

Goldman-Sachs Posts $1.8 Billion 1Q Profit, Looks to Sell Stock, Repay TARP - ojbyrne
http://money.cnn.com/2009/04/13/news/goldman.earnings.report.fortune/index.htm

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ajju
Accounting regulations were changed last week [1] so that banks do not have to
"mark to market" in "inactive markets" anymore. Since Goldman Sachs is now a
bank holding company, they don't have to do this either. What is now a ~2B
profit would probably have been a far greater loss by the old rules.

[1]
[http://www.reuters.com/article/governmentFilingsNews/idUSN09...](http://www.reuters.com/article/governmentFilingsNews/idUSN0931201320090409)

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j2d2
Interestingly, they're sitting on over $100B cash and cash equiv.

[http://finance.yahoo.com/q/bs?s=GS&annual](http://finance.yahoo.com/q/bs?s=GS&annual)

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ajju
With accounts payable of $257B, so the cash doesn't really mean that much and
a net ~64B assets-liabilities and all those numbers are from Nov '08

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j2d2
Fair points.

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gills
As you watch democracy die to thunderous applause, remember to subtract the
$10 billion of government funding and the $13 billion looted from the
taxpayers through AIG face-value swap repayments.

~~~
jacoblyles
At least the first sum you mentioned does not add to profit.

~~~
gills
You are correct, sorry. That's tier capital, right?

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jacoblyles
I never had bank risk-adjusted capital regulations memorized, and it is much
too complicated for me to care to relearn now.

However, the addition of a new liquidity source on the balance sheet in
general has no direct effect on the income statement. Borrowing money is not
income. Indirectly, it will have an effect through the interest expense owed
to the owner of the liability and the interest income earned from the
additional cash. However, the net interest income or expense is likely to be
much less than the $10 billion face value of the liability.

A caveat: I didn't read through their financial statements, and I refuse to do
so unless someone will pay me.

~~~
anamax
> Borrowing money is not income.

No, but paying for their losses does mean that whatever income they do have
isn't offset by said losses, and that produces profit.

Goldman's counter-party risk was subsidized by taxpayers via AIG. If doing so
really was a good idea, it should have been done directly and in public.

~~~
jacoblyles
Yes, if AIG were to go bankrupt, Goldman and others would have had to take a
one-time charge to net income to account for the reduction in the value of the
assets owed to them by AIG based on what they expected to be able to recover
through bankruptcy court. In this, Goldman is not special, though.

~~~
anamax
> In this, Goldman is not special, though.

We don't know how the AIG flow-through worked.

There have been rumors that some firms (Goldman Sachs is usually named) are
getting 100% while other folks are taking a haircut.

~~~
op12
I really don't understand this continued suspicion of the AIG/Goldman
flowthrough.

What they did was a textbook case of how to protect yourself against a
counterparty going bankrupt. It will be used as a case study one day of how to
exercise prudence.

Direct from the conference call that explained their exposure:

"When AIG was rescued, Goldman Sachs had $10 billion of exposure to the
insurance company that was offset with $7.5 billion of collateral as well as
credit-default swaps that would have paid off in the event of an AIG
bankruptcy, Viniar said on the March 20 call."

So Goldman had $10 billion of insurance with AIG. As the insurance started
going in their favor, as is common banking practice, they demanded collateral
be pledged (treasury securities) that they could seize in the event of
bankrupty. This was 7.5 billion worth of collateral in extremely safe treasury
bonds. So in the event of default, Goldman would have kept the securities in
lieu of getting the cash settlement. Because they did not default, AIG had the
securities returned to them and they paid out cash instead (this is the 10
billion number that "went from tax payers to goldman" that everyone keeps
saying). The remainder 2.5 billion was the disagreement between the parties as
to where the insurance should actually be marked. So to be prudent, they
bought CDS protection that would pay 2.5 billion in the event of default.

What is the problem here?

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anamax
> This was 7.5 billion worth of collateral in extremely safe treasury bonds.

> this is the 10 billion number that "went from tax payers to goldman" that
> everyone keeps saying

Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman
got $10B in cash because of govt flow-through via AIG.

> So to be prudent, they bought CDS protection that would pay 2.5 billion in
> the event of default.

Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if
the insurer is not solvent, why shouldn't Goldman take the hit?

> What is the problem here?

The claim is that Goldman is not taking a hit from their transactions with AIG
while other parties are. The above documents that Goldman is, in fact, not
taking a hit from their transactions with AIG.

The only remaining question is whether other parties are taking a hit for
their transactions with AIG. If they are, the question is Goldman Sachs is
being treated differently.

~~~
op12
> Goldman Sachs was owed $10B. 7.5B was available in pledged securities.
> Goldman got $10B in cash because of govt flow-through via AIG.

If someone has pledged the majority of what is owed to me in collateral, it is
wrong for people to imply that the 10 billion flowing through the government
was just some windfall flowthrough. They got what they were owed, and the
taxpayers got their 7.5 billion in collateral back. If the taxpayers did not
pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in
treasuries returned to them--Goldman would have had the right to keep it, and
this is the whole point of having collateral pledged to them in the first
place.

> Shouldn't the insurer be paying off, if solvent, and not the US govt? And,
> if the insurer is not solvent, why shouldn't Goldman take the hit?

Are you talking about the CDS insurer? The insurance only needs to be paid if
AIG defaults. If AIG defaults then the US govt doesn't have to pay anything,
the insurer does. Since AIG was bailed out, no credit event was triggered and
the CDS insurance becomes worthless. The upside is of course they actually get
their money. In either case, whether AIG was allowed to fail or not, they
would have been made whole.

Goldman was not treated differently in this case. Many other banks were
treated the exact same way. Yes, Goldman was paid out in their insurance. So
is any individual who took out insurance with AIG--they will actually get paid
what is owed to them as well now.

~~~
anamax
> If someone has pledged the majority of what is owed to me in collateral, it
> is wrong for people to imply that the 10 billion flowing through the
> government was just some windfall flowthrough.

I didn't say that it was a windfall. I said that Goldman was made whole by the
US govt via AIG. If other folks are losing money in similar circumstances,
it's fair to ask why Goldman is being treated differently.

And, even if everyone is being made whole, the question remains - why should
the US make them whole? Why shouldn't they lose money for taking bad counter-
party risks? They were planning to keep the money that they made for assuming
said risks, so why shouldn't they take the hit when things work out badly?

If I buy something that turns out to be worth less than I expected, I take the
loss. Why not Goldman and other banks?

> They got what they were owed, and the taxpayers got their 7.5 billion in
> collateral back. If the taxpayers did not pay the 10 billion

I'll pay $7.5B for $10B.

> In either case, whether AIG was allowed to fail or not, they would have been
> made whole.

Maybe, maybe not, but in any event, not by the US govt.

~~~
op12
> Why shouldn't they lose money for taking bad counter-party risks?

I don't really know how else to explain this. They shouldn't lose money for
taking counter party risk...because they were willing to pay the price to
insure themselves on the counter party risk. Why do you keep insisting that
they need to lose money? They had 7.5 in collateral, and they insured
themselves for the other 2.5 in the event they defaulted. This is the
definition of protecting yourself from bad counter-party risks.

> They were planning to keep the money that they made for assuming said risks,
> so why shouldn't they take the hit when things work out badly?

...because they insured themselves. Imagine someone who bought a share of
Google stock and then also bought a put option on it to protect themselves.
Then the stock goes down. It's like asking why that person shouldn't take the
hit because they were going to keep the money if Google had gone up. Goldman
doesn't take the hit because 1) they were prudently collateralized and 2) they
PAID for CDS protection on the rest that was owed to them that was not
collateralized. CDS is not free, of course.

If they were willing to pay the insurance and demand collateral, why should
they have to take a hit at all?

> I'll pay $7.5B for $10B.

So would I, but this is obviously a mischaracterization. It's like a homeowner
who defaults on their mortgage and gives a house worth 250k to the bank who
lent them 500k to buy it. They are not "paying 250 for 500".

> Maybe, maybe not, but in any event, not by the US govt.

This is not really a maybe, maybe not situation. Clearly with the collateral
and insurance arranagements, Goldman would not have lost money as a
counterparty to AIG. If you have an explanation otherwise I would be
interested to hear it.

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Raplh
I'm surprised GS wants to pay back the TARP $10billion so quickly. They are
paying $500Million/yr to keep that $10Billion.

GS also "borrowed" $5Billion from Berkshire Hathaway, giving BH preferred
shares for its $5Billion. The preferred shares pay 10%. So GS is paying
$500Million/yr to keep that $5Billion from BH.

The BH preferred does have a 10% premium that GS must pay to retire it. But
this means GS has the choice: 1) Retire $500Million/year of interest payments
by giving $10Billion cash to TARP 2) Retire $500Million/year of interest
payments by giving $5.5Billion cash to Berkshire Hathaway.

It makes you wonder just what is so bad about holding TARP money that it is
worth $4.5Billion to buy your way out from under.

~~~
Raplh
I have discovered the reason. TARP requires that until it is paid back, all
sorts of other optional uses of cash are ruled out, such as pre-paying off
other debt.

R:

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ashishk
this is fantastic news, though i guess it makes sense. goldman attracts the
most talented folks just by winking at them.

~~~
ajju
Goldman's secret to "success" in this instance is the freshly changed
accounting rules (see my comment elsewhere) and in the recent past has been
the patronage of ex-Goldman Sachs CEO and now treasury secretary Paulson.

~~~
kqr2
Actually, Paulson is no longer the Treasury Secretary. Timothy Geitner holds
that post.

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ilkhd2
Goldman Sachs is one of not many who had been behaving prudently. Next news
would probably be "Chase is doing good.." or some other obvious thing brought
as revelation.

