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Due to increased volatility Goldman Sachs average
daily VaR increased 30% to $181 mn over previous year.
I saw this coming last quarter, and it is a strong chance that it will
blow up in thier face. Reference my post about their previous quarter
concerning risk adjusted performance. As it turns out, it was rather
prescient:
Risk vs. Reward is what the successful investor looks at when
gauging an oppurtunity. The Street and the media are just looking at
reward in regards to Goldman Sachs!We
have looked at company’s recent quarterly filings and 10K to have a
closer view of Goldman Sachs’ (GS) exposure. Following are some of our
observations:Value at Risk (VAR) and Risk Adjusted Return on Risk Adjusted Capital (RARORAC)
Goldman has the highest VAR among its peer group of $184 mn, followed by Lehman at distant $123 mn (we all know how well LEH is currently faring). Notably, GS also the highest range (difference of highest and lowest daily VAR during a quarter) of daily trading VAR of $92 million, reflecting significant (read risky) volatility
in its trading portfolio. This is higher than $61 mn and $67 mn (for
1Q2008) for Lehman and JPM, respectively. This is also being reflected
in the lowest risk adjusted return on risk adjusted capital (RARORAC -
a much more grounded measure of risk adjusted return) of 14.8% for GS
among its peer group. Just so this doesn't escape anybody, GS has the
lowest risk adjusted return on the Street. Simply analyzing earnings (or looking at CNBC) would lead one to believe that Goldman has the highest return on investment, but unfortunately, the world is a bit more complex than an earnings statement or a cable news channel.
Average Daily Trading VAR (in million dollars)
Q208
Q108
Q407
Q307
Goldman Sachs
184
157
138
139
Morgan Stanley
99
97
89
87
Merrill Lynch
NA
65
65
76
Lehman Brothers
123
130
124
96
JPM
NA
122
107
112
Range of Daily Trading VAR (Difference between highs and lows) (in million dollars)
Q208
Q108
Q407
Q307
Goldman Sachs
NA
92
77
68
Morgan Stanley
NA
34
46
36
Merrill Lynch
NA
39
51
32
Lehman Brothers
37
61
107
66
JPM
NA
67
138
64
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- Risk Adjusted return on risk adjusted capital (RARORAC)
Q208
Q108
Q407
Q307
Goldman Sachs
12.9%
14.8%
16.1%
15.3%
Morgan Stanley
19.7%
19.1%
21.5%
23.3%
Merrill Lynch
NA
31.6%
32.5%
30.5%
Lehman Brothers
14.0%
12.3%
12.0%
15.3%
JPM
NA
54.1%
60.2%
56.8%
Goldman also has the highest adjusted leverage ratio (adjusted
asset divided by adjusted equity) of 18.6x (for 1Q2008) among its peer
group, reflecting lower equity cushion against any valuation write-down
or loss. This highest leverage portends much greater volatility in
economic earnigns. In other words, when the win chooses not to blow in
their direction, the sh1t will hit the fan that much harder than the
rest of the Street
Adjusted leverage ratio
Q208
Q108
Q407
Q307
Goldman Sachs
NA
18.6x
17.5x
18.0x
Morgan Stanley
14.1x
16.0x
17.6x
18.8x
Merrill Lynch
NA
18.2x
20.3x
17.9x
Lehman Brothers
12.0x
15.4x
16.1x
16.1x
JPM
NA
13.1x
12.7x
12.3x
Click here for a worksheet that illustrates the VaR exposure for all ofthe big US brokers in detail:
Broker VaR Worksheet (634.49 kB 2008-07-05 09:25:24).
Goldman Sachs
level 3 assets to total assets declined marginally to 6.7% of total
assets as of August 2008 as against 6.9% and 7.2% 2Q2008 and 3Q2007,
respectively.
