1. At the height of the September financial crisis, Goldman and other investment banks converted to bank holding companies, making them eligible to gather deposits and tap into new Federal Reserve Board programs for banks. As part of the move, Goldman is switching its fiscal year-end to December (from November), starting this year.
So the last fiscal year ended on Nov. 28. The current fiscal year began on Dec. 27, 2008. What happened in between? Little children woke up one morning to discover that a fat man in a funny suit left them a wrapped box of Lego under a balsam fir. And Goldman lost $1-billion, primarily because of trading losses and writedowns on investments. But the loss stains neither the 2008 nor its 2009 full-year numbers - it's marooned. It's almost like it never happened.
2. It's such an innocuous-sounding term: "level 3 assets." In financial accounting, it describes loans or securities that are too illiquid to easily determine what they're worth. When there's no market, banks use their own models and estimates to put a value on them; when those estimates prove too optimistic, big losses are the result.
Goldman's stash of level 3 assets is getting smaller - it has shrunk by about $10-billion since November, 2007. But it's not shrinking as fast as the rest of its balance sheet. The level 3s are still nearly $60-billion, or 125 per cent of what shareholders have invested in the company. Most of the money was invested in private equity deals, "leveraged loans" (which finance corporate takeovers or leveraged buyouts) and commercial real estate debt. It's impossible to know how conservative Goldman is being in its valuations, but the size of its level 3 pile remains large enough that significant writedowns would hit the bank's capital.
3. Goldman wants to repay its $10-billion in TARP money and extract itself from the grip of the executive-pay limits the Obama administration placed on banks receiving federal funds. Good for them. But we mustn't confuse that with a desire to sever the umbilical cord of government assistance. Since the crisis began, the investment bank has issued nearly $30-billion in debt guaranteed by the U.S. Federal Deposit Insurance Corp. Barron's magazine estimates the FDIC backing saves Goldman $600-million in annual interest costs.
Other U.S. banks are also borrowing heavily under the program. That's what it's there for. The difference is that Goldman does little lending compared with, say, Bank of America or Wells Fargo. What Goldman does do is trade and invest for its own account. The firm still owns $18.2-billion in securities and real estate as "principal investments" - a decline of 20 per cent from November, 2007, which doesn't seem like a lot, given the collapse in asset prices.
A cynic might ask how long the U.S. government will want to guarantee the debt of what is, in part, a giant hedge fund. In any event, Goldman can only issue another $5.3-billion in cheap debt before it hits its cap under the FDIC program.
4. In many respects, Goldman's first-quarter numbers were awful. Few companies are selling shares or doing deals, so investment banking fees were down 30 per cent. Stock-trading commissions were way down. Goldman took $1.3-billion in writedowns in real estate and other investments. So how did it produce such a good quarter? Its trading revenue in fixed income, commodities and currencies, or FICC, was off the charts, more than doubling to $6.6-billion. How? "Favourable competitive dynamics, wider margins," said chief financial officer David Viniar.
Simple translation: On that remarkable weekend when U.S. Treasury Secretary Henry Paulson (ex-Goldman) allowed Lehman Brothers to fail and sent Merrill Lynch into the arms of Bank of America, a lot of competition left the trading floor. So now, when Goldman goes to buy or sell a bond, an oil contract, a yen futures contract, it can pay less and charge more, earning better spreads. All together now: Thanks, Hank.
5. Because of the new austerity on Wall Street, Goldman's compensation costs in the first quarter went up only 18 per cent from the first quarter of 2008, to $4.7-billion - or a mere $168,000 for each of the firm's remaining employees.
No wonder they want to get out from under Washington's thumb.
Derek DeCloet