Peering Inside Goldman's Black Box

Posted by John Carney, Sep 21, 2007, 9:13am

One of the stunning things that Goldman Sachs said yesterday was that they had offset losses arising from this summer's credit crunch by shorting mortgages. With hindsight that seems like such an obvious bet that you want to kick yourself for not thinking of it first. But one thing we've been trying to understand is what exactly Goldman means when it says it was "short mortgages" in the third quarter. What asset classes was it shorting?

We can think of a few obvious ways to short mortgages by going short assets that are correlated with the mortgage market. Short the common stock of mortgage companies. Short ABX. Buy protection on correlated bonds. But these are just guesses. We want to know more. How do you think Goldman minted the kind of money they say they did by "shorting mortgages?"

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Posted in: Goldman Sachs

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Posted by rotten, Sep 21, 2007 9:45AM

Investors don’t like to catch falling knives and get hurt.

The old adage is “don’t start buying until you see blood running in the streets.”
TGIF

Posted by , Sep 21, 2007 9:50AM

did you think of that or did i think of it and post it in a comment at 8:35am this morning (and i meant, obviously, buy protection not sell protection)? well, either way. i'd be interested to hear about some more interesting and less obvious ways

i do happen to know of several hedge funds that were just buying protection on discrete CDO packages but i'm not sure that kind of bet is available in the size necessary to move the goldmans to a multi-billion $$ gain

Posted by , Sep 21, 2007 9:52AM

oh by the way mr carney you should probably change your post to also say "buy protection" before these guys jump all over you here, and possibly also suggest that you smell like fish

Posted by AC2005, Sep 21, 2007 10:01AM

Look at the hedge fund Paulson's credit strategies (Credit and Advantage) for clues...short ABX, short specific CDO securities in heavy subprime geographic markets, short brokers, short homebuilders. Their intermediate strategy was up 70% through August.

Posted by , Sep 21, 2007 10:05AM

How about shorting collateral, (TBAs)...

Posted by , Sep 21, 2007 10:05AM

Whether Goldman is lying through its teeth or not, nobody is going to call them out on it. So it's pretty much irrelevant.

How the hell did they do it when their two "flagship" funds lost a total of ... what.. 4 billion in the third quarter? Who the hell in that company was shorting mortgages when their hedge funds tanked so much?

Did they paper over $3 billion in losses with that fund bailout? That $2 billion sale of the company purchased by the guy who left covered some stuff up too.

Sure, Goldman is teh awesome, but something definitely doesn't add up.

Posted by , Sep 21, 2007 10:22AM

buying protection on the ABX. liquidity in single names totally dried up

these are paper gains that will vanish as the ABX continues to rally (as it did much of this week). shorting BBB will continue to be a good trade but further up the stack, not so much. fundamental mortgage people are starting to look at prepayments curvesand other factors that mortgage investors actually care about.

this was a smart way for goldman to clean up their books but its hardly profitable unless losses eat through ABS pools beyond the single-A level.

Posted by , Sep 21, 2007 10:23AM

yah - selling protection makes you long an asset economically

Posted by , Sep 21, 2007 10:40AM

I know the money was made in ABX. Big positions.

Posted by , Sep 21, 2007 10:40AM

poor jimmy cayne gets laid up in the hospital while these people are making fistsful of dollars? bloodmoney!

Posted by L'Emmerdeur, Sep 21, 2007 11:17AM

Maybe they are taking a cue from their super-duper-successful hedge fund and leveraging their short mortgage positions to the hilt.

Now, if you'll excuse me, there's a fire in the IT Room that need putting out with gasoline.

Posted by , Sep 21, 2007 11:23AM

i dont know about all of gs, but i know certain desks were net short using abx

Posted by , Sep 21, 2007 11:23AM

i dont know about all of gs, but i know certain desks were net short using abx

Posted by J. Dimon, Sep 21, 2007 11:45AM

ABX = Barrick Gold?!?!

Posted by J. Dimon, Sep 21, 2007 11:46AM

ABX = Barrick Gold?!?!

Posted by Lloyd Blankfein, Sep 21, 2007 11:51AM

Carney:

This is how we hit our numbers here at GS

1: Cut a hole in a (black) box,
2: Put our junk (bonds) in that box,
3: Never open that box
... and that's the way we do it

Posted by , Sep 21, 2007 11:57AM

What's funny is they lost $600mm going long abx earlier in the year, so they are not that prescient.

To make that much going short, they would have done it across so many different assets, or else you just move the market. These aren't that liquid. I'm skeptical.

Posted by , Sep 21, 2007 1:28PM

they could get that size in ABX earlier this year... some are short >10bn in LCDX now as hedges.

Posted by , Sep 21, 2007 1:48PM

11:51
To paraphrase Bess: we laughed so hard that we could barely keep our legs crossed.

Posted by Arzman, Sep 21, 2007 3:00PM

ABX is an OTC derivative traded between the investment banks. See www.markit.com

Posted by , Sep 21, 2007 3:45PM

1:48 did bess really say that? god thats clever.

wow, i can't believe someone posting under the name J. Dimon does not know what ABX it. holy crap dude. i'm blown away. it reminds me when i was 12 and every kid on my hockey team that didn't win a single game was fighting over who would get to have #99 and #66 on their jersey.

Posted by J. Dimon, Sep 21, 2007 4:34PM

I'll post under the name of J. Wells or any other "J" bank ceo if I want... In the 80's, I was busy blowing up Bankers Trust when you were skatin' around in new hampshire with a mullet.

Posted by Barbara, Sep 21, 2007 7:29PM

Could Goldman's diversifications have had something to do with its performance during the credit crunch? I ran across this article yesterday that maps a lot of the company's current board connections: http://www.newsvisual.com/newsvisual/2007/09/goldman-sachs-b.html at newsvisual. It's interesting... I would wonder how those ties help with business

Posted by Tom Blankfein, Nov 14, 2007 9:29AM

Goldman restated that they were short CDO/sub-prime at investor conference yesterday, I'm told. The only way I can think of to do that in the "locked-up" and non-trading market is to sell short a high yield income fund like the RMK funds, or, to short the ABX, or BOTH.

Posted by Tom Blankfein, Nov 14, 2007 9:30AM

Goldman restated that they were short CDO/sub-prime at investor conference yesterday, I'm told. The only way I can think of to do that in the "locked-up" and non-trading market is to sell short a high yield income fund like the RMK funds, or, to short the ABX, or BOTH.

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