Frequent readers know that when it comes to Goldman Sachs, Zero Hedge has consistently claimed two things: i) that in the peak bubble days, the firm regularly commingled flow and prop traders on its trading floor(s), thereby allowing prop traders to either front run the firm's flow accounts, or trade alongside them in real time; and ii) that when it comes to OTC derivative trading, Goldman Sachs is the de facto Wall Street monopoly, a status made even more acute following the annihilation of Bear and Lehman, thereby cementing the firm's undisputed role as primary fixed income/OTC derivative market maker. Whereas yesterday we received indirect confirmation of the former, when we learned that Merrill was slapped on the hand with a token $10 million fine for doing precisely what we alleged, and which we are certain will soon be reconfirmed transpired at all other major banks in the 2003-2007 period, Goldman most certainly, and probably profitably, included, tomorrow it will be made clear that Goldman was an effective monopolist within the derivative space, with a bulk of its revenues in its highest margin, FICC group, coming from derivatives. When tomorrow the FCIC releases its long-awaited 545-page report exposing a tiny fraction of the criminality on Wall Street, we will discover that "Derivatives accounted for 70 percent to 75 percent of revenue in the firm’s commodities business from 2006 to 2009, and “half or more” of revenue from interest rates and currencies, the firm estimated, according to a report by the Financial Crisis Inquiry Commission. From May 2007 to November 2008, about 86 percent of $155 billion in trades made by the firm’s mortgage business involved derivatives, the FCIC said."
A breakdown of the firm's "activity" by segment was provided by Goldman recently. As can be seen when it comes to FICC, the firm's perpetually most profitable group, which combines both prop and flow, derivatives accounted for a majority (50%-55%) of the revenue:
And since revenues are obviously not profit or pre-tax net income we present a recent breakdown showing that when it comes to actual margins, FICC, both prop and flow, generate by far the highest firm-wide margins:
In other words, derivatives have long been the driver behind the bulk of the revenue of the firm's most profitable group, in a time when the banking lobby (read Goldman) does everything in its power to prevent the collapse of OTC trading margins, and thus compromise the firm's second to none monopolistic position in the space. We are confident that when the FCIC report is released tomorrow, much more information on Goldman's activities will be gleaned. In the meantime, Bloomberg has the following additional disclosure:
The commission examined derivatives as part of an investigation of the credit crisis, which sparked the worst recession since the 1930s and the loss of more than 8 million U.S. jobs. Derivatives -- contracts whose value is derived from assets such as stocks, bonds, currencies or commodities -- may have contributed to the turmoil by making it hard for regulators, responding to Lehman Brothers Holdings Inc.’s 2008 bankruptcy, to gauge the interconnectedness of financial firms.
Stephen Cohen, a spokesman for Goldman Sachs, declined to comment. The company yesterday posted on its website a copy of its response to the panel’s questions on derivatives, listing the share of revenue generated through derivatives in different types of trading. The figures are based on a “rough analysis of our major businesses” from 2006 to 2009, it said.
“To be clear, these percentages do not accurately reflect the percentage of aggregate firm-wide revenues from derivative transactions, since each individual business is a mix of derivative and non-derivative activity,” the firm wrote to the FCIC. The estimates were “prepared solely for the purposes of your request, and we would not (and do not) use this information in the management of our businesses.”
But wait, there's more...
Also as part of tomorrow's FCIC disclosure, we will discover that "Wells Fargo & Co. aimed to take advantage of a change in tax law that occurred two days earlier when revising a 2008 offer for Wachovia Corp. and trumping a bid by Citigroup Inc., the Financial Crisis Inquiry Commission said." BusinessWeek reports on the latest act of criminal impropriety by the then-administration, not to mention the complicity of the IRS, and the executive branch:
Federal Deposit Insurance Corp. Chairman Sheila Bair told the panel that Richard Kovacevich, Well Fargo’s chairman, informed her that IRS Notice 2008-83 -- which gave tax breaks to acquirers of struggling banks -- “had been a factor leading to Wells’s revised bid,” according to the report. A previous offer by Wells Fargo had been rejected as regulators rushed to stave off bankruptcy at Wachovia.
Wells Fargo’s offer of $15.1 billion in stock derailed Wachovia’s agreement to sell its banking operations to Citigroup, which was reached a day before the IRS notice, according to the report. That led to two years of litigation among the banks. San Francisco-based Wells Fargo posted more than $20 billion in profit since the deal, while Citigroup required a $45 billion U.S. bailout.
The tax break, repealed in 2009, was “an unprecedented executive branch usurpation of tax law,” Commission vice- chairman Bill Thomas said last year.
Basically what happened for those who are confused, is that the tax law was changed in the last minute to prevent Citi, which Paulson et al thought may fail, from buying Wachovia.
Bair and Wachovia Chief Executive Officer Robert Steel informed Citigroup CEO Vikram Pandit of the Wells Fargo deal at 3 a.m. on Oct. 3. Pandit was “stunned” at the news and wanted to counter the bid, according to the report. Bair declined to help and told the FCIC she had “concerns” for Citigroup’s “viability” if it matched the Wells Fargo offer. “In reality, we didn’t know how unstable Citigroup was at that point,” Bair said in the report. “Here we were selling a troubled institution ... with a troubled mortgage portfolio to another troubled institution.”
Who thought central planning started off so early in America's two year non-stop centrally planned market meltup.
But wait, there's even more...
None of this really matters you see, because as Goldman president Gary Cohn said in Davos today today "the drive to impose more regulation on banks could cause the next crisis by pushing risky activities towards hedge funds and other lightly supervised entities."
“In the next few years, the unregulated sector will grow at an exponential rate,” he said. “Risk is risk. My concern is that ... risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector.”
One hedge fund manager in Davos dismissed Mr Cohn’s remarks as “self-interested”, however, saying banks use such arguments because they are concerned about losing lucrative business to new entrants.
So why not just let sleeping dogs lie, and let the banks resume being totally unregulated. After all, who knows just how mutually assured the destruction will be if instead of the TBTFs, which as we all know by now will not be allowed to fail until the Keynesian Frankenstein monster is aborted, handling risk, we left those parties who actually are not protected by the ubiquitous Bernanke put proceed without regulation. Because the Fed has bailed out so many hedge funds: who can possibly trust those evil, evil funds with 3x leverage, when the ultra safe banks struggle to make ends meet with $100 million year end bonuses, and revel in the knowledge that nothing bad can ever happen to them?
The crisis is over. And it all now forgotten: time to give banks back their 50x leverage, and restart the securitization machine. Because Netflix at $200, Apple at $400, and BofA at $15 (which these days are the market, and per the Fed's third mandate, also the economy) said so. And lest we forget, we need to raise another $100 trillion in debt in the next 9 years. That isn't going to happen if we don't all place our trust in the House Of Lloyd immediately if not sooner.