Wednesday, September 23, 2009

Goldman Sachs CEO: "We Didn't Realize How Bad Things Would Get" (GS)

As a follow-up to the post immediately below, "Warren Buffett's $3 Billion Goldman Anniversary (BRK.A; GS)" we'll retell a couple favorite Goldman stories and link to this DealBreaker post on CEO Blankfein's interview with Der Spiegel "Only The Salt Of The Earth Work For Goldman Sachs":
Blankfein: I think we all know that greed can drive behavior, but it tends to be short term and ultimately destructive. Our leadership team stands out because most of our people have built their whole career at the firm and stayed through many years and many changes in the market. When our people leave they tend to go on to other positions -- whether in government or other forms of public service -- that no one would do if their were motives were financial. Those characteristics don't make me think of "greed."

SPIEGEL: So only modest, good people work for Goldman Sachs? We hardly believe that....MORE

Speaking of salt o' the earth, Mr Blankfein came up through the commodity trading side at GS crown jewel, J. Aron:

"When Blankfein asked about his title, a boss at J. Aron said, 'You can call yourself contessa if you want.'"
-Fortune, January, 2006
That's from a June '09 post. Here's a tidbit from our March post, "David Viniar, CFO of Goldman Sachs Blows Smoke at Journalists on AIG" on how bad it could get:

...Reading Mr. Viniar's words, I am reminded of his statement on market moves in August, 2007:

“We were seeing things that were 25-standard deviation moves, several days in a row”
Several folks, when they finally quit laughing, pointed out how blatently Mr. V was spinning.
Most however underestimated how infrequent 25SD events are, the most common guess being once in 100,000 years. Tee hee.
In a snappy little eight page paper "How Unlucky is 25 Sigma" we see that at 7 Sigma the odds are:
...The reader will note that as k gets bigger the probabilities of a k-sigma event fall
extremely rapidly:
• a 3-sigma event is to be expected about every 741 days or about 1 trading day
in every three years;

• a 4-sigma event is to be expected about every 31,560 days or about 1 trading
day in 126 years (!);

• a 5-sigma event is to be expected every 3,483,046 days or about 1 day every
13,932 years(!!)

• a 6-sigma event is to be expected every 1,009,976,678 days or about 1 day
every 4,039,906 years;

• a 7-sigma event is to be expected every 7.76e+11 days – the number of zero
digits is so large that Excel now reports the number of days using scientific
notation, and this number is to be interpreted as 7.76 days with decimal point
pushed back 11 places. This frequency corresponds to 1 day in 3,105,395,365
The authors go on to describe the problems involved in computing numbers on the cosmological scales required for 25 standard deviations. A good read, both for the statistically challenged and for pros like Viniar, a very highly paid PR guy, in addition to his CFO duties.