Thursday, November 06, 2008

A chat with my favorite broker, on the possible demise of Goldman Sachs

Broker: hearing bad rumors about Goldman

Cav: probably way long commodities

Cav: i know their prop traders are really underwater. buttresses my theory that since Fischer Black's passing, Goldman is just another firm now

Cav: the corollary is that, since Black died, Robert Rubin is just another suit

Broker: it is bizarre how global alpha were so poor

Cav: Black was the guy saying how LTCM was doomed well before their blowup. Goldman could be the new LTCM

Cav: Rubin was the guy who "discovered" Black, brought him to Goldman, and then rode all the way to the managing partner office

Cav: and then SecTreas

Cav: Black dies in 1995, and Goldman hits its peak a few years later, following his risk inertia

Broker: i would argue GS peaked later than that

Cav: right, but under my theory, it is because Black moved them ahead on risk
Broker: not the stock (2006), but the company

Cav: look at notre dame, how great is charlie weis?
Cav: great coach, horrible, horrible recruiter

Cav: so you separate Rubin and Goldman from Black, and they are all of a sudden very average, but because their risk culture, processes and controls are so advanced vs. the competition, they continue to mine the gold

Cav: but then the main force keeping from them becoming the next LTCM dies, so they will revert back to overconfident risk folks. Benoit Mandelbrot is great, and Nassim Taleb is not bad (except for his writing)--but they are not Fischer Black

Cav: think about it--the Black-Derman-Toy interest rate derivatives model gave Goldman so much proprietary advantage in the 80s and 90s. What happened to Scholes & Merton? They joined LTCM and blew up. What happened to Derman-Toy and Goldman ...? I predict a gentle demise, if not dramatic blowup

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