An interesting passage from a recent CreditSights note on Goldman, following a meeting with the bank’s CFO, David Viniar (emphasis ours):
Lastly, Goldman explained that a further defense against a stressed funding situation driven by problems rolling over the repo book was what it referred to as its “secured funding excess.” Goldman noted that it raises repo funding in excess of current financing needs, in order to reduce its secured funding rollover risk.
Basically, Goldman uses additional repo above and beyond its needs as a sort of an”insurance policy” against potential stress situation in which it could not roll its repo with some counterparties.
Goldman noted that it often uses US treasuries as the collateral for this secured funding excess, and then it can substitute different assets into the repo transaction if needed.
The company explained that it uses a program called an “optimizer” which helps identify the best way to fund on a daily basis. Goldman did not disclose the amount of its current secured funding excess, but noted that a portion of its current repo funding was related to this secured funding excess.
This is a staightforward example of the shadow banking safe asset grab in action. But it’s also notable in that four years after the crisis, repo markets continue to be viewed nervously by at least one bank that taps them for funding. Good.
Of course, use of the word “optimise” or any derivation of it normally means that what whatever is being communicated can be dismissed as utter nonsense. In this case, there isn’t much about exactly how the “optimizer” works or just how much “additional repo above and beyond its needs” Goldman is raising.
But we were somewhat comforted by the generally cautious tone of the note as it applies to this part of Goldman’s funding, especially given that the collateral crunch has kept the lid on repo rates and therefore made this an even cheaper source of financing.
The bank also told the analysts that it no longer uses repo to fund asset-backed securities and certain other kinds of illiquid assets, and longer-dated repo to fund others. And it has lately increased the average maturity of its secured funding.
We wonder about the extent to which Goldman’s caution also applies to the repo funding of other broker-dealers. (Though we’ll hasten to add that after MF Global, there’s also a limit to just how comfortable we can get.)
Here is more detail from the note:
While Goldman Sachs’2011 10-K discusses the use of repo in generalized terms, we note that specific information about the repo book in terms of average length and collateral is not specifically disclosed. We note that Goldman Sachs relies on collateralized financing for a sizable portion of its funding. Specifically, repo (securities sold under agreements to repurchase) and securities loaned were $171.7 billion as of YE11 and other secured financings were $37.4 billion. All together, this represents $209 billion, or 25% of Goldman’s total liabilities.
Matched Book, Liquidity Store, and “Real” Repo
Goldman Sachs noted to us that of this total, it considered only about ~$100 billion of this to be core or “real” repo that funds its securities inventory. Goldman stated that roughly ~$100 billion of secured financing was its matched book. A matched book is essentially a self funding portion of the balance sheet, where repos are fully offset by reverse repos (securities purchased under agreements to resell). Typically, the matched book is structured so that the asset side (reverse repo) matures before the liability, thereby minimizing any potential funding gap.
The company noted that the remainder of repos was used to fund its trading inventory, primarily U.S. treasuries, high grade corporate bonds, and listed equities. The company noted that it no longer used repo to fund other types of less liquid assets, such as ABS, mortgage structures or bank loans, even though that may have been its practice prior to the onset of the credit crisis. Goldman acknowledged that it occasionally funds some of its less liquid assets with repo, but in that case it would utilize long-dated repo financing in order to adequately match up the asset-liability maturities.
Lengthening Tenor, Diverse Counterparties
In terms of tenor, Goldman previously disclosed that the weighted average remaining life of its repo book was over 100 days. In a February presentation, CFO Viniar showed that the weighted average maturity of secured funding was up +52% since YE08. So, we estimate that the weighted average life for repo is approximately ~150 days. Goldman also noted to us that the overall repo funding average life included some shorter-term repo as well as term repo with a longer maturity. The company stated that it was able to do a portion of its repo with a tenor of 1 to 3 years, depending on the liquidity characteristics of the underlying collateral.
Goldman noted that its counterparties for longer-dated repo were typically investors with extended investment horizons, such as investment managers and pension funds. Other counterparties that were willing to engage in term repo included the U.S. bank sector, which currently is awash in liquidity. The company emphasized that it worked closely with its repo counterparties to tailor each agreements to that counterparty’s comfort level with regard to haircuts, collateral composition, and tenor. The company noted that the bulk of its repofunding is via tri-party repo, rather than via clearinghouses.