I suppose I should take anything said by Goldman in general, and its CFO David Viniar, with a fistful of salt. This is the man who during the October-November meltdown, attributed the poor performance to the fact that they were seeing “25 sigma events, several days in a row.”
That show such manifest ignorance as to be laughable. As Brad DeLong pointed out the day before the Viniar remark, apropos quant defenses of defective models, that saying they had seen a 16 sigma event was ridiculous, since the universe wasn’t old enough for one to occur. A 25 sigma event is VASTLY more remote. To say it happened not once, but repeatedly, it tantamount to an admission that the models were rubbish. But Viniar said it with a straight face, apparently unaware of what he was really conveying.
We see the same pattern at work in today’s remarks. Viniar professes to by “mystified” at the interest in the Goldman’s dealing with AIG and pretends AIG is a mere “counterparty”. Let’s see, the CEO of AIG was recently a board member of Goldman and still owns $3 million of Goldman stock. Goldman CEO Lloyd Blankfein was the only Wall Street representative asked to confer with Treasury Secretary Hank Paulson when the AIG crisis broke. AIG paid out al its counterparties in full on their exposures at each downgrade, a move that has since been questioned, and Goldman was far and away the biggest recipient of these payments. Viniar’s defense is that the payments netted to zero, which is technically correct but more that an tad misleading (why should Goldman be made whole on a bad business decision? Since when is the taxpayer in the business of propping up Goldman, particularly since the firm paid large bonuses in 2008? Aand unlike AIG, where the bonuses are mere chicken feed, we are talking bonuses in easily in excess of $10 billion.
From Bloomberg:
David Viniar, Goldman Sachs Group Inc.’s chief financial officer, said he’s “mystified” by the interest investors and government officials have shown in the bank’s trading relationship with American International Group Inc.
“They’re one of thousands and thousands and thousands of counterparties and the results of any trading with AIG are completely immaterial to what we do,” Viniar said today in an interview. “I am mystified by this fascination with AIG.”…
Viniar told analysts today that any profits related to AIG in the January-to-March quarter “rounded to zero,” as most of the transactions were unwound before the end of the year. In an interview, he also said profits in December weren’t significant.
“I would never tell you that we didn’t book any profit, I don’t even know,” he said. “I couldn’t tell you with any counterparty that we booked zero, but I could tell you it rounded to zero.”
After AIG was rescued by the U.S. from collapse last year, banks that bought credit-default swaps got $22.4 billion in collateral and $27.1 billion in payments to retire contracts, the insurer said last month.
Neil Barofsky, special inspector general for the government’s Troubled Asset Relief Program, began an audit two weeks ago into whether there were attempts by AIG or the government to reduce the payments, according to an April 3 letter to Representative Elijah Cummings. The Maryland Democrat requested the probe last month along with 26 other members of Congress.
Lawmakers, frustrated with the cost of an AIG bailout that has expanded three times, have asked why about $50 billion was paid after the initial September rescue to banks that bought credit-default swaps from the firm. The audit will reveal who made “critical decisions” regarding the payments and provide an explanation for the actions, Barofsky said.
Viniar held a conference call on March 20 to answer questions about the firm’s trading relationship with AIG and to “clarify certain misperceptions.”
When AIG was rescued, Goldman Sachs had $10 billion of exposure to the insurance company that was offset with $7.5 billion of collateral as well as credit-default swaps that would have paid off in the event of an AIG bankruptcy, Viniar said on the March 20 call.
He also said on the call that Goldman Sachs recorded a gain “over time” on the value of the hedges it bought to guard against a default on AIG, even though the government enabled the insurer to honor its obligations. In today’s interview, he said those gains were booked “from 2006 to now” and that any gains booked in the first quarter “would have been very, very small.”
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Not mentioned is that the profit was zero only because Goldman continued to inflate the values on their balance sheet by assuming that AIG would pay in full.
Yes, when you assume they pay in full and then they actually do pay in full, there’s no profit recorded. Any reasonable recording on the GS balance sheet (based on AIG’s ability to pay, not AIG’s ability to access Tim Geithner’s bottomless well) would have had a reserve; and payment in full would have resulted in large profits.
So how many years does a it take for a 25 sigma event occur, anyway?
erfc(25/sqrt(2)) = 9.5*10^-137
Basically, it will never happen.
Well, hey, what do you think those bonus payments were for, anyway? Ability to wrench a trillion bucks out of thin air ought to be worth more than $10 Billion, especially when others are suffocating from the rarified air wrought by the same business models.
It’s the united goldman sachs of america.
Congress gave permission for the Treasury to payoff AIG counter parties which the majority were GS.
Why do you do these postings? Just to piss us off more?
Somewhat related…in the realm of Goldman.. Anyone familiar with this guy Martin Armstrong? Just released a new paper from behind bars. Fascinating to say the least.
http://economicedge.blogspot.com/2009/04/martin-armstrong-behind-curtain.html
Presumably most readers of this fine blog have also
read Chris Whalen’s “Before there were CDS there was
re-insurance”, which raises the important question of
whether these contracts were binding at all. It points to the use of side letters which undo the effect of the
re-insurance, which , when it began to be attacked
by regulators, essentially morphed into CDS. It is an
important piece worth reading in its entirety.
“Viniar told analysts today that any profits related to AIG in the January-to-March quarter “rounded to zero,” as most of the transactions were unwound before the end of the year.”
Well then, Mr Viniar, since the taxpayers are irked about this little pecadillo, why don’t you just offer to give the AIG money back. I guarantee that people will shut up about the Goldman AIG relationship after that.
His lips are moving, therefore he’s lying.
‘Why do you do these postings? Just to piss us off more?’
I, for one, greatly appreciate the work done here. I hope the answer is: YES
The awareness being raised here is nowhere to be found on syndicated news.
This is my news source when it comes to economics, because it bares the truth, bar none.
The issues of the TARP money and the AIG conduit are only part of the story of the US government support of GS. After the LEH crash, GS rushed to become a bank holding company. They wanted access to the Fed discount window. How much of their profits came as a result of this support? Have they reduce their operating leverage to the traditional levels of bank holding companies?
GS is also getting taxpayer support by issuing FDIC guaranteed debt. Again how is this affecting their bottom line? What would their cost of capital be if the taxpayer wasn’t backstopping all the risk via the Fed and FDIC programs?
The assumption that simply repaying the TARP will allow a return to business as usual belies an arrogance and sense of entitlement that is breath taking.
25 sigma?
Reminds me of Mother of Storms by John Barnes, where they were concerned with hurricaines of 32+ on the Beaufort Scale scouring Hawaii and crossing Mexico.
How dumb do they think we are? Goldman had $10-20 billion of exposure to AIG. In return they got collateral and CDS which obviously wasn’t convertible to cash at face value :( So they used their influence to get Uncle Sam to pay them back in cash.
THAT is the explanation. Don’t insult our intelligence with lies and obfuscations.
These thieves are getting a little paranoid now the the street lights are on.
Maybe Mr. Viniar is hoping for a 25-sigma event — as in, nobody notices nothing awry.
Read Rob’s link above.(Check the read counter and wonder why so few care)
That should slap your consciousness around enough to bring you back to reality.
Armstrong wouldn’t play ball and suffers the consequences.
I agree with your central point about the relationship between Goldman and AIG, but I must take issue with the critique of Viniar’s comment. Sorry I wasn’t a reader back when you wrote this piece on the same quote. Gotta love the line you quoted from Dizard, too: “All this makes life easy for the financial journalist, since once you’ve been through one cycle, you can just dust off your old commentary.”
I think that Viniar’s statement is not quite as foolish as you suggest. It definitely betrays the inability of Goldman’s models (just like, well, practically all models) to pick up tail risk, but I don’t think it’s really ignorant, per se. There's a bit of a danger of throwing the baby out with the bathwater when you vilify Goldman for saying that its models are inadequate. What should be vilified is not the attempt to model financial data, but the irresponsible assumptions made on the basis of models with known flaws, and the excessive risk taking encouraged by over-reliance on statistics. Not the statistics themselves! The really immoral thing is the misaligned incentive structure that drove banks to do reckless things in the short-run with disastrous long-run consequences.
As DeLong pointed out, the key point is that the tails are fat. A 25-sigma event under a leptokurtic distribution isn't necessarily all that unusual, as pointed out in the comments on the 2007 post. We should probably be angry at Goldman if their risk-taking is based on the assumption of normality, though.
Anyway, since we manifestly don't know the true shape of the distribution, we should be using Chebyshev's Inequality to set our bounds:
P[|X-mu| >= k*sigma] <= 1/k^2
P[|X-mu| >= 25sigma] <= 1/25^2
P[X is a 25-sigma event] <= 1/625
(Assuming the second moment exists. I don't think anyone's arguing that there's so much tail risk that returns are Cauchy-distributed).
So here's the kinder, gentler interpretation of Viniar's comment:
Under the generous assumption that Goldman uses models that use distributions that attempt to account for tail risk, we would expect them to observe a single 25-sigma event at least every 625 observations. Viniar didn't say what the unusual observation was, after all. Suppose it was an unexpectedly large jump in an asset price. Since they're looking at high-frequency trading data, you might expect to observe a 25-sigma jump as often as once every ~10.5 hours if you had data every minute and the price process were extremely leptokurtic.
Obviously that's a pretty extreme lower bound, but statements like "the universe isn't old enough for a 25-sigma event to have happened" are just silly. They are based on the same fallacious assumption of normality that so richly deserves criticism in finance.
Bottom line: A 25-sigma event has a probability no higher than 1/625. For most distributions, it’s much much lower than that, but if anything Viniar’s comment suggests that Goldman is trying to incorporate tail risk into its models, even if it still surprises them to learn just how fat those tails are.
It’s a shame that the public focused all their outrage on AIG. Goldman is clearly a bigger culprit.
I was shocked and laughed out loud when I thought your first sentence read as “I suppose I should take anything said by Goldman… as a fist full of shit.”
Freudian slip (on my part) I suppose.
I’m quite impressed that someone beat me to the Chebychev-inequality observation that I was about to post. Nice reader group here.
-Former Probablity Professor
Rob said…
Somewhat related…in the realm of Goldman.. Anyone familiar with this guy Martin Armstrong? Just released a new paper from behind bars. Fascinating to say the least.
http://economicedge.blogspot.com/2009/04/martin-armstrong-behind-curtain.html
Now this is the America, I know.
Dirty deeds done at home and around the world, to keep us safe from the bad guys out there, or is it to enrich the CLUB?
High profile professionals and wealthy supplying the seed monies for large drug shipments into the country. Ethnic and business mobs/gangs colluding with each other in turf wars/consolidation of ground gained.
skippy…throw away almost every history book you have opened…the world is a big bad place…monsters can ware expensive suits and ties…sociopaths learn how to use camouflage like the big bad wolf…now give granny a kiss little girl.
Anonymous @ 8:52 said:
➢ It’s a shame that the public focused all their outrage on AIG.
The public knows the problem is huge and will take time to sort out. And they believe the Administration’s line that we must bail out Wall Street, however distasteful, in order for the entire system to work. And the public always gives its new President the benefit of the doubt. Obama, for obvious reasons, benefits from a double, maybe even a triple dose of this goodwill.
Look, we all know that $165 million, with an “M” (for bonuses), is pocket change compared to $170 billion, with a “B”. But the billions for bailouts falls under the heading of “fixing the whole system.” We hate it. But we hold our collective noses and we roll with it because the MSM and Obama tell us that we must.
We get angry about 1/10 of 1 percent (of the total AIG bailout) being used to line the pockets of people who, by rights, shouldn’t even have a job because it smacks of ridicule. If I lose 20 bucks playing 3-card monte, that’s one thing. But to have the 3-card monte dealer follow me home, laughing at me, telling me how utterly stupid I am, telling the whole neighborhood what a chump I am, well … that’s likely to end in violence.
I can tell you that the attitude in the ‘hood is grievous disappointment. But we don’t want to admit it. It’s like “let’s give the man some more time. Maybe there is something that HE knows that we don’t know.”
But when the Black Swan event occurs and everyone suddenly realizes that the king has no clothes, it’s bare-knuckle time. Obama won’t be feeling the love anymore.
Maybe we won’t be angry about exactly the right thing to be angry about. (25 Sigma events? What the heck is that? I’m not _even_ going to look that up.) And maybe we won’t be angry at exactly the correct person to be angry at. But we’ll be angry. Violently so.
I don’t think the violence will begin in my neighborhood. I don’t even think it will begin in the city. But it will begin. And, eventually, it will erupt here as well.
Be grateful, everyone, that the public has not yet focused its rage.
I want to stress that I’m not saying these things as a threat. I don’t want to see the kind of violence in the streets that I read about in Bangkok. I have a 10-year old daughter. Why would I? And I really, really do comfort myself with the knowledge that I’ve been wrong before and I’m probably wrong now.
But what if I’m not?
I love mysticism!
See: Ambiguities of meaning
The mystic interprets the world through a different lens than is present in ordinary experience, which can prove to be a significant obstacle to those who research mystical teachings and paths. Much like poetry, the words of mystics are often idiosyncratic and esoteric, can seem confusing and opaque, simultaneously over-simplified and full of subtle meanings hidden from the unenlightened. To the mystic, however, they are pragmatic statements, without subtext or weight; simple obvious truths of experience. One of the more famous lines from the Tao Te Ching, for instance, reads:
My words are very easy to know, and very easy to practice;
but there is no one in the world who is able to know and able to practice them. (Legge, 70
Viniar’s 25-sigma “explanation” was directed to losses (-27%, at 6x leverage)at GS’s Global Alpha fund in August, 2007. GS was beating the bush for new investors in GA, and clearly Viniar was suggesting a once-in-a-lifetime freak. When he claimed GA saw “25 standard deviation moves, several days in a row”, the point was not whether that statement has any computable meaning, and I doubt that it does, but rather “nobody could see this coming, so don’t blame us; it won’t happen again.” It was marketing speak, not an analysis of the sufficiency of GA’s risk management in understanding fat tails. The laughter wasn’t at the 25-sigma part, it was at the refusal to accept responsibility for performance. The market beat GA black and blue. GA was marketed as providing uncorrelated returns…
Viniar’s marketing didn’t work. GA is currently at $2.5B AUM after a peak of $12B in 2007.
As a closet quant myslef, I often misuse ‘sigma’ to mean the root-mean-square of the historical deviation from the mean. A ’25 sigma’ event would thus mean that the observed deviation was 25 times the historical.
Of course if the stock markets were efficient and random and continuous and gaussian then we could never see a 25 sigma event.
Since quants don’t do gaussian in real life (except card counting and some lottery stuff), the parlance of sigma is often as I misuse. Nobody who actually does this stuff hears the word sigma, and actually believe there is a gaussian curve underneath. It is simply a common shorthand.
Also, I would rather hear from Dick Fuld than anyone at Goldman. The next election cycle will be about how Goldman ruined the world.
HarlemDad: I think you can probably relax re “violence”. People are bred these days for placidity. There will be individuals to watch out for, but they are currently murdering cops and their own families. It sounds cruel to say it, but that’s not a big slice of the general population.
Most others will accept their fate. We have this whole Calvinist “poor people deserve what they get” thing going on so strong that even the poor people seem to have bought it.
With the complexity of all the problems (financial oligarchs, corruption, climate change, peak oil) and everything falling apart, I don’t see how any organized resistance will get traction. Ever. Your 10 yo will have a different set of rules to follow (as will my 8 yo and 13 yo) but they’ll figure it out.
Serfdom will seem like second nature to our kids.
c@
John Hempton has recently posted in the comments section of his “Goldman’s Orphan Month post
http://brontecapital.blogspot.com/2009/04/goldmans-orphan-month.html
suggesting that Goldman was not the ultimate beneficiary of the AIG CDS money, but rather that it was Goldman’s counterparties, likely life insurance companies.
If correct (and, knowing his expertise it very likely is), this should be covered.
I’m getting tired. Tired of the lies… and more tired of the fact that the liars are apparently going to get away with it. IN PLAIN DAYLIGHT. The story with Goldman in general and with AIG in particular is full of greed, graft, and corruption. I work in this industry and as such have: a) a perfect view into it in real time; and b) full understanding of exactly how the con is working. It makes me sick and it makes me sad.
At first I thought blogs like NC would serve the purpose of exposing the fraud, thereby bringing to light the need for The Authorities to act. Unfortunately The Authorities are either: a) complicit; b) ignorant; or c) don’t really care so long as their brand of graft doesn’t get exposed in the crossfire.
I’m becoming more and more aware that the only way this ends is through civil unrest. I know that sounds outrageous, but active revolt is the only way forward. Absent that, all of us who read NC are engaging in self immolation. Nothing will ever change and the guys at 85 Broad are going to get paid another $10B in bonuses for their trouble.
About ready to give up and lobotomize myself. Not ready to start the revolution, but will certainly be amongst the first to join it in progress.
Cat,
I think your take on this is correct. You make an interesting point about “individuals to look out for.” Crazy people teetering at the edge of rage and sanity are always among us. I suspect that they _sense_ from the Zeitgeist that lots of people are getting away with outrageous crimes in broad daylight. And this just tips them over.
Entirely,
You’re right. This blog is really great at explaining the machinations of the Financial Industry’s systemic fraud. But it gets so complicated trying to undo the tangled web. I get misty-eyed for the days when you could just “follow the money.”
I’m with Alexander the Great on this one. Don’t waste your time trying to untie the Gordian Knot of Finance. Just take your sword in hand and start swinging.
But don’t give up. We need not hope in order to persevere.
Tim in Sugar Hill
Want to follow the money? Here is the simple math… and this relies only on facts that either: a) are known in publicly traded markets; or b) Goldman has admitted.
1) CDS on AIG before September 2008 traded at ~200bps running plus 0 pts upfront. Today it trades at 500bps running plus 40pts upfront.
2) Goldman Sachs had $13B of super senior CDOs insured by AIG. Prior to AIG going thermonuclear and becoming an ongoing ward of the state, Goldman Sachs owned three things:
a) $6.5B of super senior CDOs naked exposure to AIG;
b) $6.5B of cash collateral in a margin account due to ongoing posting of margin against the position by AIG; and
c) $6.5B of CDS on AIG purchased for 200bps running spread to hedge their exposure in “a”
The government comes into AIG and makes Goldman whole on the super senior CDOs that they had insured with AIG (i.e., they pay them the $6.5B from “a” and Goldman gets to keep whatever margin they were already holding from “b”). At this point, Goldman has $13B of cash **AND** they own $6.5B of CDS on AIG.
Well now, given what’s happened at AIG, the CDS is trading at 40pts upfront. Goldman sells the $6.5B of AIG CDS at $40-00… thereby pocketing $2.6B additional cash.
In a trade where they have $13B of exposure, Goldman pockets $15.6B of cash.
The math is strikingly simple but they get away with it nonetheless. And no one calls them out. And no one makse them return the money. And the stock market gets itself into an orgy when they say they’re “going to pay the TARP money back”. They raise $5B of capital yesterday and say the rest is going to come from “other sources”. Well guess where $2.6B of that “other sources” comes from?? From the same taxpayers they’re paying back via the windfall profits they made from the AIG transfer.
The killer is that, in pieces, they’ve admitted the whole thing. But no one with any sort of soap box will put the pieces together and call them to account. It makes me sick…
Entirely,
Good point. We don’t even have to follow the money.
I vaguely recall someone putting that one together in print some time ago. Maybe it was on this blog. But there have been so many outrageous things occurring on seemingly an hourly basis, that I can’t keep it all straight. (see Yves’ outrage at Goldman quietly “disappearing” the month of December, 2008 above.)
I’m keeping this one. Gonna copy it to my list of things I need to remember. It’s a really cogent, succinct re-cap of Goldman’s utter contempt for the American people.
Tim in Sugar Hill