Why Harvey won’t answer July 17, 2013 at 6:24 am

Matt Levine says, apropos the Goldman earnings call, that

someone at Reuters counted the number of times he [Harvey Schwartz, Goldman CFO] was asked to quantify Goldman’s leverage ratio (eight) and the number of times he did (zero).

Matt’s then amusingly unkind about Goldman’s explanatory note. He’s kinda right, it does bluster. So what’s the real reason for the silence? Well, I don’t know, but perhaps GS has a trick (or more likely at least 7 tricks) for getting less leveraged. You know, repo conduits, new netting schemes, securitisations with retained thick equity, that kind of stuff. But Harvey doesn’t know which of them will work yet, and maybe his people have to eat a few lunches in Norwalk to find out. So he’s keeping stumm until he finds out what works and how much good it will do. That will tell him if he needs to, you know, retain earnings or something distasteful like that.

3 Responses to “Why Harvey won’t answer”

  1. It’s fairly clear to me from the note; GS hasn’t got model approval for CVA yet, so they’re on standardised approach pro tem. So they’ve got a beggar’s choice between

    1) report a way-high number for the leverage based on a big derivatives credit risk add-on (and then attract further flak for “gaming the model” when they get it approved)

    or

    2) get the regulator’s back up by presenting the number as if model approval was a done deal when it isn’t.

    The underlying problem is that the gap between SA and models is so damnably big, which is what the fundamental review is meant to address.

  2. That’s fair, D^2. Certainly the PR consequences of putting out a non-models number, then replacing it with a models one, are nasty. Plus they have only had the NIM for week, so getting the non-models number right might be non-trivial. Still, JPM must have the same problem, so I wonder how they can be so unequivocal about their leverage. Or perhaps they just punted on getting approval…

  3. Yes I dunno – perhaps it’s just that the derivatives add-on is smaller compared to the size of JPM than it is for GS, plus JPM are often at the leading edge with these things.

    On the other hand, JP were asked once or twice on the call “how does your leverage look under the new Basel that doesn’t allow repo netting?” and my gosh, they didn’t want to talk about that …