Balance sheet analysis: WFC, GS

[scriabinop23]

http://www.sec.gov/Archives/edgar/data/886982/000095012307013636/y40224e10vq.htm

http://www.sec.gov/Archives/edgar/data/72971/000095013407022973/f35144e10vq.htm


I find the WFC much more clearly written -- seems much easier to understand the profit model at WFC. Look at goldman's assets under control -- something like a notional trillion dollars. What blew me away at this latest report is GS' 'interest income'. That is the bulk of their earnings. Makes the 'investment banking' portion look like child's play. Is this from all the CDS they are short against zero collateral? [ie just collecting free risk premiums from CDS buyers]


Any sharp balance sheet readers (err professional CPAs) care to try to scrutinize these and make a discussion of these? I'll admit I don't understand much of whats on the GS book, and would like to see if any seasoned pros would like to pick it apart.

 

[PAPA ROACH]

One tidbit I found on page 39. table is on 40.

Guarantees

The firm enters into various derivative contracts that meet the definition of a guarantee under
FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Such derivative contracts include credit default and total return swaps, written equity and commodity put options, written currency contracts and interest rate caps, floors and swaptions. FIN No. 45 does not require disclosures about derivative contracts if such contracts may be cash settled and the firm has no basis to conclude it is probable that the counterparties held, at inception, the underlying instruments related to the derivative contracts. The firm has concluded that these conditions have been met for certain large, internationally active commercial and investment bank end users and certain other users. Accordingly, the firm has not included such contracts in the tables below.

The firm, in its capacity as an agency lender, indemnifies most of its securities lending customers against losses incurred in the event that borrowers do not return securities and the collateral held is insufficient to cover the market value of the securities borrowed.

In the ordinary course of business, the firm provides other financial guarantees of the obligations of third parties (e.g., performance bonds, standby letters of credit and other guarantees to enable clients to complete transactions and merchant banking fund-related guarantees). These guarantees represent obligations to make payments to beneficiaries if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary.

I read this as they have not disclosed their exposure at all to credit defaullt swaps.

For the people that think Goldman is teflon in this, think again. This is the instrument that can bring firms down. I am not saying this is happening, just that this would be much worse than subprime.

 

[scriabinop23]

FIN No. 45 does not require disclosures about derivative contracts if such contracts may be cash settled and the firm has no basis to conclude it is probable that the counterparties held, at inception, the underlying instruments related to the derivative contracts.


you have to be kidding they get away with this. basically they say that they aren't required to disclose CDS holdings because there is no evidence the counterparty [CDS buyer] (GS is a CDS seller, equivilent of naked put seller on corporate bonds) holds the actual bond to be insured. I read somewhere CDS require possession of the underlying defaulted bond to redeem. So GS gets out of reporting CDS liabilities because they aren't deemed liabilities if there's no evidence of the CDS buyer has the bond in hand? thats nuts.


I think I figured out how GS makes all of its 'interest income'. Just sell CDSes on EVERYTHING high quality under the sun with amplified leverage, and hope we don't go into recession.

Imagine if your $50k IB account allowed you to sell $50k worth of naked puts every month.

 

[ASusilovic]

A credit default swap (CDS) is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) happening in the reference entity. When a credit event is triggered, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement).

Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge against credit events. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can be used to speculate on changes in credit spread.

Credit default swaps are the most widely traded credit derivative product[1]. The typical term of a credit default swap contract is five years, although being an over-the-counter derivative, credit default swaps of almost any maturity can be traded.