The Breaking Views column in today’s WSJ features a column
by Lauren Silva originally published last Thursday. "Can Goldman Win on
Debt?" is the headline on the piece, which asks whether Goldman Sachs is
"about to turn the credit crunch to its advantage".
The problem is that the mechanism Silva’s talking about doesn’t seem to be
any more profitable for Goldman than if the bank simply kept all its unsellable
debt on its balance sheet. Basically, the bank buys debt from itself at 85 cents
on the dollar, recoups "a third of its original loss" if the debt
rises to 90 cents, and "would eliminate its loss" if the debt goes
all the way back to par. Well, yes: if you issue debt at par and it’s worth
par, then there’s no loss.
It seems to me that the Goldman plan, if Silva’s description of it is accurate,
is an attempt not so much to turn the credit crunch to its advantage, so much
as to limit its own downside if things get a lot worse. Goldman’s upside, in
Silva’s plan, is essentially identical to its upside if it kept all its debt
on its balance sheet. But its downside is much smaller: just 17% of face value,
rather than 85%.
Goldman’s share price seems to be stabilizing around a price-to-book ratio
of 2, which is not bad for an investment bank in the midst of a credit crunch.
My guess is that Goldman reckons that its losses on the loans it’s underwritten
are already baked in to its share price, and that taking an up-front charge
to move those loans off balance sheet will actually go down quite well among
its equity investors. The scheme does seem to be a way of moving risk from Goldman’s
shareholders to an as-yet-unspecified group of lenders. Which raises an obvious
question: who are these lenders?