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".

World blogger championship of online poker

I have registered to play in the PokerStars World Blogger Championship of Online Poker!

This PokerStars tournament is a No Limit Texas Hold’em event exclusive to Bloggers.

Registration code: 608823

Sign ahead: Crossroad

Oh yes I am alive !!!!

In a slight dilemma right now regarding the road ahead. So I'll spend this post outlining my current thought process (muddled obviously) and hoping that readers (if any are left) will come up with some constructive comments.

Right now I am stuck between deciding whether to pursue an MBA or pursue poker as my longtime career goal (MBA blogs maintain MBA parlance !!).

Each have their own pros and cons, but they aren't mutually compatible. Doing an MBA and getting into a long-work-hour job would essentially mean that between work and family (did i mention im tying the knot in Jan 09) time for poker would be extremely restricted if not completely non-existent. At the same time an MBA is a much much safer option than a high risk venture like poker.

When it comes to taking up poker full-time, heres the kind of timeline based framework I have in mind. My girlfriend finishes her PhD sometimes in 2011-2012, my green-card application wont come through till maybe 2013ish. Thus the earliest I can quit work and start playing pro would be in the 2013-2014 range (remember without a green-card I cant quit work as I'd be booted out of the US in seconds). Also to rake in any kind of decent dough from poker, I would need a poker-bankroll in the 50-60k range, maybe even higher, possibly 75ksih is a good number. My current poker accounts have about 15kish in them, so I have about a 5 year time-frame to get to 50kish. Certainly doable if I dont keep taking my wiinings out and go on binge spending.

Also of great importance is the fact that if I do go fulltime in poker, it gives me the independence of settling down in any city I want, basically in the same place where my girlfriend/wife goes to work. Not to mention the enormous freedom/independence it brings in terms of flexi work-hours.

Just to put things into perspective in terms of numbers, heres this year's numbers:

• 9-5 job : 115kish
• poker: YTD tournament profits: 50k
• poker: cash game profits: havent worked it out yet, should be in 10-15kish range.
• poker: some other significant profits in the 30ksih range
  

I havent done the math regarding how an MBA degree will stack up in terms of ROI versus full-time poker, but might be close, especially if I factor in the feel-good feeling of doing something I love and the flexi-hours and the opportunity of settling down wherever I want. I know of atleast one person (Rizen, see blog on left) who left an accountant job to get into poker fulltime.

Sigh, I hate decisions. Comments welcome

Catching up

Its been a while since I've posted, but unfortunately for the readers of this blog I plan to put them through some more misery before I'm done.

First of: 'Grats to MBA-veggie and Middle of Nowhere for securing the first known admits of the 09 mba blogosphere, and almost surely this is just a start.

As for me life has been kind of meh over the past couple of weeks. Nothing even remotely exciting is happening except that the Indian cricket team is whipping some creamy Australian ass back home. Oh and I finally finished "Frasier" on Netflix. Frasier has almost always been my favourite sitcom, followed closely by Seinfeld, and frankly the deadpan, snobby/snootish, understated and most importantly the refined play-on-word-humor (compared to the blatant physical humor of friends) of Frasier has always had me cracking.

When it comes to the dreaded GMAT preps, much to my non-astonishment I havent made an iota of progress, ah but theres always tomorrow.
Random links/news away from this blog:
Some new priceless sites where I can be found wasting my time:
Engrish
Go-fug-yourself

For you Dark Knight junkies, theres a Bob out there (no seriously the guy's name actually is Bob) making the bat-tumbler and batmobile from scratch. Place your orders with Bob here. View of Bob's home-made bat-tumbler:


Finally some balla-timepieces that successful poker players love to flaunt at the table (snaps taken by Nat Arem at the World Poker Tour 08 Final table):

















Finally heres something that I decided to get for myself as a part of the me-too crowd (this is my first shopping spree of any kind in well over 8 months, so indulge me for a second)

Its a Breitling Super Avenger, waiting for its arrival with bated breath !!!

A quick buck=running good in life

Those of you who follow this blog might remember this post where I said:

In this week's OMG news: I won a seat via an online mega-satellite (1k buy-in) to the Europeon Poker Tour-London No-Limit-Holdem Championship event, starting October 5th at the Victoria Casino, London. By winning the satellite, I get my buy-in (10k) for the tourney waived, free hotel, free food, free air-fare. I only need to get the visa and everything else is pretty much taken care of, EXCEPT of course freaking work. With a bunch of projects being worked on, my manager is going to flip out if I ask for vacation, lets see how things work out. If I cant make it to London, then I can probably keep the value of the seat I won.

Well as it turned out I could not make it to LOndon due to work commitments, but being the degenerate gambler, I wanted a part of the action anyway. So after several back and forth PMs and emails and AOLs, I bought 10% of Eric Liu's action. In the poker world, in big-buyin (entry fee) live tournaments (such as the 10k EPT london), often players will try and get an insurance by selling a part of their action, that is a backer takes a 10% stake in the player's buy-in and whatever profits (if any) the player makes, the backer takes 10% of that.

Anyhoo to cut a long story short, I had a 10kseat already that I couldnt play in, so I redeemed the seat value for money and bought 10% of Eric's action(incidentally I bought 10% stake in 3 other players for a net 4k investment). And while 3 of my 4 horses came out duds, Eric hit the motherload as he finished 4th --> results here , for a $470k payday for him and a $47k payday for me. I am running really really good in life at the moment, but my taxes are going to get super-complicated next year.

Good luck to all those waiting for your MBA admission results, godspeed.....

PS: I found this interesting blog post by Steve Jacobs (known in the online poker world as stevesbets), he is a Upenn undergrad who dropped out of penn's grad school to play poker professionally (over 1/2 a mill in winnings in 2 years he played pro poker) and last year had applied to several top b-schools (got into fordham, nyc), but was rejected by wharton. He went absolutely ballistic because of the wharton rejection and his follow-up with Wharton and the whole experience associated with that is a very very good read.

Quantum of Solace

On Black Monday markets worldwide collapsed by 20%, today we are down just about 9%. Not everything is bad in today's world see !!

In this week's OMG news: I finally managed to ride my first stock to $0.00. I had aggressively bought Wachovia bank-WB when it was part of the financial rally early last month, managing to make a killing as it moved from the 9s (bought a big chunk at 10.x) to the 20s. Even booked a big chunk of those profit, but still held onto a fair number of shares. And today it is at $1.84. Life is good. Oh and yes the market is a bitch.

Cuurently: On life tilt. And contemplating moving my whole equity-portfolio to my poker accounts. To put it in perspective, ROI in poker 35% (essentially it means that on an average everytime I play an online poker game I make $45, extrapolate that to well over several thousand games), ROI in stock (YTD): -13.5%. Did I say life tilt??