Goldman Sachs Responds To Zero Hedge

Tyler Durden's picture

A week ago we posed several questions to Goldman managing directors Lucas van Praag and David Viniar. Earlier today we received a broad response. We present it in its entirety for our readers. We will provide our counter-response shortly.



Dear Mr. Durden:

We read your comments about prop trading with interest.  I’ve addressed some of the points you raised, as well as the questions you directed to David Viniar and me.  The fact that I haven’t necessarily addressed all your points shouldn’t be construed as tacit acceptance of any of them.

1)      “Considering that Goldman must disclose a trading VaR, or value at risk on a quarterly basis, which over the past year has averaged over $200 million, one can back into actual prop capital and revenue”

Our VaR is primarily driven by client-related activity rather than proprietary activity.  Using VaR to “back into actual prop capital and revenue” would produce a meaningless result.

2)      “A month ago Zero Hedge presented a unique glance into Goldman’s prop trading activities courtesy of the 2008 tax filing of the Goldman Sachs Foundation”

Your premise wrong. There are tax and legal restrictions which prohibit the firm from trading on the Foundation’s behalf.

3)      “Goldman disclosed that it had $352.2 billion in fair value of principal trading instruments at September 30, 2009. How much of this is considered allocated to prop if this is in fact a distinct strategy from principal?”

The $352.2bn is the fair value of our trading assets, the vast majority of which consist of trading inventory we use to make markets for our clients.

4)      “Does the firm's FICC revenue line have absolutely no prop trading embedded within it? Goldman made $20 billion in FICC year to date: is none of this $20 billion due to capital at risk, or is it all due to wide bid//ask spreads? ”

We’ve said publicly that prop trading represents approximately 10% of this year’s reported net revenue.  Some of that revenue is reflected in the FICC line.

We generate the vast majority of our revenue in FICC by facilitating trading activity for our clients and nearly all our revenues in FICC are “due to capital at risk” (your phrase).  In periods  when capital withdraws from the market, bid-offer spreads tend to widen and we benefit to the extent that we are willing to commit capital and do so successfully. These activities necessarily involve risk taking.

Over the last 5 years, prop investing activities have represented about 12% of firmwide net revenues

5)      “What was the pro rata allocation to Goldman Sachs Foundation as a percentage of capital per each trading ticket in 2008? Does GSF have a dedicated trading silo within Goldman?”

As I said above, as required by law, the Goldman Sachs Foundation is managed separately. There are no “trading silos” dedicated to the Foundation’s activities

6)      “Why did the Goldman Sachs Foundation not participate in Goldman's prop CDS trades?”

See above. 

7)      “How much did Goldman's prop operations lose in 2008 trading Russell 1000 futures?”

The amount was de minimus.

8)      “How much did Goldman's prop operations lose trading all equity, credit and commodity products?”

Not disclosed

9)      “When will Goldman clearly and distinctly segregate on its income statement the prop trading profit and losses, if these are in fact unique from "principal" trading as defined, and attach an MD&A to all relevant disclosure?”

Our proprietary activity is small in the context of the firm’s overall revenues and risk exposures.

10)     “Goldman is insinuating is that the firm's prop trading really carries virtually no risk.”

We don’t think any trading activity is risk-free. Risk is risk, and our job is to make sure individual risks are appropriately sized.

11)     “How do you define market risk?”

We define it as the potential for change in the market value of our trading and investing positions.

12)      “Do you take fixed price positions?”

Please explain your question.

13)     “Are you exclusively a hedger or do you ‘optimize’ your assets?”

Please clarify what you mean.

14)     “Do you have a risk policy?”

Yes.  We think of risk management as being one of our core competencies and it remains integral to our success as a firm. 

Our management team is active in risk management discussions across the firm and open discussion on the subject are encouraged.  By the way, we think fair value accounting is a critically important aspect of risk management.  Another important tenet of our approach to risk management is the independence of control functions from the business units

We also use a variety of approaches to monitor risk.  In addition to VaR, we use multiple stressed-based methodologies, including jump-to-default analyses, to quantify tail risks. 

16) “How do you monitor trading/hedging limits?”

Virtually all of our equity and fixed Income businesses receive VaR based risk-limits, aged inventory limits and balance sheet limits. The limits are reviewed by senior management and Risk Committee on a regular basis.

17)  “Mr. David Viniar, who recently said that the firm doesn't benefit from any implicit government guarantee. Goldman, as presented here, benefits directly from $21 billion in FDIC (taxpayer)-insured bond issues. How does Mr. Viniar reconcile this particular fact with his spurious claim?”

We don’t believe that we have any form of guarantee, implicit or otherwise, from anyone and we certainly don’t manage our business as though we do.

We issued debt under the FDIC’s Temporary Loan Guarantee Program and, like every other bank that issued debt under the program, paid the FDIC a significant amount of money upfront for the guarantee. We also pay interest to the investors who bought the notes. We stopped issuing debt under the program in March. The notes are not callable.

In the context of the firm’s approximately $900 billion balance sheet and hundreds of billions of dollars of funding, we don’t think any informed investor would believe that FDIC insurance on a small portion of our funding represented a “guarantee” of the firm.

Regards / Lucas van Praag

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
casino capitalism's picture

As a former trader on wall street competing with GS, I can categorically say that GS is substantially a prop trading house.  They can come up with all kinds of mis-information to argue otherwise (big surprise).  But I have always wondered who would trade with them knowing full well that GS is totally conflicted and is essentially a big hedge fund.  The answer is they have a group of counterparties they are very close to who they partner up with on trades.  That is a common strategy.

Chopshop's picture

thx for sharing your thoughts with us, casino capitalism.

am simply amazed that so few, if any ?? actual traders (outside of an obvious quant whose ZH handle is "quant-this" ... with experience on an "IB" / broker-dealer prop desk (forget even actual HF experience on a "real" desk) have yet to chime in with rather obvious comments / statements about the actual 'how' n the literal 'why' of such seemingly legit questions, which are little more than cursory questions from accountants who have absolutely no experience in / with actual trading while boasting all the experience in the world of auditing such firms / desks / outfits / operations - distinctly - after the fact.

... umm, basic barbell portfolio mgmt of short NG a fraction what ur long CL ... umm, similarly : TF losses as an off-setting byproduct of effectively hedging ES longs  ... umm, AIG solo-directional puts way the fuh OTM and synthetically-related / equivalent 'short' positions across a multitudinous litany of competing n confluent instruments which are extraordinarily managed across / within both a comprehensively strategic allocation as well as a highly technically-oriented tactical weighting ... so on n so forth.

umm, anyone else care to break THE cardinal rule of 85 broad / HFT / pokers (prime-brokers) / trading desks / 'stamford' (the literal epicenter of the hedgehog landscape), the PPT & the 'paper street soap company' and explicitly how real trading desks are structurally designed in terms of seating charts  / information flow diagrams across 3 concentric layers / spirals of undoubtedly formological construct, much like Dr. Paul MacLean's seminal work within his ground-breaking details into the structural evolution / physiological development / biological imperative within the triune brain, which is, percussion please ~~ Fibonacci.

on Fri, 11/20/2009 - 17:00

bold/ italics/ underline added to underscore the three basic rules of HFT as per Fight Club

Much like all complex growth organisms (ie. "formological") and in true Fib fashion, Stamford only follows 3 of the 8 rules (#'s 1, 2 & 7) found within the basement of the Paper Street Soap Company.

Tyler Durden: "Welcome to Fight Club. The first rule of Fight Club is: you do not talk about Fight Club. The second rule of Fight Club is: you DO NOT talk about Fight Club! Third rule of Fight Club: if someone yells "stop!", goes limp, or taps out, the fight is over. Fourth rule: only two guys to a fight. Fifth rule: one fight at a time, fellas. Sixth rule: the fights are bare knuckle. No shirt, no shoes, no weapons. Seventh rule: fights will go on as long as they have to. And the eighth and final rule: if this is your first time at Fight Club, you have to fight"

without giving away much, if any, of my own thunder, so as to retain the option of penning a direct reply (or four) to both GSCO as well as KPMG ( via Tyler's very well-said recounting of their rather basic questions ) ... i'll simply defer to my previous - rather crude, cursory, off-the-cuff - remarks about what GSCO legal would allow within a formal reply.

I / we have never been interested in making friends n simply continue to try to be as rigorous and actionable as we possibly can within our work / my personal opinions, which are exhaustively prefaced as such. 

that said:  can someone help me find where GSCO said anything about crude oil or natty ??

by Chopshop
on Sun, 12/13/2009 - 01:30

An outrageously good piece. just filthy really.

thank you, tyler.

actual 'journalism' which underscores the difference between detailing how to find a g-spot versus Ron Burgundy-esque "Discovered by the Germans in 1904, they named it San Diego, which of course in German means a whale's vagina ...." type bullshit. 

between you & marla, it must feel like an inverted / distorted version of omaha beach for ol goldilocks. like retaining all the lawyers with offices on the caymans so no one can ever sue you, 'they' know that they will win, eventually. but how more moons will it take? and will it just be some shallow figurative and self-declared victory of nothing but self-exoneration ... ?  anyhoo, great fjuc**** work, yet again.

by Chopshop
on Sun, 12/13/2009 - 03:36
#161810  ...  what a gorgeous 'random' number   

Assetman:  simply bc gsco will not allow a direct public gauntlet from TD himself to remain un-vanquished beyond Thursday's european open if not Tuesday mid-morning (10:40 est ish release); TD gave em more than enough lead time for a response to be vetted by legal by globex, today.

after two reads, about the only thing that goldie's legal ought not allow them to rather flippantly address will be the fact that natty (nat gas) plays bitch-boy bottom barbell hedge to wtic.  4.62x times long CL etc. versus 1x basic hedge on various nattie derivs. very simple by me, but in the absence of any actual reason provided (gsco legal won't any) it seems to my simple mind that such would be Occam's razor.

thanks again for the time / thought put into this excellent piece, TD.

Anonymous's picture

You guys are losing it, collectively and literally.

Anonymous's picture

ChopShop. I can only assume that you have communicated something to a narrow audience of prop desk people. However, for general communication clarity, I can only say, "Say what, Son?"

Anonymous's picture

as former managing director of GS, I can categorically say that you are incorrect. Goldman's flows are substantially "principal" and "agency", not "proprietary". Give it up, folks. Goldman Sachs is a great institution and we should be thankful that the USA still has some world class industry leaders like GS, as so much of the rest of our country's competitive position erodes into dependancy and socialism.

chumbawamba's picture

Under the hope and assumption that Goldman Sachs folks will be reading these comments:


I am Chumbawamba.

drbill's picture

Subtle. I love it!! :-)

geopol's picture


You need come out of your shell


shadowboxer's picture

 ...i'd rather put GS in a hole, ...collectively,  ...metaphorically speaking of course.

Anonymous's picture

Beware of these men, they are extraordinarily dangereux.

They prey upon the weak and the ignorant.

chumbawamba's picture

The GS harpies have finally arrived.

I am Chumbawamba.

Anonymous's picture

And by any chance such attitude is new for you over the history ? Thats exactly how 99% of the rich people got rich. Starting at the King of a XYZ Kingdom to the drug dealer of a war devastated country. They simply stepped over the weak and the ignorant.

Anonymous's picture

I am deadly curious as to why this comment was left in, in the event that GS reads any of the comments. Who in their right mind would respond to a distraught person who responds in such a way? ZH even in comments could be a little more credible then that spew. This blog can lose a bit of credibility on stuff like that.

Anonymous's picture

Early twenties, gotta be...ultra-defiant avatar, all caps, dude is always either lewd or profane, points to his chest and tells everyone who he is at the end of every post...could be late teens.

Bob's picture

If I get your chi, you'd like to see a change in the dynamics of this web community.  I'm always for change, just the way I am.  A change from anonymous posting would be one (though I grok that razor's edge from management's perspective), but I strongly believe that if you register and develop a persona here, you could really have impact.  Whatever your schtick.  Forums are like that. 

What's with all the fucking anons? 

Anonymous's picture

I remain anonymous simply so my words speak for themselves, independent of personality.

I do, however understand your trepidation, particularly for the less articulate.

Unscarred's picture

I agree, #169324, one hundred percent.

deadhead's picture

I don't always agree with Chumba's words or approach but in this case, what is the problem?

1. he asks for truth.

2. he tells them to stop lying. his postulation is that they are lying and he is certainly not alone in this regard.

3. he reiterates a request for truth.

4. he suggests that Goldman is a parasite.  this is a very reasonable statement.

Perhaps anger shows through, at least it seems that way to me.  There are millions of American citizens (as well as other countries in the world) that have anger towards Goldman Sachs.  Chumba simply is reflecting a widely held view.  The use of the "f" word is troubling to some but to those people I would simply say "get a fucking life" and take a moment to read some background on the right to free speech.


as to "a distraught person"

People probably said that about James Madison, George Washington, Ben Franklin certainly, clearly Abraham Lincoln and I'm sure we could come up with several thousand more names.

American citizens know they are getting screwed and they are becoming angrier.  Get used to it.

Anonymous's picture

Deadhead, just FYI freedom of speech is not about the "F" word. For some reason the above poster and you are the only ones that have used it. Frustrations set aside if a company at least even responds to ZH, comments can at least be kept to reflect someone who understands the issues not someone who is looking for a drunken bar room brawl, sobbing at how his freedoms are denied or what not.

deadhead's picture

169532...your response just seems a bit incoherent to me. 

I parsed Chumba's statement, which is mostly about truth or lack thereof.  One of my pieces was an assumption on my part (perhaps incorrect) that perhaps the reason for your negative response was the "f" word. I think you are saying that this is not issue but am not sure. I have no idea how you come up with the "sobbing his freedoms are denied..."

Frankly, your response lacks content. 


Tommy's picture

Sometimes the right thing to do is call an a$%hole, an asshole.

Certainly, GS has been most vulgar themselves.

Unscarred's picture

I'm down with "Vulgar..."

theadr's picture
Traders say "fuck you" more than any other profession.  This includes the traders on GS prop trading desk.  Thus, F-U.  
Anonymous's picture

Since comming to ZeroHedge I've gotten use to reading "the F word". I find it very refreshing. Why? Because I find that's the way real people talk in the real world, espically when they are pissed.

Why not reflect the real world here? ... Because all the other sites hide it?

Unscarred's picture

I'll say this...  When used effectively, "fuck" is perhaps the greatest word of the English language.  "Fuck" commands full attention, saves time, and gets shit accomplished.  If you're not strategically using it at least 25 times daily, you're losing out.

Unfortunately, some fuck-heads abuse it's fucking power and fuck it all up for the rest of us sorry fucks.

BRAVO 7's picture


For  Unlawful  Carnal  Knowledge










Unscarred's picture


Sweet.  We have the ability to junk our own comments.  (And sorry to deadhead, et al for getting carried away)

I'm always amazed how these posts inevitably play themselves out.  The most enlightening posts always elicit the most ridiculous comments, creating the most disturbing reactions...  And I've NEVER seen this many comments marked as "junk" on any post, excluding my own contributions to the junk heap.


Anonymous's picture

Awesome. Physical violence: a perfectly ironic punishment for the use of profanity.

Anonymous's picture

The Stranger: There's just one thing, Dude.
The Dude: And what's that?
The Stranger: Do you have to use so many cuss words?
The Dude: What the fuck you talking about?
The Stranger: Okay, Dude. Have it your way.

Anonymous's picture

As Oscar Wilde asked "why have a word if you can't use it"? This could well be the time AND the place for fuck's use (for fuck's sake).

Oh yeah, we'd better kiss up and "be proper" to the Goldman von Priggs (try spellcheck next time, bozos) so they dignify us with a reply... look dumbasses, the only reason they replied was to try to repair some of the PR damage done here. Of course they are lying, who cares if they use the f-word or not?

As my uncle used to say, "fucking is what you do to your wife while she's making love to you".

Bob's picture

+10, I think. 

As my uncle used to say, "fucking is what you do to your wife while she's making love to you".

Could you elaborate on that a little more?

dark pools of soros's picture

when you say the "f" word towards GS.. you must mean thou shalt not condemn the Fed


why not just ask GS what their risk strategy would be if there wasnt a federal reserve  anymore 

FischerBlack's picture

LOL, seriously, shut up #169532, if that is your real name. You obviously don't know the first thing about your own Constitutional rights, never mind lecturing others on theirs. There's a time for civility. Walking in on a violent rape is not one of them.


BoeingSpaceliner797's picture

There's a time for civility. Walking in on a violent rape is not one of them.


Very well put. 

Unscarred's picture


[edit] and credibility.

Bolweevil's picture

I'm with the hippy on this one, people are gonna speak their minds as they see fit. It's up to the reader to interpret accordingly. Mr. Wumba's points are valid and by no means detract from the unique relevance (and quality) of ZeroHedge or it's core contributors. Thanks for taking the time you crazy Dutchman.

Unscarred's picture

I agree with everything you have said, but I would carry that thought one step further.  Given that #169324 specified Goldman Sachs as the audience, the question he was asking is how well a statement that extreme will permeate with GS brass, given that they obviously will be paying close attention to the ensuing comments to a contribution from their own managing directors:

cougar_w's picture

[they obviously will be paying close attention to the ensuing comments]


1) It's not at all obvious.

2) They are roundly despised, so the comment was within a standard deviation of the normal temperature here.

3) It would not hurt their corporate souls to read something shocking, and might do them some good. Though I doubt it because they seem well beyond redemption.



Unscarred's picture

You're right.  It may not be obvious.  I assumed that they would pay attention to something an MD says to a media outlet that has been overly critical of them, given the incredible PR backlash they have suffered recently.

They may have just replied to Tyler's inquiry as a giant "go fuck yourself."

I would, however, disagree that the comment was within a standard deviation of the normal temperature here, and counter that the comment was actually about par for the course at ZH re: Goldman.

Lastly, I do not think that their corporate souls are hurting whatsoever.  They sold them long before they ever made partner.

estaog's picture

[they obviously will be paying close attention to the ensuing comments]

I have a feeling Goldman Sachs brass have other things to concern themselves that are more important than Chumbawamba's internet-economist-superhero ravings on ZH.

deadhead's picture

Ummm, not sure there myself estaog...they are very concerned about these types of comments.  they have the hatred coming at them from the financial types like ZH and associated community and importantly Obama's base, which is ready to rip his stones off because he hasn't "changed" the financial world's dominance of the USA.

once his base is off the health care reform clusterfuck, they will increasingly go after the wall st, banking community.   just read huffpo everyday, it is very, very clear.  btw, my postulation is that huffpo is ground zero for the obama base and I believe that is an accurate call.


Anonymous's picture

Very good call, DH. I have voted Dem all my life, but am totally disillusioned with them in particular, and Washington in General at this point.

I now see the two party system as a Punch and Judy show that is bought and paid for by Wall St using the Fed, which was set up to allow the old 'money masters' of the nineteenth century to maintain control of our economy in 1916. (Rothbard/Mullins/Griffin etc etc)

Politics in this, our once great country, has become so rotten and foul as a result of the dollar drip feed lobby system that controls/determines success in the very expensive game of politics, that I think my change of voting allegiance will not an isolated one. I believe that anyone who cares to look will see that we have simply swapped the corruption of the guns and oil mafia that was the Haleburton/Rockerfeller White House for a Wall Street/GS mafia. Honestly to me it appears both have exactly the same intent, to steal as much as they can from the American people for their respective sponsors.

I will be voting for the Libertarians next time out, because they are the only ones who are speaking from a place of real concern for us the people, not their sponsors. I doubt they'd win, but my vote will be my protest.

I do not believe in revolution, George Orwell described the results perfectly in Animal Farm, but I do hope for change, real change, and not just the change of which sponsors get to rape us.

Anonymous's picture

You're right..except for the "once great country" part.

This blog is starting to smell like a stale tea bag more everyday.

ZH Readers: Study some damn history! There are no good ole days. The US has always had a financial elite that bent policy (and the polity) to its own will. What was true in 1886 is true in 2009. Or better yet, check out Alexis de Tocqueville's "Democracy in America"

Actually, you know what all this reminds me of? The Education of Henry Adams. What a bitter, bigoted dick. He was butt-hurt that all the robber barons, many of whom where not educated at Harvard like he was, were making all the money raping the US workforce at the turn of the last century. He lamented that it was an unfair system. Wahh. But he wanted to be one of them! He didn't actually want reform -- he just wanted to get a slice himself. Sounds a lot like what I see here - people who rail for the common "citizen" but would just as soon squash someone in the intersection as an alternative to breaking.

So what do y'all want? Break up GS? why-so you can get on with the business of gaming the market and screwing the common people? Don't give that "we would trade fairly" crap.
I don't think disgruntled wannabe blood suckers are in a good moral position to tell the successful bloodsuckers they have moral hazard. If the big bully finance institutions were out of the way, some of the whiners here would be boosting for Monsanto or Walmart. I see more envy than a desire for justice.

Anonymous's picture

if you want to vote for the nihilist party, that's fine by me. just don't vote republican or democrat is all i ask, ok?

Bob's picture

For a supplemental reading of US History, I strongly recommend Howard Zinn's A People's History of the United States

Much shorter and more entertaining, while preserving the spirit and basic substance of the book, is his video documentary The People Speak ( .  It's been running on The History Channel for the past week. 

Little there to please the flag wavers but, hey, that's the shit we're all fed all the way through school to make us the exceptional and patriotic people we are.  Very thought provoking stuff.  Lots of shit even most liberals don't know.  Reminds me of Jekyll Island in that respect. 

PS  Anon, even I was tempted to "junk" your post, if only for the poor judgment demonstrated in your slam against anyone and everyone in the trading community, but I passed on the grounds of free speech and diversity of views.  It strikes me, however, that the remarkable tolerance here for such comments strongly suggests that your basic thesis is incorrect, or at best only marginally correct,  wrt this community.  Why not show some respect for that and the people who are providing it?  I suspect you will be more persuasive that way (if persuasion is your goal.) 

Yossarian's picture

I recommend reading this book for a laugh at the completely biased socialist undertones.  I have it on my bookshelf- I think I will review it again when I get home just to remember why I hated it so much...