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!”

<Click on chart for larger image>

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).

<Click on chart for larger image>

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.

<Click on table for larger image>

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.

<Click on chart for larger image>

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)

<Click on chart for larger image>

<Click on chart for larger image>

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).

Category: Earnings, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “What Is Goldman Sachs?”

  1. [...] Jim Bianco asks the question: What is Goldman Sachs? [...]

  2. Mike in Nola says:

    In other words, GS is another GE?

  3. [...] Goldman shares are now a big bet on credit.  (Big Picture) [...]

  4. contraguy says:

    Buffett should ask for a refund??? What an incredibly dumb thing to say. For starters, Berkshire’s holding in Goldman common shares is zero. The entire $5 billion holding is in 43.4 million preferred shares with a 5 year term, paying 10% interest. Each preferred share carries a warrant, to buy a Goldman common share at $115. With Goldman common at $149.66, these warrants currently show a paper profit of over $1.5 billion. Of course, if these warrants were on the market they would be worth much more than that, with 4+ years of time premium remaining. Also importantly, the agreement with Goldman restricts how many new common shares they can sell, so Berkshire is protected from potential dilution. As for the 10% yield, aren’t we supposed to be in a low interest rate environment?

    The bottom line is that Buffett and Munger have more business savvy in one of their grey hairs, than in all of Jimbo’s big brain. To hear him questioning their investment prowess is laughable.

  5. Pat G. says:

    GS is a bank whose profits were greatly enhanced by the USG’s TARP program, the taxpayers’ subsequent bailout of AIG (CDS) and who currently benefits nicely by being able to borrow from the FED at 0% while making loans at 3.5%.

  6. FromLori says:

    The correct answer is BO’s master.

    Collateral Use Increases By 86% to $4 Trillion

    Financial Chaos: The Invisible One Quadrillion Dollar Equation

    A failure at CIT could result in losses for Goldman Sachs and Wells Fargo. Goldman last year agreed to a $3bn secured financing facility for CIT and Wells Fargo provided $500m in secured financing.

    So what is tax cheat timmy government sachs doing?

    Despite the tough talk about CIT Group not being systemically important enough to be bailed out by the government, it looks like the bailout is coming.

    Who is really picking up the tab?

    The panel, charged with determining whether taxpayers are receiving maximum benefit from the TARP, conducted its own valuation of the warrants the Treasury holds. It found that the 11 banks that have repurchased their warrants from the Treasury for a total amount that the panel estimates to be only 66 percent of current market value, shortchanging taxpayers by $10 million.

    Goldman Sachs Group Inc executives sold almost $700 million worth of stock since the collapse of rival Lehman Brothers last year, the Financial Times said on Monday.

    The newspaper said that most of the stock sales took place while the biggest U.S. investment bank was bailed out by the government with $10 billion of taxpayer money, according to filings with the Securities and Exchange Commission.

  7. [...] failure to correct our own actions–and nothing says this better than stellar $GS earnings on some very risky “banking”–means we are doomed to repeat ourselves. Until we learn–until we learn–I’ll [...]

  8. dcsos says:

    What Is Goldman Sachs?
    Men with Sacks made of Gold

  9. [...] The Big Picture veröffentlicht mehrere Charts zur Entwicklung der Goldman-Sachs Bilanzpositionen und Aktienkurs. [...]

  10. [...] is Goldman Sachs? (A giant credit portfolio?) [The Big [...]

  11. Jim Bianco says:

    Responding to contraguy …

    With most managers almost everything they do is twisted into a “why they are wrong” scenario. With Buffett almost everything he does is twisted into a “why he is right” scenario?

    Regarding his buy into Goldman … He bought his preferred on September 24 when Goldman’s stock was at $133. It bottomed on November 21 at $47. Today it is $155. Can I be graded on this scale too when my investments are judged “right or wrong?”

    Recall that he bought the week TARP was passed. He said he bought in anticipation that it would pass and it was a wonderful idea to do it. How has this idea worked out?

    His 10% coupon on September 24 compares to a 8.75% yield on the overall Preferred index and 8.52% on the investment grade bond index. So yes he received a premium but it is not a huge as you imply.

    Additionally, when you compare it to GE, an investment he made a week later (October 1) with the same terms, the two collectively are losers. GE was at $24 on October 1 versus $11.60 today. Those warrants are worthless.

    Buffett admits one of the worst investments he ever made was Solomon in 1987. These investments prove the guy is bad when investing in brokers.

    Or, can I lose over half my investment in three months and then pretend I never made it until it bounces back? That is what Buffett is doing.

    But, this digresses from the point of the post. Buffett bought a leveraged position in LQD or JNK and thinks it is something other than that.

  12. contraguy says:

    For starters, there is no need to “twist” anything to show that Buffett made a fantastic move with his Goldman deal, one only need a keen sense of the obvious. I note that you did not refute any of the numbers regarding the tremendous size of his current paper profit. Now, if you wish to argue that it is after all a “paper” profit, and that Goldman will go bankrupt in the next four years and Buffett will consequently lose his shirt, then that’s a different matter – but you ought to say so then.

    So he’s way ahead on his warrants now, but he was way behind, i.e. a “loser”, when Goldman common was at $47. Wrong!! The warrants cannot have a negative value. His cost base is zero. Now, if he had bought Goldman common, then it would matter more. If he bought Goldman common on margin, well then your point would actually be relevant. But he did neither of these. Haven’t you asked yourself why he didn’t buy the common?

    Then weirdly you bring in GE. An interesting ploy to introduce a supposed “loser” to water down the big winner. It would have been far more effective if you had included ConocoPhillips, which Buffett has characterized as an “unforced error”. But why stop there? How about throwing in his ill fated investment in Dexter Shoes in 1993?

    Whatever, sure, then let’s throw GE into the mix. The “two collectively are losers”? How do you reckon that? Again, that might be true for somebody who bought the common on those dates, but that somebody wasn’t Warren. To say he lost half of his investment in three months is ridiculous.

    Now we get to the fun part. Buffett’s warrants to purchase GE at $22.25 on October 1, 2013 are apparently worthless. You might want to send a memo to the poor slob who bought the Jan 2011 calls, strike $22.50 at $0.30 today. Tell you what Jim. How about you write a big pile of those warrants, and I’ll back up my truck and take that worthless crap off your hands. I’d like that a lot.

    Does Buffett make mistakes? Of course he does, and he is more forthright in admitting them than 99.9% of money managers. But Goldman wasn’t one of them, rather, it is a sterling example of why he has had such a remarkable career. In your piece, you did bring up some worthy points about Goldman’s business model, but that is just one facet of a unique financial entity. What you’re missing is the big picture, Goldman in its totality, which Buffett with his wealth of experience, is a master at assessing.