Goldman Sachs Responds To Zero Hedge

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