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

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Ed Grebeck, CEO of Tempus Advisors had an interesting story to share which might be pertinent to the new Sober Look post upon the Goldman - Buffett transaction:

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

Trying to address the counterparty risk upon the brazen contracts, GS came up with the solution: number crunch "joint luck 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... solid BBB"... the pricing is "standard for BBB, plus [small, almost infinitesimal] premium".

Goldman longed for to buy insurance upon these firms, though to have it cheaper, longed for insurance for waste above 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 critical discuss of "liquidity... hedging ourselves"... alternative than "we [GS] do not mind if you reinsure yourself ... of course, you can assistance YOU sidestep in top mkts".

I deserted outright -- though I'm certain alternative P&C Re "convergence operations"... AIGFP (as well as alternative rival silos inside of AIG), Swiss Re, Munich Re, names not in business today-- ACEFS, St. Paul Re, Gerling Global, Centre etc etc ... jumped during possibility to "write premium for GS".

IF GS risk management went berserk 1999 over relatively tiny counterparty bearing to earthy bullion producers, imagine what they must have suspicion 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 concentration upon hedging all their exposures (based upon inner policies), they must have been desperate to get the little income out of Buffett to revoke their rapidly taking flight Berkshire risk (as the puts went low in to the money). It is therefore likely which Buffett was means to vigour Goldman in to the contract which was significantly skewed in his favor - not just since Goldman needed one more equity capital, though since they had to revoke their Berkshire exposure. This in fact provides one more await to the theory which Buffett took Goldman for the float using his income losing reduced put positions as negotiating leverage.



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