Goldman survives subprime heat, sees record ’07 profits
Somewhere in the wreckage of securities backed by subprime mortgages and the resulting seizure in the credit markets, is a new paradigm on Wall Street where Goldman Sachs Group will report record earnings for 2007.
By Agencies |
NEW YORK: Somewhere in the wreckage of securities backed by subprime mortgages and the resulting seizure in the credit markets, is a new paradigm on Wall Street where Goldman Sachs Group, increasingly perceived as the world’s biggest hedge fund, will report record earnings for 2007.
While Goldman, the largest securities firm by market value, insists that it caters to the needs of clients and has never been anything but customer-driven, New York-based Goldman also is considered No 1 in proprietary trading and manages more hedge funds than anyone except JPMorgan Chase.
And like Paulson, Harbinger Capital Partners and Hayman Advisors, which are posting their highest returns when so many conventional financial institutions are reeling from subprime investments, Goldman profits substantially from allowing its traders to use the firm’s capital to speculate on whether the price of assets will fall or rise.
“The real world is much better than what we’re reading in the headlines,” said Michael Holland, who oversees more than $4 billion at Holland in New York. “Many more billions are being made on the positive side than are being lost.”
Goldman may be the most prominent example of the transformation of the securities firm that behaves more like a hedge fund. Like New York-based Goldman, Morgan Stanley and Lehman Brothers Holdings also will report record earnings this year, according to analyst estimates.
Where Paulson, Harbinger and Goldman used hedging strategies to prosper in the third quarter, Merrill Lynch, Bear Stearns and UBS weren’t so nimble when the subprime tide ran out. The divergence, following three years when earnings at the top investment banks rose almost in lockstep, also illustrates why hedge funds exist — to take advantage of others’ distress.
Goldman’s third-quarter earnings soared 79% to almost $2.9 billion after the New York-based firm, led by chief executive Officer Lloyd Blankfein, took positions that rose in value as the price of mortgage-backed securities declined. By contrast, Merrill, the biggest US brokerage, and Zurich-based UBS, Europe’s largest bank, reported their first quarterly losses in more than 4 1/2 years after mortgage-related writedowns. Bear Stearns, the No 5 US securities firm, posted its biggest earnings drop in a decade.
Merrill said October 5 that losses from mark-to-market accounting for subprime mortgages and collateralised debt obligations were $4.5 billion, net of hedging gains, in the third quarter. Anticipated losses on non-investment grade lending commitments were an additional $967 million, or $463 million after including underwriting fees, the firm said.
New York-based Merrill blamed “an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter.”
The tumult spread to the UK where mortgage lender Northern Rock was bailed out last month by the Bank of England after rising short-term financing costs hampered its ability to sell new mortgages. The Newcastle, England-based company is now looking for a buyer.
While Goldman, the largest securities firm by market value, insists that it caters to the needs of clients and has never been anything but customer-driven, New York-based Goldman also is considered No 1 in proprietary trading and manages more hedge funds than anyone except JPMorgan Chase.
And like Paulson, Harbinger Capital Partners and Hayman Advisors, which are posting their highest returns when so many conventional financial institutions are reeling from subprime investments, Goldman profits substantially from allowing its traders to use the firm’s capital to speculate on whether the price of assets will fall or rise.
“The real world is much better than what we’re reading in the headlines,” said Michael Holland, who oversees more than $4 billion at Holland in New York. “Many more billions are being made on the positive side than are being lost.”
Goldman may be the most prominent example of the transformation of the securities firm that behaves more like a hedge fund. Like New York-based Goldman, Morgan Stanley and Lehman Brothers Holdings also will report record earnings this year, according to analyst estimates.
Where Paulson, Harbinger and Goldman used hedging strategies to prosper in the third quarter, Merrill Lynch, Bear Stearns and UBS weren’t so nimble when the subprime tide ran out. The divergence, following three years when earnings at the top investment banks rose almost in lockstep, also illustrates why hedge funds exist — to take advantage of others’ distress.
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“Out of this carnage of the summer, it was clear there were going to be huge opportunities because for all the managers who blew up, there were sure to be a bunch that exploited the situation,” said Bill Grayson, president of Falcon Point Capital, a San Francisco-based hedge fund manager. Goldman’s third-quarter earnings soared 79% to almost $2.9 billion after the New York-based firm, led by chief executive Officer Lloyd Blankfein, took positions that rose in value as the price of mortgage-backed securities declined. By contrast, Merrill, the biggest US brokerage, and Zurich-based UBS, Europe’s largest bank, reported their first quarterly losses in more than 4 1/2 years after mortgage-related writedowns. Bear Stearns, the No 5 US securities firm, posted its biggest earnings drop in a decade.
Merrill said October 5 that losses from mark-to-market accounting for subprime mortgages and collateralised debt obligations were $4.5 billion, net of hedging gains, in the third quarter. Anticipated losses on non-investment grade lending commitments were an additional $967 million, or $463 million after including underwriting fees, the firm said.
New York-based Merrill blamed “an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter.”
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The worst credit markets since Russia’s debt default in 1998 and the collapse of John Meriwether’s hedge fund, Long-Term Capital Management, was triggered by defaults on subprime mortgages in the US. The tumult spread to the UK where mortgage lender Northern Rock was bailed out last month by the Bank of England after rising short-term financing costs hampered its ability to sell new mortgages. The Newcastle, England-based company is now looking for a buyer.
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“You’ve only seen the first round in the deterioration of the mortgage area,” said James Melcher, president of Balestra Capital, a New York-based hedge fund with about $270 million of assets. “The second round is just starting, and it’s going to be worse.”Download
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