What Is Goldman Sachs?



Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.

Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).


What Is Goldman Sachs?

  • Office of the Comptroller of the Currency (OCC) – Quarterly Report on Bank Trading and Derivatives Activities First Quarter 2009. The OCC’s quarterly report on bank derivatives activities and trading revenues is based on Call Report information provided by all insured U.S. commercial banks and trust companies, as well as on other published financial data. Derivatives activity in the U.S. banking system is dominated by a small group of large financial institutions. Five large commercial banks represent 96% of the total industry notional amount and 83% of industry net current credit exposure.


Recall that in Q4 2008 brokerage firms (Goldman Sachs, Morgan Stanley) and finance companies (CIT, GMAC) were given permission to convert into commercial banks. They did this to get access to better sources of funding during the dark days last fall.

Now that Goldman Sachs is a commercial bank comes a new set of public reporting requirements. One of these public reports is linked above, and below is a series of charts and tables from this report.

The first chart shows total credit exposure to risk-based capital for the five largest commercial banks. Below the chart is a table showing the the underlying data. Goldman Sachs is among the five largest commercial banks. Regarding their credit exposure to capital relative to their peers, we believe the technical term is “wow!”

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What is credit exposure? The two charts below detail bank ownership of credit instruments. 61% of all credit derivatives were written on investment grade credit. 64% of all credit derivatives have terms of 1 year to 5 years, meaning they most likely originated as a 5-year maturity. 27% have a maturity greater than 5 years, meaning they most likely originated as a 10-year maturity. Finally, 98.41% of credit exposure is structured as a credit default swap (CDS).

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The next chart shows quarterly trading revenue at the top five banks. Notice the blue bar under Goldman Sachs, it is their Q1 2009 results. Trading revenue accounted for 69% of gross revenue. No other large bank is even close to having trading be this large a part of their gross revenue. Combined with the charts above and we can see that Goldman’s revenues primarily come from credit trading. What happened to investment banking?

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The table below shows credit equivalent exposures for the 25 banks. This gives more detail to the first chart above. The second line is Goldman Sachs (click on the table for a readable image). Notice its credit exposure as a percentage of capital relative to the other 24 largest commercial banks. Again, they are in a league by themselves.

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Finally, from the OCC report, Goldman’s ability to make huge trading revenues in credit stands apart from other commercial banks. The charts below break down trading revenues by type for Q1 2009 (left) and Q4 2008 (right). Notice that commercial banks have lost money in credit the last two quarters, but not Goldman.

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This all suggests Goldman Sachs is a giant credit portfolio. Does the market know this? See the next two charts. They compare Goldman’s stock price (blue line, top chart) and an index of bank stocks without Goldman (blue line, bottom chart). Since 61% of all bank credit exposure is investment grade CDS, we compare Goldman’s stock price to the option-adjusted spread (OAS) of an investment grade index (red line, both charts)

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The charts note two different dates. The first is February 8, 2007, the date we believe the credit crisis began (the date HSBC, or “patient zero”, restated 2006 earnings because of subprime losses). The second date is September 5, 2008. This was the day Fannie Mae and Freddie Mac were placed in conservatorship and a week before Lehman Brothers failed.

Since February 7, 2008 both Goldman’s stock and the bank index has been highly correlated to credit. Neither was highly correlated before this date. Since September 5, 2008 Goldman’s relationship to credit held, but the bank index’ relationship has begun to diverge. So, in answering the question, “do stock traders understand that Goldman is essentially a large credit protfolio”, these charts suggest the answer is “yes.”

Given all this, AIG’s bailout of its massive CDS portfolio was in Goldman’s interest more than any other “commercial bank.”

Does Buffett understand he invested in a giant credit portfolio? His comments last week do not sound like someone that would want a massive bet on credit:

In a live interview on CNBC today, Warren Buffett said there has been little progress over the past few months in the “economic war” being fought by the country. “We haven’t got the economy moving yet.” While the economy is a “shambles” and likely to stay that way for some time, he remains optimistic there will eventually be a recovery over a period of years.

Maybe Warren should ask Byron Trott for a refund, or at least a weekend in his house (Hint: no house in the Midwest pays more in property taxes).

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