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As a backgrounder for this one, see Zerohedge on dwindling market liquidity, then the video below with the trader from Themis Trading, and then my stuff on Goldman Sach's over reaching dominance on the NYSE, and the effect that it is having on its risk metrics (Market Manipulation from the Big Boys: Is there really a PPT (Plunge Protection Team)?).


If you aren't disturbed yet, don't worry. I'll get you by the end of this blog post.

First, let's explore the most likely reason why Goldman Sachs, et. al. are pushing so hard into capturing program trading market share, or to put it another way, why they are trying to take over the trading markets...


As the volume in the broad market decreases, GSs trading volume spikes...



GS trading volume is more than double the old title holder of the "The Riskiest Bank on the Street". You can guess who wields that title now (Who is the Newest Riskiest Bank on the Street?).

Goldman Sachs program trading volumes has increased considerably for the first six months of 2009 with 68% increase in average weekly program trading volumes to 1,123 mn compared with 670 mn in 2008. Overall, GS share of program trading volumes averaged 22.7% in 2009 versus 12.8% and 11.5% in 2008 and 2007, respectively. Goldman Sachs program trading volumes share in total NYSE volumes averaged around 7.0% for the first six months of 2009 compared with 3.2% in 2008.It is quite apparent that Goldman is desperately trying to compensate for the significant drop in its other major business lines by accepting more risk in its proprietary trading units. This has, thus far and excluding the month of December -08, managed to generate greater accounting revenues but has also actually REDUCED Goldman’s risk adjusted returns. It appears that BoomBustBloggers are some of the very few that seem to give a damn about the risk assumed in pursuing accounting earnings and the bonuses that are attached to them, but if one pursues risk long enough, one will find it. It is a matter of time before this expanded exposure pushes back (as it did last December), and there is no telling how hard the blowback will be the next time around.



      Despite increase in trading activities Goldman Sachs trading revenues had a setback. Goldman Sachs’ net trading and principal revenues declined to $9.0 bn in 2008 from $31 bn in 2007. In 1Q09 (three months ended March 2009) GS trading revenues were $7.1 bn. As GS became a bank holding company, it was required to change its fiscal year-end from November to December. This resulted in a one-month transition period that began on November 29, 2008 and ended on December 26, 2008. GS had separately reported one month results in its 1Q-09 release. In December alone the company’s net trading and principal revenues were negative $507 mn. (Gross trading and principal revenues excluding interest revenues were negative $964 mn for the month of December).

It would be most unrealistic to assume a billion dollar trading loss will not happen again, or happen to a greater extent. The very nature of trading the markets entails engulfing significant risk and that risk (loosely defined as the potential of deviation from expected returns) is what is driving down Goldman’s risk adjusted returns. You see, if one were to adjust Goldman’s activities for risk, they are rapidly becoming less profitable, not more profitable. Even on a pure accounting basis, the affects of said risk are quite evident, as can be seen in the billion dollars of trading losses had in December. Long story short, if you roll the dice often enough, shit happens. Goldman is now forced to roll said die since nearly all of their major revenue drivers have all but dried up: M&A, securitization, underwriting, asset management, prime broking services, etc.


Notice a near perfect negative correlation between VaR (risk) and RORAC (risk adjusted return). Of course many will say that's because risk is used to calculate risk adjusted return. That's the point! For every incremental unit of risk assumed, one must generate that incremental unit of risk plus, in order to produce an economic profit. This is not the case in Wall Street and regulators, investors and analysts are not viewing Goldman or any of the systemic risk banks in this light until, of course, it is too late and they have already blown up after looking like super stars just months earlier.


It is plain to see that as Goldman captures more of the program trading market, it simultaneously and significantly increases its risk. Hey, where are our regulators when you need them? Now is the time you should be cracking the whip on systemic risk, before the not-so-Black Swan event happens, not after. Regulators, oh regulators, where out thou???'

As a result of increased trading activities Goldman Sachs trading VaR has increased consistently over the past two years. Goldman Sachs average daily trading VaR has increased to $240 mn in 1Q09 from $180 and $101 mn in 2008 and 2007, respectively. Since 2005 (arguably the apex, or close to it, of the credit bubble) Goldman Sachs trading VaR has increased more than three-fold increasing to $240 mn in 1Q09 from $70 mn in 2005 as Goldman has assumed multiples more risk in its pursuit of accounting revenue which consequently generate bonuses.

Remember, Goldman takes the risk of a public company using shareholder’s (and as of late, that of the US taxpayers') capital while being compensated as a partnership whose partners are indemnified against whatever risk they take. A perfect example is the reporting of record bonuses in the MSM, which were generated directly off of the backbone of taxpayer capital life support – TARP, debt guarantees, ZIRP, expedited bank charters, significantly relaxed collateral requirements, etc. The taxpayer’s capital earned a materially significant amount of those bonuses, and the taxpayer shoulder significant risk in the process without due compensation for said risk. I, as a significant US taxpayer, want both my cut of the Goldman bonus pool for my part in their revenue generation, and adequate compensation for the use of my capital as well.

Goldman Sachs risk adjusted return on capital continues to witness a downward trend as market volatility continues to increase. Keep in mind that the VIX is not the only metric of market volatility – reference the delta of the spreads on CDS contracts. As can be seen, GS’ RAROC declined to 11% in 1Q09 versus 13.7% in 1Q08, and it is fair to say that it will sink even further if they continue to pursue revenue though expanding their takeover of the NYSE through thier program trading aspirations. There is a reason why they call risk, RISK. The billion dollar loss in December can clue you in... 


Who is am I?

I know many of you new readers are wondering, "Who the hell is this guy?". Well, this guy is someone who has been pretty good at ferreting out weak companies on the verge of collapse:

There is the call of the fall of REITs and commercial real estate in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months". I also called  Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]), Lehman Brothers CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008]), Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer), nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!), MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others - well in advance.

More Goldman Sach's Research:


Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb - 17 pages

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages

Free research and opinion

§  As Reality hits, the Masters of the Universe are starting to look like regular bank employees

 Premium Stuff!

Goldman Sachs - strategic investment and public offering Goldman Sachs - strategic investment and public offering 2008-09-26 02:29:15 895.36 Kb 

Goldman Sachs Report June 21, 2008 Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb

Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18 10:12:37 267.49 Kb

Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail 2008-10-20 15:45:05 348.99 Kb

GS ABS Inventory GS ABS Inventory 2008-02-25 06:48:56 1.22 Mb


Historical context for the "Riskiest Bank on the Street" moniker. 

Banks, Brokers, & Bullsh1+ part 1

Wednesday, 19 December 2007 | Reggie Middleton

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...  Last week, Morgan Stanley called Citibank the “short play of...

The Riskiest Bank on the Street
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

Key highlights of my research on the "Riskiest Investment Bank on the Street": The Riskiest Bank on Wall Street – Morgan Stanley has US$74 billion of Level 3 assets, over 200% of its eq
Monday, 11 February 2008

A closer look at the exposure of the other brokers
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

...- Who has the most of their assets tied up in illiquid Level 3 as a proportion to tangible equity? You guessed it, The Riskiest Bank on the Street. Now, they do have a decent amount of liquidity the ...
Sunday, 16 March 2008


19. On the insolvencies of non-bank financial institutions
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...Bullsh1+ part 1 Banks, Brokers, & Bullsh1+ part 2 Money Panic Bear Fight The Breaking of the Bear The Riskiest Bank on the Street Here comes the CRE Bust (Quip on Lehman Brothers)...
Tuesday, 18 March 2008


20. Quick Morgan Stanley update from my lab
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
  This is a refresher to the The Riskiest Bank on the Street piece that I posted a few months ago on Morgan Stanley. Let me get straight to the salient points. High exposure to lev
Thursday, 20 March 2008


21. Early morning scan of events
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
For those that haven't noticed, I've begun sharing my early morning news and data routine with the blog. Here goes Monday moring EST. Is the Fed running out of ammo? Reserve
Monday, 31 March 2008


22. Reggie Middleton on the Street's Riskiest Bank - Update
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
This is the update to my forensic deep dive analysis of Morgan Stanley. It is still, in my opinion, the "riskiest bank on the street". A few things to make note of as you browse through my opinion a
Sunday, 06 April 2008


23. Banks, Brokers & Bullsh1t 3.0: Shenanigans at Morgan and Lehman
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
I've been promising to give an illustration of the shenanigans being played by the commercial and investment bank's for some time now, but I've been quite busy working on my entrepeneurial pursuits
Wednesday, 16 April 2008


24. I warned you about the risk of those I Banks
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...ive counterparty and credit risk to imperfect hedges to dead and depreciating assets held off balance sheet: The Riskiest Bank on the Street Is this the Breaking of the Bear? Banks, Broke...
Wednesday, 21 May 2008