A look at Goldman Sachs’ balance sheet

Nice Website. I went straight to the information for their creditors – given the “Credit Crunch” as the media are calling it this seemed the first place that I should focus. Easy, shareholders equity is $45.2bn. OK so now let’s look at the other side of their balance sheet. Oh, first problem, the creditor information seems to provide only information required by regulations – not exactly creditor friendly. Let’s explore the rest of the website and see if we can find out what the structure of their balance sheet is like.

I go straight to the 10Q Quarterly results ending May 2008 that were published in July. I am immediately attracted to the Off-Balance Sheet Arrangements section. I have always been suspicious of off-balance sheet arrangements. Here we find a statement to say that GS engages in such arrangements and that they are incorporated at fair value unless accounted for under the equity method of accounting. Wow! How about giving creditors an idea of how much risk is being run off-balance sheet!

Moving on to the balance sheet, the assets look solid at $1trillion although only $100m of these are near-cash and therefore have a pretty certain value. The rest include financial instruments and collateralized agreements. These are I suspect very difficult to value and with only $45bn of capital a %5 error in valuing assets means that Goldmans is bust.

Now on to liabilities. Here we can generally be sure that valuations are easier. Usually creditors are good at reminding you what you owe them! Here we have a few problems 1) GS has deposits of around $30bn – this may well reduce in a hurry if people get worried about GS, 2) only $71bn is short-term borrowings, that’s OK then, just under twice the capital of the bank, 3) $182bn of short-selling…..WHAT! Described as securities sold but not yet bought, these are valued at fair value. These may well be worth more today with the market crashing, maybe GS can finance their balance sheet through short-selling profits as the markets crash around them!

The summary is that with $45bn of capital, GS has built a balance sheet of $1 trillion. Get something wrong or have short-term funding withdrawn and you are dead.

The UK Chancellor today suggested that HBOS was in difficulty because they had a balance sheet that was financed only to the tune of 50% by deposits – well, GS is at least 10 times as risky.


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