How to Live on $100 Million a Day.

There has been a lot of talk the last few days about Goldman Sachs $100 million per day trading gains.  In the second quarter of 2009 the firm made $100 million 46 times out of 65 trading days.  That's a batting average of .707.  Move over Ted Williams!  The question is, how do they make this kind of dough so consistently?  Are they just outwitting everybody?  Are they cheating?  My answer for the most part is;

• No and
• No 

In the current environment where there are a zillion Federal Reserve term funding facilities as well as a program from the FDIC to issue debt with the full faith and credit of the United States government standing behind you, funding costs are near zilch.  Goldman Sachs had a balance sheet of approximately $900 billion at the end of the second quarter.  I know this is simplistic but I bet it is not too far off.  For every 1% of Goldman's net interest margin ("NIM" or the net income made by the difference between what where Goldman funds versus what yield they get on their assets) Goldman makes nearly $25 million a day just by turning the lights on.  Not bad eh?  And you know what....that's fine with me.  This is how we have rebuilt the banking system in the past (like the early 1990's after the high yield loan, commercial real estate and lesser developed country lending debacles).  Because Goldman is gigantic and because they are taking full advantage of all the near free funding, the numbers thrown off are huge. 

Now lets think about Goldman's dominant position as a global dealer of government debt, agency debt, mortgage backed debt, corporate debt, commodities and currencies.  The flows are huge and the spreads are, for the first time in a long while, wide.  There's definitely risk to being a dealer.  You have to put capital at risk when someone hits you with $200 million Fannie 5's.  You can't always turn around and immediately hit a customer with the full $200 million for a 1/32 or two.  Still, spreads are wide enough to compensate for the risk AND there are fat programs going on like the Fed's mortgage backed security purchase program.  A big dealer has ample time to "set up" for those trades and make a nice score.  If we assume that Goldman runs $50 billion a day though all these global business lines (pulled that out of the modified anus model) and takes out 1/8, that's over $60 million a day.  Add in a few monster smart or lucky trades and that number can go up nicely.

So between carry and being a global dealer with large market share, making $100 million a day in this environment isn't a huge stretch in my opinion.  However, Goldman making this kind of money isn't what irks me.  What irks me, and what the issue should be is, these earning are being heavily subsidized by current government lending facilities AND by a playing field that was thinned dramatically in 2008 as government and timing picked the winners and the losers.  The winners need to be thankful and they need to know that things can not go back to business as usual.  Taxpayer and government "generosity  cannot be turned into monster compensation.  That is the issue for me.

Comments

[g]

What irks me the most is that GS is underwriting these deals that the government (Fed/Treasury) is actively participating in as a buyer.

Not only has the government subsidized GS, but now they are allowing GS to underwrite deals in which they participate, so the gov't has a direct pipeline as to giving GS commissions.