Last month I opened a short position in Goldman Sachs. I understand that they are best of breed and have a great franchise, but ultimately the majority of their profits come from trading. Here are a few reasons I think Goldman could have peaked
- The fall in the Global Alpha fund during the market turmoil last year shows the weaknesses in using computer models to trade unusual markets
- Goldman also has a huge portion of their portfolio in level 3 assets
- Goldman may face significant counterparty risk from hedge funds, private equity, and financial guarantors
- A highly leveraged firm in a market that is de-leveraging
“The derivatives business is like hell easy to enter and almost impossible to exit” – Warren Buffet
“Two parties to [a derivatives] contract might well use differing models allowing both to show substantial profits for many years” – Warren Buffet
Update April 2008
In early April I closed one of my two Goldman short positions. I had a put position that expired in January 2009 which I closed out at a small loss and I still have open a short straddle that expires in January 2010. I was disappointed to see the Fed provide financing to the investment banks without requiring any additional oversight or regulation.
The fact that our government is now directly financing an institution with 40 to 1 leverage is absurd. The Fed giving Goldman Sachs access to financing is like the government providing crack to a crack addict. With a Fed chairman and Treasury Secretary that are both Goldman alums you get a situation similar to Italy’s.
