Is Goldman’s luck about to change? | FT Alphaville

Is Goldman’s luck about to change?

It’s that time in the quarter when we get to see how successful Goldman Sachs has been at making money.

Without further ado then, here’s the 10-k chart that shows the frequency distribution of daily trading net revenues for the year ended December 2009:

So that’s 131 out of 263 trading days in which Goldman Sachs made $100m or more, and 0 days in which it lost $100m or more.

As the bank explained:

As part of our overall risk control process, daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day did not exceed our 95% one-day VaR during 2009. Trading losses incurred on a single day exceeded our 95% one-day VaR on 13 occasions during 2008.

It’s worth noting, however, that daily VaR at Goldman Sachs has been creeping lower in the year:

As Goldman explained it:

Our daily VaR decreased to $153 million as of December 2009 from $244 million as of November 2008, due to a decrease in the interest rate and currency rate categories as well as an increase in the diversification benefit across risk categories, partially offset by an increase in the equity prices category. The decrease in interest rates was principally due to lower market volatilities, tighter spreads and lower levels of exposure. The decrease in currency rates was primarily due to lower market volatilities. The increase in equity prices was primarily due to higher levels of exposure.

Meaning, a low-interest environment may have helped Goldman cut VaR exposure on a cross-asset basis — presumably due to lower collateral funding costs.

At the same time though, it means tighter spreads and lower volatility are beginning to hit.  As Goldman expressed it: “certain of its trading businesses” depend heavily on market volatility to provide trading and arbitrage opportunities. Which conversely means..

…decreases in volatility may reduce these opportunities and adversely affect the results of these businesses.

Too much volatility can have a negative effect by increasing VaR and adding to funding costs – especially if it corresponds with falling asset prices.

However, against wide spreads, high VaR and rising asset prices — as we saw in much of 2009 —  high volatility would have been a veritable goldmine for the bank’s market making and flow-focused businesses.

Such businesses fall under Goldman’s ‘Trading and Principal Investments’ and accounted for 76 per cent of 2009 net revenues, according to the bank.

It’s also worth noting, by the by, how the face of Goldman’s trading assets  has changed in the year.

According to the chart below, the bank cut exposure to mortgage and other asset-backed loans sharply while increasing investments in government and US federal agency obligations.

The bank also appears to have increased commodity trading assets to a sizeable $3.7bn versus $513m the year before – although, that said, the 2008 commodity sell-off should be kept in mind when considering the spike.

On what can only be construed as a reference to the Volcker rule, meanwhile, Goldman rather ambiguously commented (emphasis ours):

Since 2008, governments, regulators and central banks in the United States and worldwide have taken numerous steps to increase liquidity and to restore investor and public confidence. In addition, there are numerous legislative and regulatory actions that have been taken or proposed to deal with what regulators, politicians and others believe to be the root causes of the financial crisis, including proposals relating to financial institution capital requirements and compensation practices, proposals relating to restrictions on the type of activities in which financial institutions are permitted to engage and the size of financial institutions, and proposals to impose additional taxes on certain financial institutions, as well as proposals calling for increased regulatory scrutiny and coordination with respect to the financial services industry and markets.

It is presently unclear which of these proposals will be adopted and in what form and whether the net effect of such proposals will in fact be positive or negative for the financial markets over either the short or long-term.

Related links:
Goldman’s getting riskier
– FT Alphaville
Was 2009 the year of the market maker?
– FT Alphaville
On baseline VaR – FT Alphaville