Yes Hank “saved” the system, just like you can “save’’ yourself from chipped toenail by cutting off your leg with a steak knife. He rearranged what was left of the system in a criminal self and former peer serving fashion that is obvious and dangerous to the body surviving into the future. This is on one hand via increased populist anger in an environment quite unfavorable to the typical person, and on the other with a precarious over concentration of power, wealth and influence in a shrunken financial services oligopoly led by a bunch of fools who couldn’t see the last crisis coming.
Sensitive? Suckle suckle.
Here's the thing. Right now, the green shoots and confidence propaganda have slightly pacified an extremely pissed off and well-armed population. If you don't like the fact that we flyover minions know about GS sucking our tax dollars from the state while we see our entire world destroyed, then stop sucking. Motherfuckers.
Banks fail. Final answer. If GS fails, then fucking fail. Don't go hat-in-hand to Hank and squeeze us down. Let the motherfuckers fail. I eagerly welcome the day that the whole system fails. Bring that shit on. I know how to grow food and sustain my life without debt. Do you?
Wow. An angry, uneducated guy living in a double-wide in Ohio that reads Zero Hedge. Who'd have thought.
I'm glad that you know how to grow food since it's clear that you may not have the means to earn money for food, aside from perhaps welfare and robbing 7-11s with your "well-armed" buddies.
I'm sure that Goldman Sachs security (the FBI) will review your veiled threats of gun violence with great interest.
What a loser...
Yes, of course. Ohio, loser, welfare, robbing. Less the Ohio part, you just described GS. Right?
I'm sure that Goldman Sachs security (the FBI) will review your veiled threats of gun violence with great interest.
That's just like you beta-male frightened wimps. Run to the government after manufacturing a problem.
since you are such a "tough", "macho", "well-armed", "he-man", why don't you just load your guns in your 1993 Buick Skylark, drive to 85 Broad Street and have at it.
Of course, you'd get taken out by security before you had a chance to pull your fat ass off the tattered bench-seat, and beer gut past the steering wheel, but it sure would be fun to watch.
Please, let me know the date and time so that I can park myself in Pax World, with a coffee and donut, to enjoy the show.
The contempt for middle-America is strong. At least you like our money.
One day, the welfare will run out. I'll be fine, because my bread doesn't come from the government. I have actual skills independent of my vocational skills. A hedge, really.
I have no contempt for middle America.
I have contempt for uninformed populist nonsense.
I have contempt for the dirtball RepubloCratic party that has been stealing from the people for 95 years through their "federal reserve" w/ its money printing and credit creation.
I am glad that you have skills, because you will need them.
http://images.google.com/images?q=1993+Buick+Skylark&rls=com.microsoft:en-us:IE-SearchBox&oe=UTF-8&sourceid=ie7&rlz=1I7ADRA_en&um=1&ie=UTF-8&ei=5FHzSqzpJMHK8QbL47jfAQ&sa=X&oi=image_result_group&ct=title&resnum=1&ved=0CBUQsAQwAA
Here are the photos of all the 1993 Skylarks that still run.
That way you will be able to see it coming.
LOL
Fucking touche.
I want the white one, 2nd row from the top, 3rd from the left. I promise I'll shut the truck before the drive by to lower the drag coefficient and maybe get er up to 40 for the get-a-way. :>)
Leave Ohio out of it...
Properly hedged would imply that they wouldn't have been dragged down by their supposedly less scrupulous, insolvent counterparts.
Was this the case?
No. Had AIG been allowed to default, GS would have been wrecked. As would every other bank, you, your mother, your sister, your children's future, and everything else in the Western world save the grand canyon and rocky mountains.
Rescuing AIG was about saving the "world" from a financials meltdown and deflationary depression.
GS was hedged in its exposure to AIG, and did not "profit" from being made whole on the AIG collateral as there were offsetting positions
ahh. The you're all dead if you try and move the 1,000 pound man to health argument. Fact remains that if the banks had failed in that situation they would have simply as a reflection of the leadership of those banks, those that work at those banks and those that regulate those banks failed catastrophically. The banks, shareholders, debt holders and counterparties should have been allowed to fail to teach us all a lesson in prudential economic & financial policy and structure.
This argument is so played out. I promise you if the banks had all failed fresh private capital would have rushed in and quickly established new banks ready and willing to pick up where the previous banks had failed.
The process for those who don't remember is called capitalism with a capital "C".
But those "new banks" wouldn't have had time to hire lobbyists... think of our poor politicians in Washington DC who have spent years "cultivating" relationships with the "old banks" - where would they have been if the banks failed?
That would be the end of civilization as we know it.
That is utter bullshit pal. If AIG had gone down we would have had a bank holiday. The regulators would have walked in and shut everybody down, fired the dumbasses who lost all the money, and reopened for a business a week later. Nothing would have changed except a bunch of squid suckers would be out of jobs. This absurd argument that the world would have ended if AIG had blown just has to stop. It is ridiculous, misinformation, alarmist bull shit.
plus a gazillion
They were hedged on their direct credit exposure to AIG but weren't properly hedged on the total CDS counterparty risk for an AIG bk event:
http://www.tavakolistructuredfinance.com/GS2.pdf
CDS are actually unregulated insurance products that allow the global financial system to become extremely overleveraged to any sort of counterparty failure events.
In other words, if Step 1 was to bail out AIG to prevent system-wide collapse, then logically Step 2 is to regulate the CDS market and break up the monopoly players.
Those who argue that the government 'didn't bail out GS they bailed out the entire financial system' are also arguing that 'therefore the CDS market needs to be regulated and concentrated players like GS need to be broken up'. Funny how they never mention the next step in logic to where their own argument leads. You can go back to watching American Idol now.
FDIC TLGP
And who said that GS did, aside from you, Matt Taibi and Max Keiser? Based on what evidence?
FDIC TLGP
I followed the Taibi story for a while. The best response Goldman Sachs had was "nuh-uh" and some other name calling. Taibi blistered Goldmans ass and the best Goldman could come up with was something about being accused of being an accomplice to the Kennedy assassination.
To this day Goldman is accused of doing the following:
1. Causing the Great Depression
2. Causing the tech bubble
3. Causing the housing bubble
4. Causing the run up in oil prices
5. Rigging the bank bailout
6. Causing the global warming nonsense
TARP was forced on you... just like all those government positions that were forced on you.
We have a saying in criminal law. If you're gonna be a good criminal, first be a good liar.
You're out of your league
Bullsh*t it would have just cleared the entire deck for the honest and unleveraged players to fill the void. That's the way capitalism works, my friend. The regular folks like me and TD would have been much better off if they let AIG go down.
I have a problem when any company helps make a market and helps write laws that completely favor that market.
There it is. Both cop and crook.
121165 said:
The assertions about the "advantageous seating chart" are simply not true.
Does that include the seat occupied by Lloyd Blankfein during the AIG bailout sessions next to the United States Treasury Secretary? You know, the meetings where no other private sector executives were in attendance?
game.set.match.
and that is only one little example......
DH,
Lloyd just happened to be in the neighborhood and dropped by for coffee and danish. I heard from an impeccable source that all he did during the entire meeting was play with his pencil and pick his nose. And then eat it.
i see mr hot shot former gs 10 yr employee has not responded to this theme as well as my above in the thread FDIC TLGP goldman mammary bailout.
actually, i'm glad that we have a goldman defender in here, particularly an aggressive one. i have yet to see him posit one item that hasn't been reasonably shot down.
i find it interesting that he/she talks about "no evidence"......it's pretty hard to garner that evidence when the goldman club is part of the Executive Order 12631 team.
DH - What I would love to see from that Anon would be links to actual documents and commentary that supports the positions that are advocated. Don't try to tell me to believe you then fail to provide the fact upon which I can make a informed decision.
you're absolutely correct miles, as you well know.
Anon would have us believe the Lloyd Blankfein "force for good" at face value.
Even a schmuck like me could trade with "prowess" if most of my competiton was eliminated, I had gazillions available to me at zero interest, i had the Fed, Treasury backing me all the way, and if I lost, no problem, taxpayer bailout and I do the dirty deed again.
Oh, that's prowess all right. and skill too.
First they ignore you, then they ridicule you, then they fight you, then you win. Gandhi
May their blade chip and shatter.
Good one.
So after Goldman's involvement in flash trading, dark pools/Sigma X, the oil speculation scam through J Aron that included intentionally manipulating Semgroup into bankruptcy, their shorting of the subprime housing market long before anyone else, the massive campaign contributions (including being one of the Obama campaign's top donors), and the covert bailout through AIG, are you REALLY going to try to tell me Goldman operates with "integrity"?
Puh-LEEZE!
well, it all depends on how you define "integrity"
with apologies to William Jefferson Clinton.
You are an idiot. A complete and utter idiot. If you think a firm can run 99% winning trades without having a market rigged, you have to be the dumbest MF on the face other earth. You know nothing about markets, probabilities, etc. Goldman is fucking over market participants by rigging the markets.
Janet Tavakoli: More Goldman
From Janet this afternoon.....
I apologize to Goldman Sachs’ CFO David Viniar. He did not lie when he said that Goldman’s direct credit exposure with AIG was hedged in the event AIG collapsed. He only addressed direct AIG credit risk.1 On September 16, 2008, he may merely have been unimaginative about risk to Goldman as a result of AIG’s potential bankruptcy partly brought on by stress created by billions in collateral payments already made—and the billions in additional collateral owed—to Goldman Sachs (and other CDS counterparties). Systemic risk is a matter of public interest. Viniar apparently did not intentionally give the impression that Goldman was disinterested when it came to AIG’s bailout.
http://tinyurl.com/yjp6ah6
LOL. So what's your point? That GS would have been hurt by the collapse of the global fianncial system? Really? Wow, David Viniar sure must be a bumpkin for not understanding that one.
So, by bailing out AIG, which in turn saved GS, MS, JPM, BAC, C, WFC, RBS, CSFB, UBS, DB, SOCG, YOU, ME, Tyler, and the financial livelihood of all 1.0 billion people in the Western World, we're supposed to be angry about that? And angry at GS? Are you kidding me?
Hank Paulson saved everything that you hold dear last November. You want the truth? You can't handle the truth!
When did CDS get created out of thin air? WHAT WAS A MAJOR CONTRIBUTER OF THE WHOLE CREDIT BOOM AND BUST!!!!
THESE FVCKERS NEED TO BE BROUGHT TO TRIAL AND ONCE FOUND GUILTY BE EXECUTED FOR CREATING AND USING WEAPONS OF MASS DESTRUCTION!!!
Wow. So uninformed. The bubble economy was fueled by asset inflation, first stocks, then credit, supported by housing. The cause? Easy Al, Helicopter Ben, George Bush, Bill Clinton, Larry Summers, Barney Frank, Tim Geithner, Fannie Mae, Freddie Mac, Angelo Mozillo, and the millions of irresponsible Americans that consumed more than they earned, using the "profit" and "collateral" of bubble house valuations.
Did "Wall Street" participate? If your definition of "Wall Street" includes JPM, BAC, WFC, then certainly yes, because they securitized the crappy mortgages. What about the Investment Banks? Lehman, Bear Stearns and Merrill were big players in mortgage securitization and even origination. Goldman Sachs was a minor player in the mortgage market.
If you want to get mad, get mad at Washington DC because that's where the roots are planted
New York existed long before Washington DC.. And enjoyed immeasurable protection and shelter in the early years from the constant squabbles between the Puritans of New England and the Quakers of Pennsylvania. It is a miracle that the first central bank failed given the operative conditions. Just goes to show that a central bank and its member institutions will always find a way to cataclysmic failure.
Where's that chart that showed the relationship between Washington DC and Goldman?
It's a great rebuttal to:
"If you want to get mad, get mad at Washington DC because that's where the roots are planted"
They are not tools of mass destruction. They are tools to slough your risk off to everybody on the planet in a lame attempt to make your self destructive behavior applicable to everyone till everyone gets suicidal.
Leave it for someone in finance to (self-servingly) argue that the world does not spin around without the mega banks... save that rhetoric for the clueless ones in Congress not for (some of the) people who actually work in the field.
You are absolutely correct--without the AIG conduit, the FDIC insured debt, and the QE all the usual suspects were going under, including the Golden boys. Within the week. The business model was broken and access to capital was shut off. Everybody who borrowed short was dead in the water. Does not change the fact that the actions of the government constituted corporate (and investor)socialism. I owned some BAC preferred and if I were stupid enough to buy that crap, I sure deserved to get wiped out.
Same goes for everybody who decided to put capital AT RISK. Whether your account is for 5K or 1B should not make a difference. You make a bad decision, you take one for the team. EMR and MMM, and the vast majority companies that actually manufacture stuff and services people need would would still be around. Their stocks would be crushed but the companies would live. NY would look like Detroit, but hey, eff happens.
Washington bailed out a bunch of people who willingly put capital at risk. That is not saving the world, even though some (including me) benefited from it. This is feeding 'moral hazard' steroids.
As for GS making morally questionable but legal decisions -- this website is probably barely scratching the surface.
For the record, I know several current Goldman employees who do their jobs diligently, well, and with integrity. Goldman's problem is more so the legion of ex-Goldmanites who are scouring the world in search of capital for their hedge funds. Those guys are smart, but sometimes they have Freudian slips that could make even the folks here blush...
I will not even get into the fact that Goldman's prop desk often trades against its prime brokerage and wealth management clients... and unashamedly so. Some dead Goldman partner from 50 years ago is probably rolling over in the grave.
IMO - Any "businessman", I don't care the industry, that willingly accepts a government bailout:
1. Has zero claim to superior skills. ZERO. GS is not full of a bunch of "geniouses." They are not "smart people". They're a bunch of charlatans who can't make their own way in the world.
2. Is an ethical INFANT compared to the average American, and deserves the ridicule and derision of his community.
3. Is a net contributor to the problems of our society. The world would be better off if the dollars we gave him carried smallbox, killing him.
4. Has sold any claim to integrity or principle
He compromises to save himself and his community... because it's better (in his mind) to save your immediate community (golfing buddies, social acquantances, charities or causes you favor) and face criticism from the larger world (which is relatively easy to ignore) than face your neighbor who has lost his job because you didn't take a handout, and have the larger community approve of you.
Hahaha. First two paragraphs = Jason Brauth on GS CDS desk. I used to admire guys like that for "genius and ingenuity" Look where that led us and the US.
How do you get the $12m? Is the P&L not 30bps x 1bn which is $3m?
What am I doing wrong?
Goldman buys at 500 and sells at 530 at the same time. the DV01 of each basis point is roughly $400,000.
Sorry Tyler, but I'm still confused. Let's say they sell $1bn of 1yr protection at 530. They buy $1bn at 500. A year passes, underlier doesn't default. Isn't their p&l (and ultimately net cash received) for the period approximately spread*notional?
Again, apologies if I'm missing somthing
In Tyler's example he was using a 5 year CDS contract, not 1 year. The DV01 for 1 billion in notional 1yr CDS is not 400k, it is much closer to 100k. So that puts you closer to the 3 million dollar number I think you are getting at in your post. A more simple way of thinking it is that they will essentially be receiving 30 basis points a year for five years (paid quarterly) and the present value of that over 5 years is roughly 12 million. Of course, their are other factors involved in the calculation, including default probabilities, swap spreads, and recovery rates upon default.
It is just ludicrous to suggest that Goldman can cross $1bn of cds a day at a 30bp bid/offer, it simply doesn't happen.
How about $2 billion at 15 bps. Or $6 billion at 5 bps? Are all those also ludicrous? I am sure you would be surprised by funds transacting in $250-500mm blocks of XO per trade several times a day, but believe me it does happen.
Speak to an index dealer.
They make money from positioning, not crossing client orders.
As do associated prop traders.
man, GS brought out the big guns to comment on this thread. Manage to make GS look even worse, and I didn't think that was possible. Sanctimonious blowhards. Oh well, at least jeebus evidently approves
Yea right. It's always entertaining to see someone argue with themself.
This article is factually incorrect on many levels and also displays a lack of understanding of how the cds market actually functions. Here is my take on it from the perspective of a buyside cds trader:
1. Wide bid/offers are a derivative of a lack of liquidity in the market. It is rare for a dealer to cross a 30bp bid/offer, and it certainly isn't as simple as just calling up your accounts with a level. If you believe you can cross both sides you will make a tighter market, and if you don't then somebody else will. CDS market making is completely different to equity MM, where you can expect to leave every day with a flat book. The essentially illiquid nature of the product means you are forced to run positions for days, if not weeks or months.
2. Average single name cds trade block size is closer to $10m than $25m.
3. As for GS and JPM providing the "only relevant inventory", this simply isn't true. Having said that, Goldman do provide some of the best liquidity in the market.
4. This is the most important point - the accusation that GS's prop traders deliberately front run client orders. It is exceptionally easy to tell when your orders have been front-run, because it is generally pretty clear when the market has moved due to a big buyer or seller hitting the screens, and once this has happened more than once to you with a particular dealer it causes a huge relationship issue and you are unlikely to ever show trades to that counterparty again. Suggesting that a prop trader can just sit there and trade off the client order flow he sees is extremely misleading. Also, you haven't provided a single piece of evidence that goldman's prop traders sit next to their flow traders.
Let's have some colour please - what connection does the person who wrote this article have to the cds market? Have they ever traded? And was this as a buyside client or a market maker? This whole article lacks serious credibility in my mind.
The article is quite factually correct, but your perspective is welcome. You bring up a good point - indeed, single names can trade down to $5mm increments for some of the very small buysiders, and $10mm for some of the average ones.
Ouch.
At least I know who is slinging crack on a street corner. What's it like to finally figure out your place?
Tyler,
I hear a lot of disagreement over your explanation of how GS makes a boat load of money on a daily basis. What I'm not hearing are alternative explanations other than "the GS guys are good" from your critics.
GS admits in their filings they make a ton of money. Until they give me a blow by blow description of how they do the near impossible, your explanation makes a hell of a lot more sense than "the GS boys have bigger balls than everyone else".
Nuff said.
As for your point #4, I would challenge Mr. van Praag to take offense with our observation. We, in turn would challenge him to provide proof that this is in fact not the case. Which is why we are fairly confident nothing out of Goldman will be forthcoming.
If you throw around accusations like that then the burden of proof rests with you, not vice versa...
Anyway it shouldn't be too hard for you to get a floor plan - I assume you just need a contact with access to the goldman intranet.....
Why do you assume we don't have one currently
Clearly a reckless assumption.
I look forward to seeing it in the not too distant future then....
I know you don't have to work hard to appeal to your core audience - but the rest of us need more convincing evidence than a few random numbers patched together.
Attempts at convincing those who have their minds set one way or another are usually pretty futile.
As evidenced by attempting to disagree with any of the regulars on this site?
Traditionally the "regulars" enjoy fruitful arguments amongst themselves. Personal attention is usually (at best) reserved for newcomers.
The only disagreements the "regulars" have is when it comes down to a question of 'which is the most evil investment bank/politician/newspaper/animal....there is a lack of serious debate on this website. Any contrarian poster is immediately criticised for being a goldman sachs lacky, and their points are totally ignored. Although I appreciate your willingness to engage when time allows...
Let me know what the regulars decide on that issue. Although I have a hint what the conclusion may be.
Might I propose that as the next poll?
Q. Is Goldman Sachs institutionally evil and a pox upon the planet earth?
A. yes/no
panda, the good news is that there's a cure for your situation.
http://blainn.com/abuse/denial.html
CW - Welcome to the human condition no doubt. At least there is the willingness to engage.. I can only hope the desire to debate with readily accessible facts and commentary will follow.
Yes.
I've been reading about the French Revolution lately. Neat stuff.
Then the question becomes: Do you believe that Robespierre is the answer once again?
You must not have been here last week, we already had that poll. Feel free to try to keep convincing us that feeding at the gov't trough while you front run the market isn't somehow giving GS an advantage once they had help wiping out their competition. And no, I don't wear tin foil.
Actually, you don't need a floorplan as I said in my earlier post that I worked at GS for 10 years.
Like many of the baseless GS bashing accusations on this site, that "goldman flow traders sit adjacent, i.e. within earshot, of its prop traders...in order to frunt run" is simply untrue.
Tyler, this ZH is otherwise really insightful and I don't understand why you damage your credibility with baseless and unsupportable accusations.
What's more, while I respect your diversity of knowlege, in the esoteric world of CDS trading it's clear that Panda6 has you covered.
Otherwise, Tyler, good stuff
With all due respect to you and your former employer, you are wrong about the layout. As to your opinion about "esoteric CDS" you are of course entitled to it. As to our understanding of such esoteric concepts, we suggest you read about the 1,000 or so posts we have discussed CDS topics covering everything from IG, HY and "at issued" negative bases, to index skews, to swaptions, to cash-CDS capital structure arbitrage opportunities, to physical and cash CDS auction settlements, and hundreds of others. In fact this would be a good start for you.
I have to say that although I agree with *some* of the points in this article, I think it's great this site appreciates the importance of the cds market.
But when have you discussed new issue neg basis opportunities? Of course it's useless to me as my small bucket-shop will never receive a decent allocation, but it would be nice to get a sense of what it might be like to play with the big boys.
a few places to start:
We have let this topic go to the backburner as the market is sternly ignoring any relative value fundamentals, as the only this that matters these days is the value of the dollar, the actions of the Fed, the amount of liquidity poured daily, and the low volume broad direction market momentum. We are, obviously, quite exasperated by it.
Thanks for those....a pity the glory days of +350 basis are behind us, but at least 200 back is still achievable to sate those who couldn't analyse a credit to save their lives.
Boaz Weinstein thought the same way you did a little over a year ago. $4 billion lighter later, I am sure he does not share your optimism. You will see negative basis again, soon, and the next time it comes it will make 350 bps look like Aresnio Hall at the Apollo.
Sure, loading up on outright illiquid basis is crazy....but there are ways and means
baseless GS bashing accusations on this site
Anon:
i've brought up 2 baseless items directed at you in this thread...how about responding?
1. in re GS receiving gov't help (your matt t and max kaiser comment)..what about the 22 billion in FDIC TLGP honey pot? Blankfein was quoted in his wsj i'view that he wishes he had taken "zero". do you consider this gov't assistance or not?
2. your "advantageous seating arrangement" comment. what about the seat Blankfiend had with Paulson (during his capacity as Treasury Sec'y, not as GS CEO) during the AIG negotiations, wherein Blankfein was the only bank ceo at the table?
I would appreciate your response. Thank you.
Are Golden Slacks players under the FED amnesty program?
a
How does GS simultaneously have the largest inventory and offset their positions through trading them out and locking in the spread? that suggests that the "largest inventory" is the "largest customer base"
GS is basically the world's largest intermediary of "wide-spread" OTC transactions. THAT is why GS makes boatloads of money "trading for its principal account." There is nothing sinister about it. They just want to be in the business of making money and they actively seek out the best ways to do so.
How does GS simultaneously have the largest inventory and offset their positions through trading them out and locking in the spread? that suggests that the "largest inventory" is the "largest customer base"
GS is basically the world's largest intermediary of "wide-spread" OTC transactions. THAT is why GS makes boatloads of money "trading for its principal account." There is nothing sinister about it. They just want to be in the business of making money and they actively seek out the best ways to do so.
You're making them sound like trillion-dollar bookies, which is fine.
Front-running is not.
I'm confused.
Is GoldmanSachs a financial holding company
or a hedge fund
or a highly organized, disciplined association that engages in unlawful activities?
I'm staggered by the excellence and importance of this article
amazing read, proof yet again of what a critical role ZH fulfils
sorry if this is a repeat but cds are not the main course...interest rate swaps are the center of the financial universe and where jpm, ms, gs and a few other elite vampire bankster terrorists control the government and world as proxies for fed interest rate policy....
irs are why intrest rates are perpetually low or wherever the government wants them and why treasury bond sales will NEVER fail....
only when irs fail will things spin out of control.....
the banksters and their puppet masters MUST be destroyed.....
From the perspective of someone who worked there before, Panda you are dead wrong. Its collusion. No sell side bank wants to decrease spread in CDS. I saw $1billion IG notional deals, and you're talking that they have trouble crossing $15 mm at a time. You are just wrong. There are specific traders at the company that figured out how to cross buy side orders quickly and effectively and take any order because they knew they could cross it quickly and effectively this led to a monopoly of the intermediary in the market. If you wanted to buy retail CDS, you went to goldman because they always offered you a bid ask spread that was meant for you to trade at, not a 70 bips spread meant to tell you to politely fuck off. You are talking about a 50 trillion dollar notional OTC market. The concept of having trouble in an "illiquid" market of crossing orders is ridiculous. IG CDS is consistently the most profitable desk at the company outside of the one year Mortgages shorted ABX and made 4 billion profit.
So where is the collusion there exactly?
Anyway, $1bn order? Sure! Cross that and you're a hero...
panda6, that is how our associates at Goldman earn their Ramen. Do it every day for a couple of years then you might be approaching steady producer status. Economics of scale.
You know if GS is ever hemoraging any gooey liquid,
the Fed will just close every bank on the planet for a few.