Tuesday, March 31, 2009

Some Observations on Goldman Sachs from a finance applicant's perspective

My weekend reading yielded some interesting titbit pieces of info that could be of interest to mba applicants as well as mba students interested in finance. The titbits however are not encouraging if you are thinking of I-banks/Wall street careers.

Background: What I will talk about is the so called derivative space in I/commercial banking, a particular member of this derivative space : credit default swaps (CDS) is now being accused of being the villain that brought down the financial sector.

The CDS for the layman is essentially an insurance against something (usually company bonds/debt etc). An underwriter (AIG) like your local auto insurer charges the insuree a monthly payment (coupon) determined by the CDS rate and if something bad happens to the insuree's holdings the underwriter ponies up the insured money just like an auto insurer pays for your wrecked car in case of accidents. Of course when all these CDSes started defaulting simultaneously (primarily because they were junk grade to start with, for example a pizza delivery boy in orange county,CA ,offered a 350k house loan on zero down, underwritten by AIG, packaged as CDS instrument by Lehmann... u get the picture), the insurer (AIG) was called upon by a myriad of insurees for the lumpsump payments causing the meltdown.

Now the derivative space has some more members besides the CDS notably :
  1. interest rate
  2. foreign echange
  3. equities
  4. commodities
  5. CDS
Brief history tutorial for the layman: During the boom period in Wall street (1998 to 2007) , leading to the meltdown, the entire derivative space ballooned from $33 trillion to about $200 trillion, while CDS grew from about $150 billion to $5 trillion.

However another silent player in this dreaded derivatives basket seems to have risen in a more alarming fashion. It is the interest rate (1, in the list above, specifically swaps but also futures and forwards) that has grown from $24.8 trillion to $164.4 trillion!

In simple terms an interest rate swap (IRS) are merely contracts exchanging a stream of interest payments for another party's stream of cash flows, the underlying interest rate is often the Fed rate. Now associated with the IRS and derivatives is something called Total Credit exposure (TCE) which is essentially a metric that measures a bank's risky credit/risk eposure. Higher the number worse the bank.

Now for the bad news:
The Office of the comptroller of currency released a chart last week for the top 5 banks and the percentage of their total credit in relation to the potential toxic risky credits/derivatives arising from interest rate swaps (item 1 in the derivative basket above).

Table reproduced for better visibility:
Total credit exposure to risk based capital (%)
JPmorgan: 400(Q4 03), 384 (Q4 08)
Bank of America: 178(Q03,08), 179 (Q4 08)
Citi 260: (Q3), 278(Q4)
Goldman: 4(Q3), 1056(Q4)
HSBC : 664 (Q3), 550(Q4)

And drum-rolls please we have a winner. IT IS OUR OLD I-BANK PAL GOLDMAN SACHS WITH A STAGGERING 1056% % ratio of their total credit in terms of interest rate swaps.

The ramifications of this I leave to the readers, but just for fun imagine GS defaulting on these, ah wouldnt that make the AIG collapse look like peanuts. For those getting ready to join Goldman Sachs be sure to ask your bosses about these charts, Id love to have an explanation for their immense love of interest rate swaps. Also those in the class rooms do me a favor ask your fin-profs about these numbers, either way I'd love to know whats going on with this epic GS and IRS love saga. And a true love saga always needs a tragic ending, right ;-)

Charts Source :
http://www.occ.treas.gov/ftp/release/2009-34a.pdf:zerohedge :Office of comptroller of currency's quarterly report for bank trading and derivative activies

I am back --- with a whimper

  • 8-6 has got boring, although I am still in research, our whole group has had a recent focus/image makeover, making us almost completely service- rendering bitches for our clients (internal and external).
  • I don't like the projects I am supposed to work in 09-10.
  • With oil and the economy in free-fall our lofty bonuses (announced Dec08 for 09) are going to be severely trimmed.
  • I am feeling immensely strait-jacketed in terms of my career road-map.
Sum total of this bullet-based rant: I WANT AN MBA, again.

So after being out of the game for just about a quarter, I am back, back to play my part in that indy-500 of rat races aka Mba-admissions (drummrolls please) and that too at an unprecedented time.

My mood is sour and am feeling especially bitchy, so lets continue on the path of dourness and take a sneak peek into the current economic scene from an mba aspirant's perspective:
  1. Sales and Trading : S&T was the reason I started looking into mbas. I wanted to be in a hedge fund running money like theres no tomorrow. Sadly investment research reveal total AUM for hedge funds have fallen to $965 billion in Jan from just about $1.9 trillion in May 08, an astounding 50%+ drop in just about 3 quarters. In may of 08 there were about 10,000 operational hedge funds, today that number is less than 6000, steamrolling towards the 5k mark, of course as hedge funds go belly-up hiring freezes, newly hired traders go over to cnbc and some audition for stripper jobs. Since I am feeling especially pissy here is the story of a hedge fund manager netting 750k anually who now works as a pizza boy at $7.95/hr,but he does deliver your pizzas in his leased Merc, soon to be repoed though.

    Former Morgan-Stanley junior banker/trader now working as a full-time NYC stripper netting 100k+.

  2. I-banking : Sell side finance to start with (sell side is for the dummies btw), where you are essentially a middleman (akin to a pimp, pimping for money in expensive $2200 black suits and gelled hair, instead of the bing and glean that your average pimp puts on) putting together exotic products for your clients and often mixing in super-toxic little understood instruments into those product pools. But hey you still make decent dough, well you used to, if I was graduating today from a B-school I wouldnt touch an I-bank with a barge pole.

  3. REITS (Real estate): I said I wouldn't touch I-banks with a barge pole if was graduating today, in that case I need to make a will forbidding my offsprings to use the phrase REITs in any source or form ever. A few charts for the pain that has now been re-christened Real Estate investment:

    What the first chart basically shows is the massive debt maturities that most REITs are now facing through to 2011. The problem is that REITs need to get financing/refinancing or some structural revolving credit line with their existing as well as new creditors to deal with these. Now those into Real estate will know that earlier this month Simon property group, perhaps the biggest player in this space (also the one with the best credit ratings on moodys and S&P), announced it was raising $500 million in bonds to take care of its debt at an astounding 10.15%!!! Pain anyone.

Now that my finance options are out of the way and the post is lit up in red, I'll retreat into my corner and sulk some more.

edit: I finished some catch up reading on mba related stuff and realized that there seems to be a shift in career focus towards clean energy, biofuels and stuff like that at most major B-schools. That is pretty surprising primarily because if you are rejecting Wall street based on your risk-averseness, then moving towards clean energy is almost surely suicidal. It is a sector that survives solely on subsidies and realistically has little chance to be a major/significant player anytime soon. The name though sounds chic and cool "Clean tech".