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Why Does Goldman Need A Fed Exemption For VaR Calculations?

Tyler Durden's picture




 

Lately the topic of Goldman's VaR has taken on significant prominence, not least because as Zero Hedge disclosed yesterday, it hit a record high. The implications for this were large enough that even Bloomberg picked up on this story. Many readers raised questions of how is it even remotely possible for the company to have a VaR in the low-mid $200 MM ballpark, yet to post a record number of $100MM+ trading days in Q1; Zero Hedge is willing to wager that the upcoming 10-Q release will demonstrate another record number of $100MM+ days in the just closed quarter as well. How is that possible?

The clue may come from a February 5 letter by the Federal Reserve to Goldman CAO Sarah Smith. The letter had come in response to GS requests for "temporary exemptions from the application of certain aspects of the Board's Market Risk Rules for state member banks and bank holding companies and the Board's general risk-based capital rules for bank holding companies." Basically through the end of 2009 Goldman is basically using non-traditional, SEC approved VaR models as can be seen here:

GSGI has requested that (1) through December 31, 2009, GSGI and Bank be permitted to use certain Value-at-Risk ("VaR") models approved by the SEC... to determine their capital requirements for specific risk under the Market Risk Rules; (2) through December 31, 2009, GSGI and Bank be permitted to use methods approved by the SEC to determine their capital requirements under the Market Risk Rules for those trading assets, including distressed debt and restricted stock investments that the SEC did not require to be included in the VaR-based models of GSGI and Bank; and (3) GSGI be allowed to use methods approved by the SEC to calculate risk-based capital requirements for its nonfinancial equity investments that are subject to the Board's Credit Risk Capital Rules.

The letter goes into detail explaining why a bank needs to follow a MRR VaR methodology. Yet what is not made clear is i) why does Goldman need almost a full year of alternative VaR calculation and MRR exemption and ii) what is the protocol for the SEC to enforce VaR compliance when Goldman's ultimate regulator is the Federal Reserve. The exemption raises critical questions not only with regard to the validity of the company's indicate VaR, but also downstreaming capital requirement reports. Zero Hedge would be remiss to point out that a very close relationship between the most critical financial company in the world and the most discredited regulator (SEC) does not bode well for confidence in this critical risk indicator, which as many have pointed out, is clearly the main metric by which to measure not only the performance, but the risk capacity of the world's largest government-backstopped hedge fund. Mr. Canaday, Mr. Van Praag - the floor is, again, yours. In your absence, Zero Hedge will, and encourages it readers to, contact Mr. Homer Hill at the Federal Reserve Bank Of New York at (212) 720-2164 to provide additional clarity on the matter.

 

GS VaR Request -

 

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Wed, 07/15/2009 - 20:39 | 7576 Hondo
Hondo's picture

Because we are all be gamed by GS, the Fed and the Treasury.  Even Congress is clueless to the rape of America.

Wed, 07/15/2009 - 20:52 | 7582 Anonymous
Anonymous's picture

this is so unreal

Wed, 07/15/2009 - 21:02 | 7584 Anonymous
Anonymous's picture

Mafia

Wed, 07/15/2009 - 21:17 | 7589 Anonymous
Anonymous's picture

dude, you've got to get off the lunatic-fringe goldman conspiracy rants. you actually are on to something with the high-freq analysis.

Wed, 07/15/2009 - 21:24 | 7594 Anonymous
Anonymous's picture

This is no "fringe". It is convenient to dismiss everyone having an opposing view as belonging to a fringe group. That is a convenient way of deluding oneself and misleading the public into thinking their opinions belong in the minority while it is the "vampire fringe" (aka Wall Street and to be very specific Goldman Sachs) that is minority player sucking blood out of hardworking folks in Main street.

Wed, 07/15/2009 - 21:33 | 7600 FischerBlack
FischerBlack's picture

How anyone can see value in illuminating HFT and not see value in illuminating Goldman's preferential treatment at the hands of regulators boggles my mind. They aren't separate things. And there doesn't have to be a conspiracy for there to be an uneven playing field which advantages a few at the expense of many.

As it happens, the sinister Mucus Van Praag and his pals have somehow managed to convince otherwise intelligent people that any  reporting on Goldman's preferential treatment is like bringing up Roswell or the Grassy Knoll. How they have managed to do this is beyond me.

They must be smarter and/or better than me (and you).

 

Wed, 07/15/2009 - 21:39 | 7606 SloSquez
SloSquez's picture

Oligarchy in force.

Thu, 07/16/2009 - 04:35 | 7717 Project Mayhem
Project Mayhem's picture

Basically, yes.

 

Anyone who is too blind to see this deserves to be hit by the trainwreck in progress.

Thu, 07/16/2009 - 09:38 | 7770 Jim B
Jim B's picture

Affirmative!

Wed, 07/15/2009 - 21:53 | 7614 pinkboxtrader
pinkboxtrader's picture

Seems as if the site's commenting demographic is congealing like the Democratic party -- an uneasy alliance of anti-machine old school traders and anti-trader/gamer investors. Throw in some anarchists who want just to watch it all burn.

YES WE CAN

Wed, 07/15/2009 - 23:13 | 7663 FischerBlack
FischerBlack's picture

Don't forget the mid-thirties semi-pros with axes to grind fighting losing battles against a bullshit tape with no willpower to hang it up and take a vacation for fear of missing the key event of the summer.

 

Those guys are a key constituent.

Thu, 07/16/2009 - 01:28 | 7698 Anonymous
Anonymous's picture

You guys have ad hominem up the yingyang.

Thu, 07/16/2009 - 01:52 | 7704 FischerBlack
FischerBlack's picture

I was actually referring to myself. I self-deprecate constantly.

Wed, 07/15/2009 - 22:14 | 7634 MsCreant
MsCreant's picture

Nah, Golem Sachs is just another sweet little Mom and Pop bank. Friendly, would never use the rules to distort the facts of what they are really holding in their nasty little portfolios.

I wonder which one gets to wear the ring of power today?

My Preciousssss.....My Precioussssss ahhahahahahahah!

Wed, 07/15/2009 - 21:39 | 7605 brown_hornet
brown_hornet's picture

You almost can't call it a conspiracy.  Its done right out in the open, and we the sheeple stand for it.

Wed, 07/15/2009 - 21:41 | 7608 SloSquez
SloSquez's picture

Oligarchy in force v2

Wed, 07/15/2009 - 22:00 | 7612 Veteran
Veteran's picture

Very interesting.  By interesting I mean horseshit par for course.  Anyone have a picture of Lucas Von Prick or his other GS cohorts?  Not to say LB ain't handsome but a couple buddies and I would love to be able to match some other faces with the asshole company we love to learn about. (Don't worry JPM, you run an almost even second).  Know your enemy, as ol Sun Tzu said.  

Disclaimer:  Strictly curious.  Wouldn't want any pussy Blackwater I mean Xe I mean GS security to get the wrong idea.  Yes, I am paranoid

Wed, 07/15/2009 - 22:03 | 7621 Stuart
Stuart's picture

Janet Tavakoli rips Goldman a new one in this video from 5:00 EST today.

 

http://watch.bnn.ca/#clip193973

Wed, 07/15/2009 - 23:59 | 7681 dnarby
dnarby's picture

Pretty sad statement on the US that the best business news is coming out of Canada.

 

Oh, what the hell..

 

...O', CAAAAN-ADAAA! : D

Thu, 07/16/2009 - 09:50 | 7775 Jim B
Jim B's picture

This one is pretty good also....  Lets hope this SH#$ achieves critical mass (LOL).

http://www.youtube.com/watch?v=khGZ3a4zTNU

Is our government just a little corrupt?

 

Wed, 07/15/2009 - 22:25 | 7639 Comrade de Chaos
Comrade de Chaos's picture

Rules? Rules are for fools mate, we are THE GS.

Wed, 07/15/2009 - 22:27 | 7641 Anonymous
Anonymous's picture

Tyler, you need to do something to differentiate the links in your posts from the other text. Underlining works. Thanks in advance.

Wed, 07/15/2009 - 22:28 | 7642 Anonymous
Anonymous's picture

We know the problems, how about some solutions

Wed, 07/15/2009 - 22:31 | 7643 Bizzle
Bizzle's picture

AEP brings up a good point in his story from last week -- i.e., the last major and prolonged instance of job loss in the US was in the late '80's and early '90's (coincidentally, as Goldman alum Bob Rubin gutted our country's ability to actually *make* things).  It was this slump that led directly to the fringe movements of the early '90's... militia, David Koresh, etc.

 

Well here's the thing... GS better be careful or Tim McVeigh II might not be drawn to a federal building...

 

Can you imagine a dude somewhere in the Rust Belt -- a guy who's lost his job, his house, and his family -- waking up one day and reading that after being bailed out from the brink of death by his tax dollars, Goldman Sachs now plans on paying RECORD BONUSES??  I hope Jackoff Von Prick has this year's interns monitoring bulk fertilizer sales...

 

Thu, 07/16/2009 - 07:31 | 7735 Anonymous
Thu, 07/16/2009 - 08:54 | 7755 Anonymous
Anonymous's picture

LOL. He's like a GDII era Fred Rated.

"Green Shoots? What f*ken green shoots?"

"2nd Quarter recovery? Only if you work for Goldman Sachs o or morgan Stanley."

Wed, 07/15/2009 - 22:42 | 7645 Anonymous
Anonymous's picture

Good question. Meanwhile, someone in Accounting at BofA apparently misposted the firm's derivatives exposure to a customer's checking account:

via AP-
MANCHESTER, N.H. A New Hampshire man says he swiped his debit card at a gas station to buy a pack of cigarettes and was charged over 23 quadrillion dollars.

Josh Muszynski checked his account online a few hours later and saw the 17-digit number a stunning $23,148,855,308,184,500 (twenty-three quadrillion, one hundred forty-eight trillion, eight hundred fifty-five billion, three hundred eight million, one hundred eighty-four thousand, five hundred dollars).

Muszynski says he spent two hours on the phone with Bank of America trying to sort out the string of numbers and the $15 overdraft fee.

The bank corrected the error the next day...

Wed, 07/15/2009 - 22:48 | 7647 SloSquez
SloSquez's picture

LMAO.  That's funny.

Wed, 07/15/2009 - 23:19 | 7667 Anonymous
Anonymous's picture

Or that credit of 23 quads was needed to prevent any liquidity issues? Now that be something.

Oops, now i don't have to borrow money (overnight fed funds) to live another day.

Wed, 07/15/2009 - 23:50 | 7678 Roy Batty
Roy Batty's picture

Another great get Tyler....I'm making popcorn and pulling up a chair, this should be good.

Thu, 07/16/2009 - 00:12 | 7683 Miles Kendig
Miles Kendig's picture

It find it noteworthy that GS no longer feels the need to operate entirely from the dark pools.  This level of confidence could only be attained if it were confident in the security of its position, regardless of whatever became known.

Thu, 07/16/2009 - 01:18 | 7695 Anonymous
Anonymous's picture

Middle Class America has become one big ant colony!

Thu, 07/16/2009 - 04:37 | 7718 Project Mayhem
Project Mayhem's picture

haha

Thu, 07/16/2009 - 02:15 | 7708 Comrade de Chaos
Comrade de Chaos's picture

"AP - According to the SEC, five people illegally tipped off others or traded on private information ahead of Liberty Mutual Insurance Co.'s 2008 announcement that it would acquire Seattle-based insurance company Safeco Corp.


One of those five charged is Anthony Perez of Maitland, Fla., a former Goldman Sachs investment banker, who the SEC says illegally tipped off his brother, Ian C. Perez of Orlando, Fla.

Ian Perez bought Safeco call options one day ahead of the public announcement and later sold them for a profit of more than $152,000, the SEC said.

As part of a deal with the SEC, Anthony Perez will pay a penalty of $25,000 and Ian Perez will pay disgorgement and prejudgment interest totaling $152,992. Neither brother will admit or deny the charges, the SEC said."

 

That what happens when you operate w/t the GS cover. If this case does not illustrate that old habits die hard, I don't know what does. 

Thu, 07/16/2009 - 03:36 | 7716 Anonymous
Anonymous's picture

Anyone know why most banks earnings reports include their provisions for credit losses but GS does not?
I assume it's part of their grace period during conversion to a bank holding company.
Just wondering...

Thu, 07/16/2009 - 06:46 | 7729 crazyjerrygarcialover (not verified)
crazyjerrygarcialover's picture

And a very nice grace period it is.  16 months!!!  September  2008 to December 2009!!!  It has to be nice when one (and individual, unlikley, or "legal person", very likely depending on who the "legal person" is) defacto controls the government and can do whatever they want.  "We are a nation of laws."  Hahaha!  We are largely a nation of sheep being led to slaughter, all the while staring in envy at the thug with the baseball bat preparing to slaughter us.

Thu, 07/16/2009 - 07:08 | 7730 Anonymous
Anonymous's picture

No sauce for BofA's goose:

"Bank of America Corp is operating under a secret U.S. regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management, The Wall Street Journal reported, citing people familiar with the situation."

http://www.reuters.com/article/ousiv/idUSTRE56F15X20090716

Thu, 07/16/2009 - 08:55 | 7756 dcsos
dcsos's picture

The 24 quadrillion number appeared here in New York in a B of A customer's checking account statement!

Then, on the local news they reported another "24 quad" event in a southern state. The Bank has  some kind of error here!

Thu, 07/16/2009 - 09:07 | 7762 Anonymous
Anonymous's picture

It must be the event horizon for the return of the Beast.

Thu, 07/16/2009 - 09:10 | 7763 Anonymous
Anonymous's picture

Or is it another Windows Vista bug? You decide.

In other news, the SEC says it will regulate the 3rd party purchase of IOU's, and nothing is heard but crickets.

I almost wrote a commentary piece for one of the blogs, but I didn't want the MIB guys showing up at my front door.

Thu, 07/16/2009 - 09:47 | 7774 Anonymous
Anonymous's picture

I would like to piss the rest of my nest egg into a sink hole. Can you please direct me to the appropriate place?
WilliamBanzai7

Thu, 07/16/2009 - 09:51 | 7776 Anonymous
Anonymous's picture

Keep up the good work!
WilliamBanzai7

Thu, 07/16/2009 - 10:38 | 7795 Anonymous
Anonymous's picture

Under SEC, VaR measures risk of liquid trading assets. Under the Fed, it will include risk on restricted positions and things like private equity, real estate, etc.

As to credit losses, GS does not provision credit losses because it marks assets to market. Other banks hold at a high value and then hold loan loss reserve based on expected future loss. It is different accounting treatment, and GS marks are much more conservative than commercial banks.

Thu, 07/16/2009 - 11:09 | 7812 Anonymous
Anonymous's picture

If Goldman is a bank, where are the ATMs and Branches. Making 100million day day profits as a standard bank MY ASS. Get real, Fed and toss them out

Mon, 07/27/2009 - 15:27 | 16085 Anonymous
Anonymous's picture

FYI. MS, Amex, and BofA all got the same exemption on Feb 5, 2009. See Fed's Website
http://www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/2009/

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