We truly live in a fast world. How many even remember Mr Smith, who resigned from GS only some weeks ago. Since then we have been occupied with the Grexit, the Spanish imploding economy and the London whale. Below, a must read piece by Vanity Fair on Goldman Sachs, Mr Smith, and the future of the world’s most powerful player.
It was the op-ed heard round the world. “When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival,” wrote Goldman Sachs vice president Greg Smith in a March 14, 2012, piece published on the op-ed page of The New York Times on the day he was quitting the firm. He went on to accuse his employer of doing exactly the opposite of its No. 1 business principle, which famously trumpets that clients’ interests come first.
Smith’s indictment went viral, and with it came renewed speculation that Lloyd Blankfein, 57—who rose through Goldman’s dog-eat-dog commodity-trading business to become the firm’s C.E.O. in 2006, when Henry “Hank” Paulson Jr. departed for the Treasury Department—will be forced to step down. Ever since Goldman’s questionable behavior during the mortgage crisis became fodder for a 2010 congressional hearing, there’s been a sporadic guessing game about who might succeed Blankfein and when. Right now, it’s game on.
Peter Tchir of TF Advisors gives some color on the JPM Trade.
We have talking about what may or may not have happened at JPM for the past week, and by “we” I mean the entire market. We do not know the exact nature of their trades, but as far as we can tell from what we read and the rumor mill, JPM had a series of complex trades, though the overall ideas seemed to be “short high yield” and cover the costs by being “long investment grade” with a particular emphasis of jump to default risk over pure spread risk (though spread risk played a big part).
They were short various XOVER and HY indices, both outright and in tranche form. They were long various IG indices, both outright and in tranche form, though with a few additional curve trades to manage the jump to default risk.
We have tried to estimate the scale of the positions by asking “how much would JPM want to make if HY sold off 10%”. Using that, and a guess of $5 billion, it gives you a reasonable guess that the HY short had to be the “delta equivalent” of $50 billion. The term “delta equivalent” is important, because a $1 billion move in the index, can have a “multiplier” effect on the price move in the tranche. In general, the first loss tranches will move much more than the index, so a $1 billion position in a tranche can behave like a $10 billion index position. A bit confusing but if you think of it if terms of how a “deep in the money” an “at the money” and a “way out of the money” option react to the price moves of the underlying stock, it is somewhat similar.
Master of the Machine, Ray Dalio in a must read interview with Barron’s.
It’s hard to imagine anyone navigating the rough seas of the past decade more ably than Ray Dalio, master and commander of money-management firm Bridgewater Associates, which oversees $120 billion for a roster of global clients that include foreign governments, pension funds and endowments.
The Westport, Conn.-based company is the world’s largest hedge-fund firm and one of just a handful of players to place more than one fund on Barron’s annual Top 100 Hedge Funds ranking. This year Bridgewater’s flagship Pure Alpha II and its All Weather @12% global macro funds both make the list, (see below for list.). Pure Alpha has tallied a three-year average return of 22.75% while All Weather gained 17.24% on that basis. BarclayHedge’s index of hedge funds returned 9.05% a year in that time; the Standard & Poor’s 500 gained 14.11% annually.
The Bridgewater funds make strategic bets on commodities, currencies, bonds, and equities around the world based on analysis of valuations and macroeconomic trends..Dalio, who brings an unusually broad and deep perspective to investing, recently shared his latest views with us.
Barron’s: You’ve called the current phase of the U.S. deleveraging experience “beautiful.” Explain that, please.
Dalio: Deleveragings occur in a mechanical way that is important to understand. There are three ways to deleverage. We hear a lot about austerity. In other words, pull in your belt, spend less, and reduce debt. But austerity causes less spending and, because when you spend less, somebody earns less, it causes the contraction to feed on itself. Austerity causes more problems. It is deflationary and it is negative for growth.