Monday, September 24, 2007

Goldman and Bear

From an FT Article:

World comes to an end. Goldman Sachs net income surges.

Well, almost. It verges on the unseemly to achieve a 20 per cent increase in fixed-income trading from the previous quarter - after stripping out a one-off gain on a disposal. That means Goldman was able to increase fixed-income revenues even after taking its lumps on leveraged loan write-downs - a painful $1.5bn, after its fee cushion.

The really impressive feat was to more than offset big write-downs on mortgage assets with better hedging than anyone else. Hapless Bear Stearns, until recently believed to be the canniest operator in mortgages on Wall Street, still took a $450m hit on mortgage securities and the like, even after significant hedging gains. There were a couple of other nuggets that underscore how good Goldman's risk management appears to be. For instance, leveraged loan debt that it sold in the market recently fetched prices in line with or slightly above the negative marks Goldman had pencilled in. That may be so for others as well, but Goldman has said it publicly.

Another, far smaller point of comparison between Goldman and Bear was inevitable yesterday: hedge funds. Goldman has taken a reputational black eye with the underperformance of its quantitative funds. But by investing in one of them, GEO, and inviting existing investors to do so as well, it has even managed to make some money out of the August rout for quants, as those strategies recovered. That helps soften the blow as incentive fees get hit. Bear suffered twice. First, the implosion of two mortgage-related funds led to a write-off. Second, prime brokerage clients, facing stress of their own, moved some of their money away.

Bear should try to avoid reporting on the same day as Goldman in future.