We flagged up a few months ago the curious case of Goldman Sachs’ liabilities: the fact that the bank was generating an interest-income not only on its assets, but in some cases on its liabilities too . Liabilities, of course, traditionally incur a negative yield and bear an interest cost.
On Thursday, Felix Salmon, via the Wall Street Journal, flagged a story that possibly sheds some light on how this might have been possible.
In short, Goldman appears to have hedged its long-term fixed-rate borrowings very effectively with floating-rate swaps. This means that when interest rates plummet, so do one of Goldman’s main expenses: it never overpays for its debt relative to current rates.
Indeed as the WSJ pointed out:
The interest rate on its long-term borrowings was a minuscule 0.92% in the third quarter, down from 3.53% in the third quarter of 2008. This $203 billion of debt is Goldman’s largest single funding source, so as its cost plunges, its bottom line benefits, as long as assets it buys yield more and trades pay off.
But as we mentioned, Goldman not only managed to cut the average rate paid on its borrowings, it managed to generate an income on some of its liabilities too - as much as an average annualised yield of 0.54 per cent in the third quarter.
We still don’t know exactly how they did it, but perhaps the clue comes in the income ($195m) being generated on ‘Other US interest-bearing liabilities’, as opposed to non-US liabilities.
In which case could it be down to some sort of combined and beneficial effect of Fed liquidity programmes and the neutralisation of debt servicing costs to current low rates via interest rate swaps?
Here, nevertheless, are the tables from Goldman’s 10q showing the level of interest income actually generated by the bank’s borrowings in the third quarter - some $114m overall for the “other interest” category (click to enlarge):
Related links:
Goldman Benefits From Debt Gold Mine - WSJ
Goldman’s Q3 trading, a breakdown by product - FT Alphaville
