Saturday, November 17, 2007

Risk Management - Investment Banks - Goldman Sachs

Goldman CEO Touts Firm's Risk-Management Prowess
9 November 2007


Goldman Sachs Group Inc. (GS) Chief Executive Lloyd Blankfein said that the secret to Goldman's success is its ability to gauge the assets it is holding on its balance sheet.

Blankfein, speaking Friday at a New York conference organized by University of Pennsylvania's Wharton business school, said Goldman places special emphasis on mark-to-market pricing of securities and other assets.

"If you rigorously mark to market every day, it's not impossible to have a very big problem, but it's less likely. it's the single most important thing at our firm." he said.

Blankfein told the audience of MBA students and others that after the recent "sunny" period for financial firms, the market turbulence that started this summer means nobody is necessarily safe from sudden losses. He said he often cautions Goldman employees against hubris.

Blankfein noted that the recent credit crunch stemmed in part from risk being priced at extraordinarily cheap levels. Today, he said in a brief interview after his speech, risk pricing has moved "in the right direction," but he said he is "not sure" if pricing needs to rise further.
March 15: Operational Risk - Goldman Sachs Settles with SEC and NYSE for Role in Illegal Trading Scheme

Date: Thursday, March 15, 2007

The SEC and the NYSE Regulation, Inc. yesterday settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for its violations arising from in an illegal trading scheme carried out by customers through their accounts at the firm. Both proceedings find that firm customers traded and profited by illegally selling securities short just prior to public offerings of the companies’ securities.

Need to find more details about it

Goldman Leads The Risk Parade

Goldman Sachs with its massive trading operations and exposure to most of the riskiest sectors in the business, is an example of how risk management has evolved.

Interest rate risk in the third quarter was up to $55 million, higher than the $49 million in the second quarter and the $38 million reported in the third quarter last year. Goldman's total value at risk--the potential one-day loss in its trading positions due to adverse market conditions--was $92 million, up from $76 million in the same period last year.

Goldman's notional exposure to derivatives alone is more than $1 trillion, though only $58 billion netting out all of its positions. JPMorgan Chase (nyse: JPM - news - people ), a far bigger player in the interest-rate derivatives market, with $47 trillion in notional exposure in the third quarter, nets out to $26 billion in exposure, by comparison.

Goldman's ability to spin gold out of virtually any market scenario on a consistent basis is the envy of many on Wall Street, but it is not by accident. Sophisticated technology systems developed over the last decade allow it to inch out on the limb without risking too much. And its tentacles in most corners of the market give it access to information that beat most of its rivals.

In the last decade, Goldman, like other Wall Street banks, has built up its trading and private equity groups alongside its more traditional asset management and merger and acquisitions advisory units. Proprietary trading has become a dominant feature of its business, and the least understood from the outside, since Goldman won't talk about its positions.

Goldman even manages to deftly juggle reputation risk in the course of its business. It advised NYSE Group and its merger partner, Archipelago Holdings, last year, despite its financial stake in Archipelago and its seat holdings on the exchange. It has managed to bid alongside potential clients for big private equity deals.

But perhaps the biggest boost has come from the industry's commoditization of risk into parcels that can be sold to investors no matter what their appetite for uncertainty.

This derivatives market has exploded in recent years. Fewer than 700,000 short-term interest-rate futures contracts traded on the Chicago Mercantile Exchange just six years ago. Now, the daily volume is 3.1 million contracts, or a notional value of $3.1 trillion.

The boom over the last six years coincides with the introduction of electronic trading side-by-side with floor traders at the Chicago Mercantile Exchange (nyse: CME - news - people ) and the Board of Trade.

But it also comes from increased investor appetite for hedging and speculating on the movements of everything from rates on U.S. Treasuries to foreign currencies and energy prices.

Seven years ago, after the near collapse of Long-Term Capital Management, 12 Wall Street firms got together with Gerald Corrigan, a former Federal Reserve Bank president and now a managing director at Goldman, to look at ways to mitigate counterparty risk in the markets.

Fourteen banks coughed up $300 million each to bail out LTCM in late 1998 and arrange for its orderly liquidation. After the smoke had cleared, it emerged that LTCM had been allowed to leverage its capital 25-to-1. One of the results of the industry group that was formed after that, the Counterparty Risk Management Group, was improved exchange of information about counterparty risks.

One of the recommendations of the group last year was to extend this reporting of large exposures to hedge funds.

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