John Dizard of the Financial Times has learned that Goldman is trying to find a counterparty for a bearish position on banking industry risk. Is this a house bet, a hedge, an attractive product, or is the firm merely trying to find a taker for a punt a client wants to make?
Regardless, the actions of savvy players say more than their public pronouncements….
From the Financial Times:
So, through the magic of globalisation, we have dollar paper moving off the books of the world’s banks and dealers, onto the books of the central banks.
This won’t be enough. In the end, I believe, the Fed will have to take a more direct role in taking risk on to its own book. There will need to be more, large, sales of equity in banks and dealers, most readily to the sovereign wealth funds.
We are getting there, though. Just in case we don’t and there is a meltdown, Wall Street firms are buying parachutes. A Powerpoint presentation for one such crossed my e-mail last week, with a note from a buy-side person saying “Fell off a Truck”.
It was from Goldman Sachs for what were termed “Large Bank Basket-Stability Notes”. This is definitely not a retail product. To summarise, the “Notes”, which have a three year term, pay 10 per cent a year to the holder to take the other side of a Goldman bearish position.
The Notes are a basket of 50 international bank stocks. “In this structure,” the Powerpoint document says, “investors earn 10 per cent for each reference stock, as long as that stock does not decline by more than 50 per cent during the next three years.”
I’m assuming the firm retained the bearish position as part of a global hedge against “gap risk”, or disaster. Given how unsatisfactory alternative approaches have been this year, such as dynamic hedging of mortgage risk through rapid-fire sale of the ABX, it is not surprising that the smarter people are buying their insurance in advance.
The earlier part of Dizard’s article is worth reading. It discusses why central bank operations to increase liquidity haven’t been successful so far and suggests a remedy.