One of the more useful information items in Goldman's periodic filings is granular disclosure on the firm's CDS holdings, and specifically segregated data by maturity bucket and by spread as pertains to "maximum payout and notional amount of written credit derivatives." In essence, due to the firm's monopoly in CDS inventory and, therefore, trading, this is the squid's beating heart: between buying and selling (hopefully offsetting positions) CDS in billions of dollars worth of notional daily, and being able to capitalize on wide spreads, courtesy of the extinction of such traditional competitors as Bear and Lehman, the firm will continue to make hundreds of millions in profits every day, month and quarter, due to its newly found monopolist exposure when it comes to trading CDS, both as principal and as agent. .... A Goldman CDS flow trader will traditionally make markets, for example in company XYZ, where he will give the (5 year) market as 500/530 bps, meaning buyers will put on new CDS at a spread of 530, while sellers will offload and/or short positions at 500 bps. By running traditionally balanced books, Goldman's flow trader is able to extract a 30 bps spread on any block of matched buys and sells. On $1 billion of notional traded CDS (which is much less than the firm does daily), with a DV01 of about $400k, if Goldman can unwind its CDS book daily to natural buyers and sellers, it can make $12 million simply by taking advantage of the spread ($400k (DV01) x 30 bps). At an average CDS block trade size of $25 million, Goldman's hundreds of salespeople need to just call up 40 accounts to trade in size and make the firm a risk-free $12 million. In days of volatility, Goldman can easily trade over $10 billion in notional equivalent. Again assuming a 30 bps spread, which the 85 Broad firm has basically guaranteed itself for life, courtesy of monopolizing the CDS market with just itself, and JPMorgan providing any relevant CDS inventory, Goldman can easily make $120 million daily, merely from trading CDS on a risk free agency basis. .... Sometimes there will be quirks: like when the firm has net notional exposure to a firm like AIG, which may or may not be able to fund tens of billions worth of margin calls, thereby skewering Goldman, which is forced to eat the loss. Of course, in those instances people like Tim Geithner step in and bail out the counterparty so that things at Goldman can continue running as smoothly as always, and the firm can go back to making hundreds of millions in virtually risk free trades daily (and that even excludes the perpetually Fed backstopped balance sheet: this aspect of its risk free business is merely a function of its near-monopolistic dominance of the CDS market: nothing more fancy). Another time when things get problematic is when Goldman is running an unmatched book: in other words when it has sold more CDS than it has bought, a disbalance from a purely P&L point of view, or when it has sold less than it has bought, a risk from a counterparty perspective. The last is precisely what happened to Goldman as it transitioned from last year and headed into 2009. As the charts below demonstrate the company materially tightened its overall sold CDS exposure, in other words the gross maximum payout it may have been on the hook for at any given moment. .... Yet on a notional basis, things are not quite as bleak, and it appears that Goldman has learned its lesson: while at Q4 2008 the firm had a net liability arising from the carrying value of its written CDS of almost half a trillion, or $460 billion to be precise(that would mean its net exposure if all counterparties failed, would leave the company scrambling to get first row seats before Bernanke's printing press and praying it could print $460 billion worth of worthless dollars in one day), that number has since collapsed to a liability of merely $82 billion. Yet even that number is staggering, and begs the questions of what will happen to Goldman if we have another Lehman event at some point when the Fed's printing presses finally blow a fuse, and, more importantly, just what is the exposure of the other major CDS trading power houses which have likely not been as prudent in managing their credit derivative exposure. Zero Hedge will next analyze disclosed CDS exposures at JPM, DB and some of the other left over CDS trading desks. Luckily, with Lehman and Bear no longer out there (providing a happy Goldman with limitless Fixed Income monopoly powers), our task will be much easier.
....
A Goldman CDS flow trader will traditionally make markets, for example in company XYZ, where he will give the (5 year) market as 500/530 bps, meaning buyers will put on new CDS at a spread of 530, while sellers will offload and/or short positions at 500 bps. By running traditionally balanced books, Goldman's flow trader is able to extract a 30 bps spread on any block of matched buys and sells. On $1 billion of notional traded CDS (which is much less than the firm does daily), with a DV01 of about $400k, if Goldman can unwind its CDS book daily to natural buyers and sellers, it can make $12 million simply by taking advantage of the spread ($400k (DV01) x 30 bps). At an average CDS block trade size of $25 million, Goldman's hundreds of salespeople need to just call up 40 accounts to trade in size and make the firm a risk-free $12 million. In days of volatility, Goldman can easily trade over $10 billion in notional equivalent. Again assuming a 30 bps spread, which the 85 Broad firm has basically guaranteed itself for life, courtesy of monopolizing the CDS market with just itself, and JPMorgan providing any relevant CDS inventory, Goldman can easily make $120 million daily, merely from trading CDS on a risk free agency basis.
Sometimes there will be quirks: like when the firm has net notional exposure to a firm like AIG, which may or may not be able to fund tens of billions worth of margin calls, thereby skewering Goldman, which is forced to eat the loss. Of course, in those instances people like Tim Geithner step in and bail out the counterparty so that things at Goldman can continue running as smoothly as always, and the firm can go back to making hundreds of millions in virtually risk free trades daily (and that even excludes the perpetually Fed backstopped balance sheet: this aspect of its risk free business is merely a function of its near-monopolistic dominance of the CDS market: nothing more fancy).
Another time when things get problematic is when Goldman is running an unmatched book: in other words when it has sold more CDS than it has bought, a disbalance from a purely P&L point of view, or when it has sold less than it has bought, a risk from a counterparty perspective. The last is precisely what happened to Goldman as it transitioned from last year and headed into 2009. As the charts below demonstrate the company materially tightened its overall sold CDS exposure, in other words the gross maximum payout it may have been on the hook for at any given moment.
Yet on a notional basis, things are not quite as bleak, and it appears that Goldman has learned its lesson: while at Q4 2008 the firm had a net liability arising from the carrying value of its written CDS of almost half a trillion, or $460 billion to be precise(that would mean its net exposure if all counterparties failed, would leave the company scrambling to get first row seats before Bernanke's printing press and praying it could print $460 billion worth of worthless dollars in one day), that number has since collapsed to a liability of merely $82 billion. Yet even that number is staggering, and begs the questions of what will happen to Goldman if we have another Lehman event at some point when the Fed's printing presses finally blow a fuse, and, more importantly, just what is the exposure of the other major CDS trading power houses which have likely not been as prudent in managing their credit derivative exposure. Zero Hedge will next analyze disclosed CDS exposures at JPM, DB and some of the other left over CDS trading desks. Luckily, with Lehman and Bear no longer out there (providing a happy Goldman with limitless Fixed Income monopoly powers), our task will be much easier.
Tyler Durden
LOL. *Lunatic*, n. One whose delusions are out of fashion.
