Did "hedge everything" policy push Goldman into a bad deal?

Thank you for visiting my Blog
Ed Grebeck, CEO of Tempus Advisors had an engaging story to share which may be pertinent to the recent Sober Look post upon the Goldman - Buffett transaction:

1999: bullion price declining as well as volatile. GS approached me [Employers Re., the auxiliary of GE capital] with the transaction to sidestep their bearing to 3 bullion mines [These firms had sole bullion forward to Goldman to sidestep their bullion production]: Ashanti [Ghana; largely owned by Anglo-American], one in Indonesia [previously part of OK Tedi Gold/copper mine] as well as an one more in Southeast Asia which escapes my memory. One of the 3 was border BBB/BB. Other two were plain B. These firms also had significant "emerging market" credit issues all around, as well as CDS in such markets would've price mega bps.

Trying to address the counterparty risk upon the forward contracts, GS came up with the solution: series crunch "joint probability of default" in to synthetic (structured finance) tranche exposure. "We want you to sell insurance upon MEZZ TRANCHE... which as you can see from the painstakingly researched model is... plain BBB"... the pricing is "standard for BBB, and [small, almost infinitesimal] premium".

Goldman longed for to buy insurance upon these firms, though to have it cheaper, longed for insurance for losses upon top of the certain level upon the portfolio of the 3 names (a mezz tranche CDS). And they were pricing it formed upon where customary BBB levels were during the time.

Ed Grebeck continues:

No serious discuss of "liquidity... hedging ourselves"... alternative than "we [GS] do not thoughts if you reinsure yourself ... of course, you can help YOU sidestep in cap mkts".

I deserted undisguised -- though I'm sure alternative P&C Re "convergence operations"... AIGFP (as well as alternative rival silos within AIG), Swiss Re, Munich Re, names not in commercial operation today-- ACEFS, St. Paul Re, Gerling Global, Centre etc etc ... jumped during possibility to "write reward for GS".

IF GS risk government went berserk 1999 over comparatively tiny counterparty bearing to earthy bullion producers, imagine what they contingency have thought in the summer of 2008, when they saw HUGE, UNCOLLATERALIZED bearing upon 10 year + S&P index to Berkshire Hathaway

The conclusion here is which with Goldman's focus upon hedging all their exposures (based upon internal policies), they contingency have been unfortunate to get some income out of Buffett to reduce their fast rising Berkshire risk (as the puts went deep in to the money). It is therefore likely which Buffett was means to vigour Goldman in to the transaction which was significantly skewed in his preference - not only since Goldman needed one more equity capital, though since they had to reduce their Berkshire exposure. This in fact provides one more await to the theory which Buffett took Goldman for the ride using his income losing reduced put positions as negotiating leverage.



SoberLook.comwww.SoberLook.com
Free Software