Goldman Sachs does not have to pay the people trying, at its behest or otherwise, to put former programmer Sergey Aleynikov in jail (again). But it does have to pay to try to keep him out of jail. For now. Unless he does go to jail (again). Then all bets are off. Which is good for old Sergey (for now), because, as you might imagine, given the ordeal he’s been through, he’s broke. Read more »
Honestly bank earnings week has been a little boring, no? It’s been quarters since anyone announced a six billion dollar trading loss, and the recent news is pretty much modest beats from a diverse mix of businesses and where is the fun in that I ask you. Financial-market memories are short and … have negative serial correlation, or something … which might explain why Goldman is down today despite announcing a $4.29 EPS vs. analysts’ $3.87, with strength in principal investments and debt underwriting making up for so-so FICC revenues.
The call: variations on boring. Goldman CFO Harvey Schwartz painted a picture of Goldman clients who are deterred from strategic activity by macro uncertainty – “oh we can’t do that merger, because, uh, Cyprus” – and so spend their time refinancing their loans every six months to get lower interest rates.1 I suppose their bankers have to make fees somehow. And there don’t seem to be many conclusions to draw from the numbers: FICC revenues are down because there is noise in FICC revenues, not due to any change in business mix or performance. VaR is down because market vols are down, not because of any change in risk appetite. Private equity gains in investing & lending reflect stronger public equity markets because private equity is just beta. I guess.
Nor is Harvey your go-to guy to fulminate about regulation, though these days really no one is. He said various nice things about how the regulators are working hard and getting it right, and how Goldman doesn’t act in anticipation of regulations but only responds to them when they’re final. Others have phrased this less charitably. Thus Goldman’s new BDC is not a preemptive effort to fit prop traders into the Volcker Rule, but just a client-driven part of Goldman’s asset management strategy – “deploying our competencies into opportunities we feel like our clients would benefit from.”
So what’s left? There’s comp, of course: comp accruals were 43% of revenue ($4.34bn), versus 44% in 1Q2012 ($4.38bn), and headcount is down 1%. Analysts tried to push Schwartz to extrapolate a trend there, but again he mostly resisted. Keep enough people to serve clients, etc. Read more »
The saddest part of this job is discovering a beautiful thing that someone has created as a way around financial regulation, and then watching philistine regulators destroy it. But the happiest part is dreaming up a come-on-that-could-never-work ploy to get around some financial regulation, and then finding out that someone’s actually doing it. Extra points if the someone is Goldman Sachs.
Two weeks ago I thought I’d concocted a way around the Volcker Rule’s porous and silly restrictions on banks running private equity funds. My solution involved (1) having a merchant banking business that took no outside investors (which the Volcker Rule does not restrict), (2) having a private equity fund that took no bank money (since the Volcker Rule limits banks to owning 3% of such funds), and (3) having your merchant bank and your private equity arm co-invest in deals. Since that doesn’t quite work,1 I later modified it a bit to have the outside investors co-invest directly, rather than through a private equity fund, and give the bank its management fee in the form of better economics to the merchant bank in each investment.
If you are in the business of selling derivatives you have to value them from time to time, because counterparties want to know what their thing is worth, and regulators want to know how deep in the hole you are. This is not always as easy as valuing a stock by just going out and getting a quote. But the principles can be stated sort of simply: you just take an integral of your net discounted cash flows over every possible future state of the world, appropriately probability weighted.*
Easy to say, but hard to do, because you have only so much direct access to possible future states of the world. Fortunately there are rules of thumb for this, of greater or lesser reliability, which exclude the unlikely and immaterial states of the world (your BAC warrants are worth zero if the world ends this Friday, but that’s unlikely; you’re perhaps equally likely to eat a bacon bowl or a salad for lunch tomorrow, but your choice will have only an immaterial effect on the value of your BAC warrants). All of these methods, however, provide only market-sanctioned guesses about the fair value of your derivatives; if the future world moves in ways not contemplated by the moving parts of your model your calculations are just wrong.
This is, I’ve always thought, a nice way to think of the world, and certainly more conceptually satisfying than “it’s worth what people will pay for it” or “it’s worth what the formula says.” And once you get into thinking of things this way, you can have fun thinking of all the possible things that (1) are not trivially unlikely and (2) would have a not trivial effect on your stuff.
Like, it turns out, your own demise. Read more »