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

April 22, 2009

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

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)	(b) % of (a)	(b) % 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
*$ mn*	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.

Q4-08

Unconsolidated VIE's ($ mn)	VIE assets	Maximum loss exposure	Maximum 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 derivative sec
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 Collateral	Total
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
Reggie Middleton, LLC
Perpetual Interests, LLCTM
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