When Goldman came limping out of Q1 like the guy who every year manages to injure himself celebrating a touchdown, investors' only available reaction was to throw their hands up and sell. Clearly something had gone haywire in an otherwise benign quarter for trading, which saw rivals like Citi and Bank of America go hogwild. Incoming CFO Marty Chavez was tight-lipped on his first earnings call, rebuffing five separate analyst queries on the bank's FICC whiff with vague excuses like “underperformance was driven by commodities and currencies” and “we didn’t navigate the market well.” Lloyd Blankfein blamed the “operating environment.”
Now we have a little more insight into who goofed up and how. It was, evidently, a love that dare not speak its name. As Bloomberg reports, Goldman's distressed debt desk got a little too friendly with a couple notorious teases: coal bonds and shopping mall debt.
Traders got burned by a constellation of souring debts tied to a coal-mining giant and struggling mall retailers, as well as wagers linked to the U.S. dollar, according to people familiar with the matter. The bank incurred tens of millions of dollars in losses on companies including Peabody Energy Corp. and Energy Future Holdings Corp. Borrowings from retailers including Rue 21 Inc., Gymboree Corp. and Claire’s Stores Inc. also stung, the people said.
The other factor in Goldman's surprise earnings collapse, the greenback, was hardly a mystery. One of the bank's “top trades” of 2017, the long-dollar gamble started looking bad in January and continued looking bad through March. But when you're riding high on a bull market, everything tends to look better. Goldman left the dollar wager last week.
It's not clear how much the dollar stung compared to the coal and mall debts. But there's got to be a greater emotional sting to the latter. If you asked the average American for two industries closest to the brink of death, they may very well say shopping malls and coal miners. Perhaps, if you squint just right, that fact makes for a great contrarian bet. But contrarian bets are contrarian for a reason.
The bigger question is whether the losses say anything about Goldman's extremely casual relationship with the Volcker Rule. We can only hope that someone in DC will soon raise a fuss about enforcement after learning that Goldman lost money in the process of navigating the market. They were taking risks! With money! The implication being, somehow, that regulators should better police the Volcker Rule so that Goldman makes more money. Sounds about right.