Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as Co-Chair, Center for Applied Quantitative Finance, Risk Research and Quantitative Solutions at SAS. Don’s focus at SAS is quantitative finance, credit risk, asset and liability management, and portfolio management for the most sophisticated financial services firms in the world.

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Case Studies in Liquidity Risk: Goldman Sachs

07/06/2011 02:07 AM

Today’s blog focuses on the U.S. dollar funding shortfall that took place at Goldman Sachs during the period from February 8, 2008 to March 16, 2009. Today’s blog confirms, contrary to some press reports on July 6, that Goldman Sachs borrowed less money from the Federal Reserve for less time than most of Goldman’s competitors..  That being said, Goldman Sachs’ maximum borrowings of $24.2 billion were nearly equal to the $28 billion the Federal Reserve was willing to lend to Lehman Brothers only after Lehman declared bankruptcy on September 14, 2008.

This is the twelfth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, Depfa Bank plc, and Barclays.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Goldman Sachs during the credit crisis
The data used for Goldman Sachs in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve.

A detailed chronology of the credit crisis through February 28, 2008 is given in this recent blog post:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 13, 2011.

The key dates in the chronology relevant to Goldman Sachs, including the timing of the Bear Stearns events, are summarized below.  The Levin report referred to below is the report entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report, Permanent Committee on Investigations (Senator Carl Levin, Chairman), U.S. Senate, April 13, 2011.

December 13, 2006
Dan Sparks informed the Firm-Wide Risk Committee of Goldman Sachs that two more subprime originators had failed in the last week and that there was concern about early payment defaults, saying “Street aggressively putting back early payment defaults to originators thereby affecting the originators business. Rumors around more failures in the market.” (Source: Levin report, page 478).
December 14, 2006
Goldman Sachs mortgage department loses money for 10 consecutive days, triggering a senior management meeting on December 14, 2006. (Source: Levin report, pages 385 and 404).
February 2, 2007
Dan Sparks reported to senior Goldman Sachs executives “The team is working on putting loans in the deals back to the originators (New Century, Wamu, and Fremont, all real counterparties) as there seem to be issues potentially including some fraud at origination…” (Source: Levin report, page 484).
February 14, 2007
Dan Sparks of Goldman Sachs noted in a memo, “Originators are really in a bad spot. Thinly capitalized, highly levered, dealing with significant loan put backs, some with retained credit risk positions, now having trouble selling loans above par when it cost them 2 points to produce.” (Source: Levin report, page 479).
February 21, 2007
A report to senior management at Goldman Sachs stated that spreads on BBB and BBB- indices had increased more than 100 basis points on the day. (Source: Levin report, page 415).
February 28, 2007
During February 2007, the Goldman Sachs mortgage department decided to cancel 4 pending CDOs, downsize another 2, and bring all of its remaining CDOs to market as quickly as possible. The Mortgage Department limited its CDO Origination Desk to carrying out only the CDO transactions already underway. (Source: Levin report, page 388).
March 7, 2007
The average early-payment default rate for subprime loans in Goldman’s inventory had climbed from 1% of aggregate volume to 5%…Dan Sparks described the firm’s exposure as follows: “As for the big 3 originators-Accredited, New Century, and Fremont, our real exposure is in the form of put-back claims. If we get nothing back we would lose about $60 million. rumor today is that the FBI is in Accredited. (Source: Levin report, page 485).
March 12, 2007
After completing review of one New Century loan pool, a Goldman Sachs analyst recommended “putting back 26% of the pool…if possible.” (Source: Levin report, page 485). In March, New Century stopped paying on Goldman Sachs claims. (Source: Levin report, page 486).
March 31, 2007
Almost two-thirds of the Anderson Mezzanine 2007-1 CDO structured by Goldman Sachs goes unsold. (Source: Levin report, page 392).
March 31, 2007
In March Goldman Sachs informed its Board of Directors and the SEC that it had stopped purchasing subprime loans and RMBS securities through, in its words, “conservative bids.” (Source: Levin report, page 409).
March 31, 2007
In March, 2007, in connection with Goldman’s quarterly earnings call with analysts, “Mortgage Talking Points” prepared for Goldman CFO Viniar stated that the Department’s revenues were primarily the result of its short positions. (Source: Levin report, page 418).
March 31, 2007
When Goldman Sachs personnel reviewed a loan pool purchased from Fremont, the results were even worse than for the New Century loans. Goldman concluded that “on average, about 50% of about 200 files look to be repurchase obligations.” (Source: Levin report, page 486). The same 50% repurchase rate was found to apply to loans purchased from Countrywide as well. (Source: Levin report, page 487).
April 26, 2007
Goldman Sachs closes Abacus 2007-AC1 CDO and sells $42 million of the AAA rated tranches to the portfolio management division of ACA and $909 million of the super senior portion to ACA Financial Guaranty Corp. (Source: Levin report, page 572).
May 20, 2007
An internal Goldman Sachs analysis projected that Goldman would need to take from $248 to $440 million in write downs on unsold CDO securities and warehouse assets. (Source: Levin report, page 389).
May 31, 2007
Goldman Sachs dismantled the CDO Origination Desk and moved all remaining CDO securities to the Structured Product Group Trading Desk. (Source: Levin report, page 390).
June 7, 2007
Bear Stearns suspends redemption rights for hedge fund heavily invested in subprime debt market after losing 19% of value in April alone (Source: www.businessweek.com)
June 18, 2007
Goldman Sachs places $100 of the Timberwolf CDO with Australian hedge fund Basis Capital. In less than a month Goldman Sachs valuations on the deal declined by $37.5 million and Basis was required to post collateral.
June 20, 2007
Merrill Lynch seizes $850 million in assets from the two Bear Stearns hedge funds. Merrill tries to auction the bonds, but the auction fails
June 17, 2007
Two Bear Stearns subprime hedge funds collapse (Source: Levin report, page 47)
June 29, 2007
On June 29, 2007, the ABX Index and the value of single name CDS contracts referencing RMBS and CDO securities plummeted in value and continued dropping until mid-July. The head of the Goldman Sachs Structured Products Group Trading Desk wrote “There is absolutely no support at the lower levels from the street…we are in the middle of a market meltdown.” (Source: Levin report, page 434).
August 1, 2007
Bear Stearns’ two troubled funds file for bankruptcy protection and the company freezes assets in a third fund. (Source: www.investopedia.com)
August 29, 2007
Basis Capital bankrupt in Australia due to U.S. related credit derivatives (source: Reuters)
September 19, 2007
Goldman Sachs CFO David Viniar tells financial analysts on a conference call that Goldman was short mortgages and “that net short position was profitable.” (Source: Levin report, page 466).
November 13, 2007
Goldman CEO Lloyd Blankfein told a public audience at a securities industry conference that Goldman was, and would continue to be, net short the subprime markets. (Source: Levin report, page 470).
December 12, 2007
Federal Reserve establishes Term Auction Facility to provide bank funding secured by collateral (Source: Levin report, page 47)
January 17, 2008
Lehman Brothers cuts 1,300 jobs in its domestic mortgage division after previously cutting 2,500 jobs due to subprime lending problems. (Source: www.bankingtimes.co.uk)
March 14, 2008
Federal Reserve and JPMorgan Chase agree to provide emergency funding for Bear Stearns (. Under the agreement, JPMorgan would borrow from the Federal Reserve discount window and funnel the borrowings to Bear Stearns. Source: Forbes and www.datacenterknowledge.com)
March 16, 2008
JPMorgan Chase agrees to pay $2 per share for Bear Stearns on Sunday, March 16, a 93% discount to the closing price on Friday March 14. JPMorgan agreed to guarantee the trading liabilities of Bear Stearns, effective immediately (Source: New York Times).
March 16, 2008
Federal Reserve agrees to provide up to $30 billion of financing to support Bear Stearns’ “less liquid” assets (Source: New York Times).
March 24, 2008
JPMorgan Chase raises bid for Bear Stearns from $2 per share to $10 per share. JPMorgan also agreed to bear the first $1 billion of losses on Bear Stearns assets, with the Federal Reserve bearing the next $29 billion of losses. (Source: The Times of London)
March 24, 2008
Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns (Source: Levin report, page 47).
May 29, 2008
Bear Stearns shareholders approve sale (Source: Levin report, page 47).
May 30, 2008
JPMorgan Chase completes Bear Stearns acquisition (Source: Charles Schwab & Co. report)
September 7, 2008
U.S. takes control of Fannie Mae & Freddie Mac (Source: Levin report, page 47).
September 14, 2008
Lehman Brothers bankruptcy (Source: Levin report, page 47).
September 14, 2008
Merrill Lynch announces sale to Bank of America (Source: Levin report, page 47).
September 16, 2008
Federal Reserve offers $85 billion credit line to AIG; Reserve Primary Money Fund NAV falls below $1 (Source: Levin report, page 47).
September 16, 2008
Barclays agrees to pay $1.75 billion to take on core Lehman Brothers businesses, including $72 billion of trading assets and $68 billion of trading liabilities (Source: New York Times and The Guardian).
September 21, 2008
Goldman Sachs and Morgan Stanley convert to bank holding companies (Source: Levin report, page 47).
October 3, 2008
Congress and President Bush establish Troubled Asset Relief Program (Source: Levin report, page 47).
October 28, 2008
U.S. uses TARP to buy $125 billion in preferred stock at 9 banks, including Goldman Sachs (Source: Levin report, page 47).
November 25, 2008
Federal Reserve buys Fannie and Freddie assets (Source: Levin report, page 47).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Goldman Sachs during the period February 8, 2008 to March 16, 2009. Goldman Sachs’ borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing $100 million on March 18, 2008, with borrowings continuously outstanding from September 15, 2008 through November 27.
Average from
2/8/2008 to 3/16/2009
$2.2 billion
Average when Drawn
$11.6 billion
Maximum Drawn
$24.2 billion on October 15, 2008
Number of Days with
Outstanding Borrowings
75 days

The graph below shows the one month and one year default probabilities for Goldman Sachs from Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form credit model. Default probabilities began rising most sharply in the aftermath of the bankruptcy of Lehman Brothers on September 16, 2008 and peaked in November 2008 to February 2009 period, but the peak in default probabilities was at much lower levels than Goldman’s competitors:

Cumulative default risk peaked for Goldman Sachs on January 20, 2009, with a 5 year cumulative default risk of only 1.01%, a small fraction of the Barclays peak of 13.89% in March 2009.

Goldman’s first borrowing from the Federal Reserve was $100 million on March 18, 2008, the second business day after the Sunday March 16 announcement that JPMorgan Chase would absorb Bear Stearns in a Fed-supported rescue. The peak borrowing for Goldman Sachs from the Fed was $24.2 billion on October 15, 2008, but all borrowings were repaid by November 28, 2008. Part of the means of repayment was a $10 billion capital injection in late October 2008 under the Capital Purchase Program of the Troubled Asset Relief Program.

In the chart below, we compare Goldman Sachs’ funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Goldman Sachs’ average drawn borrowing of $11.58 billion ranks ninth of the firms analyzed in this series to date.

If one ranks the same firms by largest outstanding borrowing on a single day, Goldman ranks eleventh, with a peak borrowing of $24.2 billion, the same as the peak borrowings of Citigroup, and slightly less than the $28 billion post-bankruptcy borrowing of Lehman Brothers:

Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008

If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, Goldman borrowed a mere $100 million for one day, less than 1/1000th of the $101.1 billion peak borrowing by the consolidated JPMorgan, Bear Stearns and Washington Mutual. Goldman ranked only 31st when ranked by average borrowings outstanding.

If one analyzes the maximum borrowings during the Bear Stearns crisis, March 15-May 31, 2008, Goldman’s single $100 million borrowing ranks only 29th among large institutions analyzed:

Borrowings from the Commercial Paper Funding Facility

Goldman Sachs borrowed only once, for $10 million on October 28, 2008 for three months, from the Commercial Paper Funding Facility.

Implications of Funding Shortfall Data

By any measure, Goldman Sachs was a much less significant borrower from the Federal Reserve than any of its major competitors. That being said, its peak borrowing of $24.2 billion on October 15, 2008 was only slightly less than the $28 billion that the Fed would lend Lehman Brothers only after its declaration of bankruptcy.  This confirms one more time that the September 14, 2008 definition of “too big to fail” was changed almost immediately in the wake of what happened soon after.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:


Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From www.twitter.com/zerohedge Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at info@kamakuraco.com.  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
July 7, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.


Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as Co-Chair, Center for Applied Quantitative Finance, Risk Research and Quantitative Solutions at SAS. Don’s focus at SAS is quantitative finance, credit risk, asset and liability management, and portfolio management for the most sophisticated financial services firms in the world.

Read More