Goldman Sachs Pragmatism

Another day of digestion of Goldman Sachs (GS) blowout quarter sheds some light.

When the world was running around talking of the “subprime meltdown” and the “freezing of credit markets” Goldman quietly looked at the situation and placed their bets accordingly. Rather than dumping positions or just sitting tight and riding out the storm and taking huge losses like Morgan Stanley (MS), Lehman (LEH) and Bear Sterns (BSC), Goldman jumped on, rode the wave down and collected the profits.

The question for shareholders of these companies might not be “why is Goldman so good” but “what the heck were you guys doing?”

Now, the media has pumped up Goldman’s move as “stunning”, “bold” and “breathtaking” and implied they bet the farm on this. The reality is just the opposite. One of the metrics investment banks use to estimate the market risk on a their balance sheet is called Value at Risk, or VaR. This indicator for Goldman moved up only 5% in Q3 vs Q2. If Goldman was placing huge bets in volatile markets like the short trade in mortgages, VaR would have been expected to move up by much more. Since it didn’t, we must conclude that these bets were neither “bold” or “breathtaking”, just simply “savvy”.

Now the latest report out is that Goldman has $69 billion in short term debt it must rollover in relatively soon and the new debt it takes on will invariably be more expensive, hurting earnings. Here is the thing though, if the analyst who wrote this knows this, and now we know it, is there a chance in hell Goldman doesn’t? Also, if we know this now do we really think Goldman has not been aware of it for a whole lot longer? Based on their history, do we really think they have not already taken steps to offset that increase? Me either…

This is one group of people I am not willing to bet against.