More Goldman Sachs Secrets that Tim Geithner Might Not Share with You!

By: Reggie Middleton | Wed, Apr 22, 2009
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Okay, this is going to be a quick and dirty review of Goldman's derivative real estate and off balance sheet real estate exposure as is probably reflected through their credit exposure as well.

OTC Derivative Credit Exposure ($ mn)
  Feb-09 % of total Nov-09 % of total Credit Quality Deterioration? Comments
AAA/Aaa $15,387 15.6% $14,596 20.7% (5.10%) <--Very significant decrease in AAA exposure
AA/Aa2 $33,820 34.2% $24,419 34.7% (0.50%) <-- Decrease in AA exposure
A/A2 $25,291 25.6% $16,189 23.0% 2.6% <-- Significant increase in A exposure
BBB/Baa2 $9,724 9.8% $6,558 9.3% 0.5% <-- Increase in BBB exposure
BB/Ba2 or lower $13,354 13.5% $7,478 10.6% 2.9% <-- Very significant increase in non-investment grade (junk) exposure
Unrated $1,236 1.3% $1,169 1.7% (0.40%) <-- Marginal decrease in small unrated exposure
Total $98,812 100.0% $70,409 100.0%    

Now, why would Goldman's OTC Credit Exposure be increasing and deteriorating even as it has taken expensive emergency money from Warren Buffet and strings attached TARP funds it is trying to pass on like a itchy veneral disease? You would think they would be trying to get rid of this stuff versus stuffing the balance sheet with it.

Exposure by
asset category
($ bn) (a) (a)
% of Equity
Incl in L3
(b) ($ bn)
% of (a)
% of Equity
Prime $12 29% $1.7 14% 3.9%
Alt-A $5 12% $2.0 41% 4.7%
Subprime $2 4% $0.9 49% 2.1%
Total $19.1 45% $4.6 24% 10.8%

Hmmm! 16% of Goldman's equity is in Alt-A and subprime assets. Alt-a doesn't look to good. Read this article thoroughly (The banking backdrop for 2009 ), then let's move on - or we can just glance at this chart.

The problem ahead: According to Fitch, of the nearly $200 bn of option ARMs outstanding, roughly $29 bn of loans are expected to recast by 2009. Of this $6.6 bn constitute 2004 vintage (that would be recast as a result of completion of the end of five-year term in 2009) and $23 bn constitute 2005 and 2006 vintage loans that would recast early due to the 110% balance cap limit.

Further an additional $67 bn is expected to recast in 2010 of which $37 bn belong to 2005 vintage (that would be recast as a result of completion of the end of five-year term in 2010) and the balance $30 bn consist of 2006 and 2007 vintage loans that would be recast early due to the 110% balance limit cap.

The potential average payment increase on the loans recast is 63%, representing an additional $1,053 due each month on top of the current average payment of $1,672. These large payment increases could cause delinquencies to increase, and increase dramatically, after the recast. The fact that only 65% of borrowers have elected (or are able) to make only minimum payments underscores the magnitude of the potential problem. The potential payment shock combined with the continuous deteriorating outlook for home prices and lack of refinancing opportunities could be a negative cause of concern for investors in Option ARM securities. Even more ominous, is pall cast upon the banks that hold these assets and are additionally exposed to other forms of consumer credit, ie. HELOCs, credit card debt and other unsecured loans (remember the links from the Asset Securitization Crisis above).

Well, let's take a look at the composition of their other exposures...

This is the "other exposure" not included in VaR table. Notice which category has the largest change...

$ mn

10% Sensitivity  
May-08 May-07 % Change
Trading Risk
Equity 1,102 709 55%
Debt 1,147 1,045 10%
Non-trading Risk
SMFG 0 130 -100%
ICBC 262 205 28%
Other Equity 1,224 591 107%
Debt 637 277 130%
Real Estate 1,369 497 175%
Surprise, Surprise!!!
Other market risk
not included in VaR
5,741 3,454 66%

Hmmmm! Their biggest non-VaR risk is real estate, primarily commercial real estate, but they have plenty of other juicy stuff as well. Let's bring back those two graphs from the previous article:

Reference the CMBS exposure that Goldman has above (at no less than 14x leverage), then reference this chart directly below.

Damn, that really looks like its going to hurt! Now, let's move on to the Off Balance Sheet Assets for the last quarter of 2008.


Unconsolidated VIE's ($ mn) VIE assets Maximum
loss exposure
loss as %
of assets
Mortgage CDOs 13,061 5,858 45% Real estate
derivative sec
Corporate CDOs and CLOs 8,584 1,079 13%
Real estate, credit-related and other investing 26,898 3,366 13% Raw real estate
& credit sec.
Municipal bond securitizations 111 111 100%
Other mortgage-backed 0 0 0%
Other asset-backed 4,355 1,084 25%
Power-related 844 250 30%
Principal-protected notes 4,516 4,353 96%
Total 58,369 16,101 27.6%

Hmmmm! $40 billion dollars in real estate related assets and nearly $9 billion in loss exposure, and that's JUST THE OFF BALANCE SHEET EDITION! This begs the question. If they have this much exposure off balance sheet, how much do they have on balance sheet? Well, let's take a look-see...

Balance as at November 30, 2008
In US$ mn Level 1 Level 2 Level 3 Netting and
Commercial paper, certificates of deposit, time deposits and otr money market instruments 5,205 3,457 0 0 8,662
U.S. govt, federal agency and sovereign obligations 35,069 34,584 0 0 69,653
Mortgage and other asset-backed loans and securities 0 6,886 15,507 0 22,393
Bank loans 0 9,882 11,957 0 21,839
Corporate debt securities and other debt obligations 14 20,269 7,596 0 27,879
Equities and convertible debentures 25,068 15,975 16,006 0 57,049
Physical commodities 0 513 0 0 513
Derivative contracts 24 256,412 15,124 (141,223) 130,337
Total 65,380 347,978 66,190 (141,223) 338,325

Now, if any of you are paying attention, you should be agasp in your chair. Why in the hell does Goldman carry more real estate assets exposure off balance sheet than on. Well, just take a look at those pretty graphs above. The answer is self-evident! Then there is also the spate of current events that are bound to make those commercial real estate credits worth a mint... Such as the nation's second largest Commercial property owner filing bankruptcy last week (as I made clear that they would fold in some form or fashion in 2007 - GGP and the type of investigative analysis you will not get from your brokerage house).

Long story short, if you are bullish on commercial real estate and CLOs, then you may want to be bullish on Goldman. However, if you foresee any real estate problems, then this heavily laden, heavily valued, publicly traded fixed income and real estate hedge fund may not be seeing the best of days in the near to medium term!

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Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

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