My weekly column in the Financial Times returns to the subject of Goldman Sachs’ great escape from the credit squeeze and what explains it. I put it down to a combination of skill, luck and edge. You can read the whole thing here and comment below.
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I am the FT's chief business commentator and this blog is about business, finance, media, technology and related matters. I live in New York so there is a bias towards US topics but I range more widely. Comments and criticism, which hopefully are at least as interesting as anything I write, are welcome. There is more about me on my columnist page.
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Hi,
Posted by: Terence Hale | December 6th, 2007 at 9:39 am | Report this commentYou may be right Skill luck or edge sounds lick a Sigmund Freud scenario. The latency of honesty is a basic problem.. Unfortunately there is more to come .
Regards Dr Terence Hale Zandvoort
“Big investment banks run advisory, securities and investment businesses but keep them walled off from each other to avoid conflicts of interest and trading on inside information.”
I have been hearing that canard throughout my 30 years in US finance. It’s worth asking how this is possible when all these purportedly ‘walled off’ silos report to the same person, the CEO. Doesn’t he speak to the others?
It’s not that investment banks are cheating, it’s that it is simply impossible to enforce inter-silo secrecy when fallible human beings are in command.
An interesting piece nonetheless, thank you.
Posted by: Thomas Pindelski | December 6th, 2007 at 11:40 pm | Report this commentThere is another possible instance of Goldman Sachs using their market position to their own benefit which I am surprised no one is talking about.
In the midst of the August “Quant Crisis”, Goldman diluted their Global Equities Opportunity Fund by injecting $3 billion of new capital. It seems apparent to those of us in the quantitative investment field that the August quant-fund swoon was some kind of massive impact event resulting from someone (perhaps Goldman’s Global Alpha) dumping a large amount of stock on the global equities market so quickly that it caused a temporary drop in the value of a portfolio which was inadvertently mimicked by a number of quantitative funds. Given that this was an impact event, there was a predictable recovery once the liquidation was over.
If Goldman’s fund was the one that precipitated that impact event, Goldman managers were in a position to predict that recovery. By investing their own capital in the fund, thus diluting the investment of those who suffered the losses, they effectively front-run their own clients. It may be true that they offered all of their investors the opportunity to increase their investment at the same time. However, as managers of both funds, they may have been the only ones in a position to know how likely it was that the fund would recover its losses.
There is perhaps no way to prove that any of this happened. Nonetheless, it is unusual for a fund to allow mid-month infusions of capital. And the timing, in retrospect, turned out to be extremely fortunate for Goldman. They may be geniuses, but they also may just have had more information than their unfortunate investors.
Posted by: David M | December 7th, 2007 at 2:59 pm | Report this commentThe only thing surprising about the sub-prime fiasco is that people are shocked. Any college freshmen who has taken or is taking Finance 101 or Econ 101 will tell you that all bubbles burst since there comes a time when the income stream or appreciation of assets do not keep up with asset value speculation. It is not that Goldman is especially brilliant in structured securities or diligent in its governance - there are plenty of examples in Goldman’s history to indicate otherwise. Rather, it is common sense. When you package a deal and when you know that the assets that back the particular security can not withstand incessant value appreciation, you hedge it. Shareholders should file class action suits against MER, BoA et al - the CEOs know better. How did they graduate from all those illustrious MBA schools?
Posted by: Roy H | December 8th, 2007 at 2:16 pm | Report this comment