Will Goldman Sachs help absorb subprime losses?

According to a rumor over at Dealbreaker, one of the big losers in the subprime mess is none other than Goldman Sachs:

“Not sure if this is on your radar, but a Goldman trader took a $1B (yes, that is $1 Billion) position in a sub-prime mortgage index last week. He was fired today after the position suffered a roughly 35% decline. I can’t verify if it was closed out yet, but the loss thus far stands at about $350M. Talk about a bad week.”

This is bad for GS, of course. But it’s also really good news for anybody worried about the systemic risks associated with all these newfangled synthetic debt products. In the old days, banks wrote mortgages and took the associated risks. Then they started securitizing those mortgages, spreading the risk more thinly across bond investors. And then investment banks started creating products based on mortgage indices, which meant that the bond investors could offload a lot of their risk even further onto CDOs and hedge funds and prop desks at Goldman Sachs. Basically, the more money that Goldman loses, the less money that people who can’t afford it are losing. So, thank you, unnamed Goldman trader!

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2 Responses to Will Goldman Sachs help absorb subprime losses?

  1. brad setser says:

    goldman is very geared up so if it takes big losses on big positions it itself could be a source of systemic risk.

    though in this case, one would assume, based on its record 06 profits, that goldman has more than enough capital to act as a shock absorber for sometime. but hedge funds (Credit ones) and prop desks are the new banks (Credit intermediaries) — so they themselves are a potential source of systemic risk should their capital get eroded. the positive thing here is that a well capitalized institution looks set to take a large loss.

    p.s. i love the idea that some of goldman’s icbc profits will help absorb losses in the us subprime market … poetic justice.

  2. Murray says:

    I don’t buy it. The numbers don’t stack up:

    The daily trading volume in the sub-prime mortgage index has fallen to as low as $300m. And that might be for the entire index, not just the triple-B section (checking on that).

    The reason? Very few traders want to go long. So this putative GS trader appears to have spent last week being almost the entire long side of the trade.

    Secondly, the triple-B index has only fallen about 20% since the start of last week, 15% since later in the week, etc.

    So, er, no, GS almost certainly hasn’t lost $350m on a position taken last week.

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