Today, during the FCIC's second day of hearings, Goldman CFO David Viniar was forced to provide additional data about the firm's AIG CDS trades. Luckily the firm kept a record of all entry and exit points, and thus will be able to confirm just what the P&L of the associated trades is (and if not, we are happy to teach Goldman's risk department how to use the Bloomberg CDSD function in conjunction with RMGR run scraping to build a real time CDS portfolio tracker)... Which is ironic, because when asked by Brooksley Born why the firm has not yet provided a break down of its derivative revenue Mr. Viniar by all accounts perjured himself. As Bloomberg reported: “We don’t have a separate derivatives business,” Viniar told the panel. “It’s integrated into the rest of our business.”
Every evening, a firm's back office (and that most certainly includes Goldman) takes the EOD CDS and cash marks from every single prop trader, be they equity, fixed income, mortgage, FX, etc. and using its own integrated pricing system or an outsourced one, compiles a daily P&L which is immediately sent to the head of the risk division, the head of trading, and other various listserv participants. And most certainly the traders, who have every interest of knowing just how they did in any given day as they prepare their bonus speech at the end of the fiscal year. Traders, who combine cash and CDS trading simply look at a consolidated P&L on the basis of DV01 exposure, which makes the form of product used completely irrelevant, and is a process whereby every change in 1 basis point in interest rates is equivalent to a profit or loss. Every single derivative is presented in Goldman's daily risk summary on a DV01 basis to show not only maximum possible loss, but what the daily profit or loss may have been. This makes the tracing of both revenue from derivatives and cash products seamless.
Obviously even the FCIC panel was fully aware of this:
“When you tell us that you don’t know how much you make in your derivatives business, nobody here really believes it,” [Commissioner Byron] Georgiou told Viniar. “Nobody here believes that you don’t know how much money you’re making on the various aspects of your business, it doesn’t make any sense.”
And Goldman's very own documents confirm that the firm, as part of its daily P&L summary, tracks the revenue by every product line, most certainly including derivatives, as can be seen from the email by Ki-Jun Bin from July 20, 2007, obtained as part of the Abacus discovery process:
As for Goldman's claim that due to possible commingling of strategies between cash and synthetic legs, any P&L report will be distorted, you will pardon our French, but this is a pile of crap. Every time a trade ticket is punched, it is the responsibility of the trader and/or their supervisor to allocate a trade to a given strategy. In other words, in the P&L of a given group, the 20MM notional of XYZ CDS would be paired with the 5MM in cash bonds of the firm whose CDS are being referenced, and then the combined EOD P&L would be derived based on the change in DV01. But leave it to Moody's to not be aware of this most fundamental principle of how banks organize their risk by various strategies:
“Reporting a revenue number, just the profit on derivatives without looking at cash positions associated with hedging those, is going to be a highly imprecise exercise,” Yavorsky said in an interview today.
Fine, so look at the cash positions which can all be reconciled. As for commingled legs, it is again the trader's responsibility to allocate portions of any given trade to various strategies on a pro rata basis. At the end of the day, it is the "view by strat" of any portfolio, and every single back office can do this, that provides precisely this data. And out of this view, the cash legs, if any even exist, can immediately be removed. Of course, Goldman knows this all too well.
Yet all of this is very much irrelevant. As the Abacus discovery taught us, Goldman rarely if ever actually hedges: recall that the firm's Mortgage group was almost exclusively short in trading daily derivatives (look at the P&L above and note how many various portiona have the same sign) in order to hedge existing legacy cash product balance sheet exposure. In other words a forensic analysis of all Goldman positions in a given period will indicate that the prop trades were mostly unidirectional and unhedged, making all of Viniar's and Moody's concerns moot. Typically traders put on one position via either cash or CDS, and on 10%, a combination of both, and wait for it to hit stops on either side. In other words, 90% of trades will be completely unhedged, with not confusion about what is attributable to derivatives and what to cash.
We were gratified to hear that Brooksley Born left Viniar with the obligation to provide a P&L split. The second this document is public we will assist the FCIC in decoding it: we are certain that for Goldman, which derives the bulk of its profits by being the monopolist in wide bid/ask-spread OTC products, most notably CDS, about 80% of trading revenue will come precisely from unregulated derivatives trading. Which, of course, is the real reason why David Viniar is stalling so hard and doing everything in his power to avoid disclosing that not only would derivative regulation massively impair the firm's profitability, but that the ongoing lie about Goldman generating just 10% from prop trading is blatantly false, and in reality the real number is the inverse. Which also explains why by the time the Fin Reg bill finally passes, the Volcker Plan will be gutted beyond all comprehension and Wall Street will be back to doing everything it used to do before, but this time with the Frank-Dodd stamp of approval.Until the next inevitable crash.