Tuesday, March 17, 2009

Goldman Betting On Distressed Debt (GS)

What an operation!
First you tell the SEC you want to monitor risk via models rather than use those quaint old leverage ratios. Result? 30 to 1 gearing.

Take the new inflated balance sheet, act as prime broker and lend to hedge funds going long securitized mortgages.
Coincidentally your own traders are shorting the piss out of the same CDS's, CMO's etc.
Bet against the country's financial structure with some chumps at AIG as the counterparty.
Pay employees tens of billions in salary and bonuses.

When the whole house of cards falls down and it looks like your counterparty won't be able to pay off, make a call or two.
Et voilà, the American taxpayer is now your counterparty!
Convert to a bank holding company, deleverage your own balance sheet by calling in the loans to the hedgies, forcing them to dump assets into a declining market.

Take the $25 Billion in TARP bailout funds while protesting you don't really need it.
(although the decision to become a bank was made specifically to qualify for the funds)
Pick over the bones of the dead:
It is clear that huge fortunes will be made in distressed debt, when the smoke clears and the economy recovers. But, as the following article mentions, timing is critically important. It will be interesting to see when John Paulson begins buying debt and financials, given his impeccable performance throughout this crisis.


From The Financial Times:

Goldman Sachs is asking investors in its $15bn private equity fund for approval to shift much of its remaining uninvested money into distressed debt in a stark indication of just how dysfunctional the buy-out business has become amid the meltdown in credit markets.

In recent months, many private equity firms have quietly shifted their focus to buying debt at a discount as they are unable to pay for acquisitions with cheap flexible debt as they could during the boom years. Goldman is now seeking to do likewise.

“Given the dislocation we are facing in the credit markets, we believe the ability to achieve private equity-like returns at an even more senior position in the capital structure provides a significant opportunity for the fund,” the bank told investors....MORE via Change Alley