Friday, January 4, 2008

Goldman Sachs – How they did it?

Goldman in comparison with its peers
Wall Street firms like Citigroup, Bear Stearns, Morgan Stanley, Merrill Lynch and others are struggling and bleeding – due to the drastic impact of the recent subprime and credit problems. The top executives lost their jobs and were kicked out in despair by their Boards and investor.

Now, consider this in contrast – On Dec 18 2007, Goldman Sachs reported excellent positive results. It is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. Goldman's annual profits were up 22% to $11.6bn. The bank's 30,000 staff will share a compensation pool of $20.1bn - amounting to $600,000 each if it was divided up equally (which, obviously, it won't be). Goldman CEO Lloyd Blankfein will take home approx $70 million this year compared to $54 million last year.

Wow – incredible!!!! How did they do it?
How did Goldman manage to avoid the downslide?
Goldman has avoided the worst of the mortgage mayhem in the US by making an inspired bet that there would be a huge rise in loan defaults among higher-risk homebuyers in the US. Last year, when the mortgage markets were still riding high, they decided to reduce their holdings and take out hedges against losses, going directly against most of their rivals, who continued to fill their boots.

According to The Wall Street Journal, taking that position generated nearly $4 billion of profits during the year ended Nov. 30. This decision did not necessarily come from the top. Instead, it came from 2 traders of a very small division (superstar traders Michael Swenson and Josh Birnbaum) of the bank. Michael and Josh pushed their belief and convinced senior management to take this strategy.

Is that the complete story?
But wait – this is not the complete story. On the one hand, they took a short position. But on the other hand, Goldman Sachs took part in issuing, packaging, slicing, and selling bundles of asset-backed debt during the past several years, charging multimillion-dollar fees to its clients (who lost a bunch of money).

Critics accuse Goldman of not being careful with their clients’ money and not advising clients to take the same bets they (Goldman) made. I do not think that this was a planned conspiracy as it looks in hindsight. They hedged their bets wisely – and made commissions out of an instrument that was in high demand. Yes – they had a double whammy – they made money on commissions as well as by shorting. Goldman has once again proved – why it is the “crème de la crème” of investment banking.

Some notable Goldman alumni – Jim Cramer (Mad Money), Eddie Lampert (K-Mart, Sears), Robert Rubin (Chairman of Citigroup), Joshua Bolten (White House Chief of Staff).

This story certainly depicts the impact of contrarian thinking. I am sure Michael and Josh got a very nice bonus check and a lot of thank you notes from their bosses!!!!! What are they up to next?

1 comment:

Rohit said...

I think Goldman Sachs has an eye for the talent. CEO of Ebay India - Avnish Bajaj is also from Goldman Sachs