Goldman Sachs Is Printing Money

Yesterday, Zerohedge published Goldman Sachs’s (GS) daily trading record for 3Q09, noting the statistical improbability of not only the firm’s success ratio, but the magnitude of the success. As ZH notes, the firm made over $100M on 116 days in 2009, which equates to 60% of all days in the year.

When reviewing the article with wide eyed astonishment, it occurred to me that while the record is unbelievable by any Street standard that I am aware of, is it different than Goldman’s recent historical past? The short answer is that it is different, quite different.

To somewhat reinvent the wheel, the chart below replicates the chart supplied Zerohedge and Goldman in their 10Qs. The difference is that I add the 9-month figures from 2007-2009 to see how the distribution has changed over time.

Source: Goldman Sachs and DF.

The chart clearly shows a dramatic improvement between 2007 and 2009 in highly profitable days. It also gives visual clues to a shift from the left to the right, but the magnitude of the shift isn’t particularly clear. I created a table to more clearly show the magnitude of the shift to the right.

The table shows each profit/loss category as a percentage of total days in the quarter. I then calculate the average number of days for each segment in 2007-2009 and to generate the percentage change between 2009 performance and the average for the prior two years. The results are even more stunning than looking at either stand-alone quarters or yearly comparisons.

Source: Goldman Sachs and DF.

The difference demonstrates that 2009 had negative deltas to the prior two year average in 8 out of 10 profit/loss categories, six of which were loss categories.

The only categories to have positive deltas were the two most profitable buckets, most notably the greater than $100MM days which grew to 68 days or 60% of the total, which represents 72% growth over prior years. Also notable is that loss days greater than $100M declined 100% to zero from an average of 7% in prior years. Good risk management there.

One can reach a myriad of conclusions from this data, including but not limited to:

1. The anomaly of all anomalies – Goldman had a lucky streak for the record books.
2. Smart dudes theory – Goldman is simply so much smarter and better than all others in the industry that their cumulative brainpower is a money printing machine.
3. Work hard and prosper – Free market economies are meritocracies. Work hard every day to manage risk and maximize profits and you will succeed.
4. VaR Shm-aR – Goldman has discovered the holy grail of investing: increasingly abnormal returns with simultaneous evaporation of tail risk.
5. Information asymmetry – Relationships with the government can be profitable. A lack of competition also helps as does liberal TOS with trading clients for just a little looksy into order flow.
6. Borrowing power – Zero to below zero interest rates combined with accommodative definitions of “good collateral” provide tangible benefits to the economy at large (and Goldman in particular).

(This list is by no means exhaustive, feel free to amend with your own conclusions.)

Nassim Taleb frequently points out that wealth aggregation tends to be a winner take all game, but the velocity and magnitude of the shift may even surprise him

Comments

[john s. gordon:]

information asymmetry -

GS gets the inside poop from their agents in the federal govt @ 5pm and starts trading on it right way, the rest of the world finds out @ 930 the next morning.
insider trading always makes money except when somebody blows the whistle & somebody goes to jail.
> jack

Nov 05 08:54 AM

[Ferdinand E...:]

I'll buy the smart dudes theory, although I suspect that the key truth is smart management. You know, the kind of management that's going out of style in the US - and elsewhere.

Nov 05 10:43 AM

[Boxed Merlot:]

On Nov 05 08:54 AM john s. gordon wrote:

> information asymmetry -
>
> GS gets the inside poop from their agents in the federal govt @ 5pm
> and starts trading on it right way, the rest of the world finds out
> @ 930 the next morning.
> insider trading always makes money except when somebody blows the
> whistle & somebody goes to jail.

On Nov 05 10:43 AM Ferdinand E. Banks wrote:

> I'll buy the smart dudes theory, although I suspect that the key
> truth is smart management. You know, the kind of management that's
> going out of style in the US - and elsewhere.

There’s truth in both these comments, particularly when you realize the “smart dudes” have figured out that by running a financial institution without borders, there are no governmental controls they have to answer to. In other words, whose jail could hold them, there’s no law to adhere to in the ether land where these organizations operate. Welcome to the land of sovereignty.

Nov 05 10:59 AM

[Amouna:]

I would buy into some of your points: Goldman is a very well run business and its people are widely recognized to be smart and very hard working. However, what IMO contributes to make it a money printing business is:

a) ZIRP almost everywhere on the face of earth. Money is free and leverage is still on their balance sheet (not a towering 40:1 ratio but probably around 20-25:1).

b) Tail Risk is still there

c) As to the collateral, I am curious to see what happened to level 3 assets held by GS as of end of 2008...


But I still believe it has a very strong business model.

Nov 05 02:54 PM