Thursday, August 6, 2009

Miracles never cease....

Greetings good citizen,

Tonight we return to a topic that has only briefly appeared in the MSM. When the topic did briefly appear in the MSM, it wasn’t displayed ‘in context’.

In fact, in the ‘post bailout’ period, the topic has disappeared from the public discourse, too bad we can’t say the same for the actual practice as well.

Without further adieu, let us proceed to tonight’s offering and see how many of you can puzzle out what I’m ‘babbling’ about…

[Hat tip: Loose cannon]

Goldman Sachs $100 Million Trading Days Reach Record (Update3)

By Christine Harper

Aug. 5 (Bloomberg) -- Goldman Sachs Group Inc. made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71 percent of the time, breaking the previous high of 34 days in the prior three months.

Trading losses occurred on two days during April, May and June, down from eight in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission. The company made at least $50 million on 58 of the 65 trading days in the period, or 89 percent of the time.

Goldman Sachs, which was [?] the biggest U.S. securities firm before converting to a bank last year, posted the biggest profit in its history during the second quarter as revenue from trading and equity underwriting reached all-time highs. The company, which has returned $10 billion to the U.S. Treasury and paid $1.42 billion in dividends and to cancel warrants, also made its largest market bets during the period.

“It’s very counterintuitive to think that they’d be able to generate this much profit and this much revenue in the middle of an ongoing recession,” said William Cohan, a former banker at JPMorgan Chase & Co. and Lazard Ltd. and author of “House of Cards” about the collapse of Bear Stearns Cos. “But the fact that so many of their competitors are out of business or severely wounded has put them in a very strong position.” [Or so they’d have you believe good citizen.]

Trading Days

In fiscal year 2008, the firm had 90 days in which traders made more than $100 million, compared with 88 in 2007. In fiscal 2006, the figure was 49 days, up from 18 in 2005 and 14 in 2004. Goldman Sachs changed its fiscal year in 2009 to end in December instead of November. [Which has nothing to do with the price of tea in China…]

Goldman Sachs’s trading results reflected the firm’s willingness to take on more risk during the period. Value-at- risk, an estimate of how much the firm could lose in any given day, rose to an average of $245 million in the second quarter from $240 million in the first quarter and $184 million in the second quarter of 2008. Most of the increase in the second quarter came from bets on equities, the company said. [Did it really?]

“They take risks for their clients and for themselves and they’ve figured out a way in this market, with less competition bidding for these things, to make money,” Cohan said. [Sound ‘plausible’ to you good citizen?]

Trading and principal investments accounted for 78 percent of the bank’s revenue in the second quarter of 2009, up from 59 percent in the second quarter of 2008. Net interest income, the difference between the interest the firm pays and what it charges, climbed 60 percent from the second quarter of 2008 as the company’s interest expense dropped 83 percent.

FDIC Backing

Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs said in today’s filing it had $25.1 billion of debt guaranteed by the FDIC under the agency’s Temporary Liquidity Guarantee Program. The bank sold about $30 billion of the FDIC-backed securities between November and March, according to company filings.

Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 1.70 percent in June from 2.14 percent in March and from 3.37 percent in November. [Doesn’t the word ‘unsecured’ imply that these funds were NOT guaranteed by the FDIC?]

Goldman Sachs is cooperating with government agencies and regulators making inquiries into its compensation practices, according to the filing. The board is reviewing letters from shareholders demanding an investigation of pay practices and recovery of any “excessive compensation,” the filing showed.

The company said it received inquiries from regulators about credit derivative instruments, and is cooperating. Goldman Sachs settled a lawsuit related to Enron Corp. on Aug. 3 and is waiting court approval. The filing didn’t provide details on the case or identify any of the regulators.

I expect most of you are still mystified by what I’m driving at as there aren’t any direct clues in this article.

Um, one phrase you hear repeatedly is the term ‘de-leveraging’, that both consumers and the economy are in the process of ‘shedding’ excess leverage.

What do you suppose this means? I’m sure most of you have brushed this off as meaningless ‘techno-babble’ dreamed up by economists and you’d be more than half right. You’re not supposed to know what it means.

To better understand how you ended up ‘over-leveraged’, we need to return to the credit crisis and examine why things fell apart like they did.

Anyone who is ‘underwater’ or upside down in a loan is essentially ‘over-leveraged’, they owe more than the asset was actually worth.

Banks became over-leveraged when they sold the same debt repeatedly to different investors. These sliced and diced ‘investment vehicles’ is what created the ‘shadow banks’.

Understand that the ‘shadow banks’ created a shitload more money and credit then actually existed in the ‘real’ economy.

These ‘fake’ financial instruments were sold to…you guessed it, institutional investors for the ‘real’ cash held in retirement accounts.

The fact that poor underwriting practices caused many of these products to default, despite their AAA ratings, was well known to the, um, counterfeiters.

A trickle of defaults quickly became a flood and the whole scheme fell apart.

But it hasn’t ended. Something else was going on behind the creation and distribution of this ‘funny money’. These instruments were used as collateral to create credit which CEO’s used to buy back their own stocks.

Reduce the number of outstanding shares and you instantly raised share value, which was the basis by which many CEO’s were compensated. Even small moves in a companies share price could result in millions of dollars worth of ‘bonuses’ for the company’s executives.

While the average person was subsidizing their lifestyle by dashing off loan payments from their home equity line of credit, this credit was being ‘securitized’ and sold to fund stock buy back programs that often exceeded a firms yearly profits.

So what did we end up with? Debt being sold not once but several times that quickly overwhelmed the ability to pay.

This mountain of debt is estimated to be in the quadrillion dollar range…and there isn’t a quadrillion dollars on the whole freaking planet!

Which begs a different question…since everyone is effectively ‘broke’, how is Goldman managing to increase the number of 100 million dollar trading days?

It doesn’t seem logical, does it?

Thanks for letting me inside your head,


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