One of the stunning things that Goldman Sachs said yesterday was that they had offset losses arising from this summer’s credit crunch by shorting mortgages. With hindsight that seems like such an obvious bet that you want to kick yourself for not thinking of it first. But one thing we’ve been trying to understand is what exactly Goldman means when it says it was “short mortgages” in the third quarter. What asset classes was it shorting?
We can think of a few obvious ways to short mortgages by going short assets that are correlated with the mortgage market. Short the common stock of mortgage companies. Short ABX. Buy protection on correlated bonds. But these are just guesses. We want to know more. How do you think Goldman minted the kind of money they say they did by “shorting mortgages?”
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Investors don’t like to catch falling knives and get hurt.
The old adage is “don’t start buying until you see blood running in the streets.”
TGIF
did you think of that or did i think of it and post it in a comment at 8:35am this morning (and i meant, obviously, buy protection not sell protection)? well, either way. i’d be interested to hear about some more interesting and less obvious ways
i do happen to know of several hedge funds that were just buying protection on discrete CDO packages but i’m not sure that kind of bet is available in the size necessary to move the goldmans to a multi-billion $$ gain
oh by the way mr carney you should probably change your post to also say “buy protection” before these guys jump all over you here, and possibly also suggest that you smell like fish
Look at the hedge fund Paulson’s credit strategies (Credit and Advantage) for clues…short ABX, short specific CDO securities in heavy subprime geographic markets, short brokers, short homebuilders. Their intermediate strategy was up 70% through August.
How about shorting collateral, (TBAs)…
Whether Goldman is lying through its teeth or not, nobody is going to call them out on it. So it’s pretty much irrelevant.
How the hell did they do it when their two “flagship” funds lost a total of … what.. 4 billion in the third quarter? Who the hell in that company was shorting mortgages when their hedge funds tanked so much?
Did they paper over $3 billion in losses with that fund bailout? That $2 billion sale of the company purchased by the guy who left covered some stuff up too.
Sure, Goldman is teh awesome, but something definitely doesn’t add up.
buying protection on the ABX. liquidity in single names totally dried up
these are paper gains that will vanish as the ABX continues to rally (as it did much of this week). shorting BBB will continue to be a good trade but further up the stack, not so much. fundamental mortgage people are starting to look at prepayments curvesand other factors that mortgage investors actually care about.
this was a smart way for goldman to clean up their books but its hardly profitable unless losses eat through ABS pools beyond the single-A level.
yah – selling protection makes you long an asset economically
I know the money was made in ABX. Big positions.
poor jimmy cayne gets laid up in the hospital while these people are making fistsful of dollars? bloodmoney!
Maybe they are taking a cue from their super-duper-successful hedge fund and leveraging their short mortgage positions to the hilt.
Now, if you’ll excuse me, there’s a fire in the IT Room that need putting out with gasoline.
i dont know about all of gs, but i know certain desks were net short using abx
i dont know about all of gs, but i know certain desks were net short using abx
ABX = Barrick Gold?!?!
ABX = Barrick Gold?!?!
Carney:
This is how we hit our numbers here at GS
1: Cut a hole in a (black) box,
2: Put our junk (bonds) in that box,
3: Never open that box
… and that’s the way we do it
What’s funny is they lost $600mm going long abx earlier in the year, so they are not that prescient.
To make that much going short, they would have done it across so many different assets, or else you just move the market. These aren’t that liquid. I’m skeptical.
they could get that size in ABX earlier this year… some are short >10bn in LCDX now as hedges.
11:51
To paraphrase Bess: we laughed so hard that we could barely keep our legs crossed.
ABX is an OTC derivative traded between the investment banks. See http://www.markit.com
1:48 did bess really say that? god thats clever.
wow, i can’t believe someone posting under the name J. Dimon does not know what ABX it. holy crap dude. i’m blown away. it reminds me when i was 12 and every kid on my hockey team that didn’t win a single game was fighting over who would get to have #99 and #66 on their jersey.
I’ll post under the name of J. Wells or any other “J” bank ceo if I want… In the 80′s, I was busy blowing up Bankers Trust when you were skatin’ around in new hampshire with a mullet.
Could Goldman’s diversifications have had something to do with its performance during the credit crunch? I ran across this article yesterday that maps a lot of the company’s current board connections: http://www.newsvisual.com/newsvisual/2007/09/goldman-sachs-b.html at newsvisual. It’s interesting… I would wonder how those ties help with business
Goldman restated that they were short CDO/sub-prime at investor conference yesterday, I’m told. The only way I can think of to do that in the “locked-up” and non-trading market is to sell short a high yield income fund like the RMK funds, or, to short the ABX, or BOTH.
Goldman restated that they were short CDO/sub-prime at investor conference yesterday, I’m told. The only way I can think of to do that in the “locked-up” and non-trading market is to sell short a high yield income fund like the RMK funds, or, to short the ABX, or BOTH.