Goldman Sachs has a $3 billion line of credit out to troubled small-business lender CIT Group. News will be coming out later this afternoon about the fate of CIT, whose shares have been halted on the NYSE. But whether or not CIT is bailed out, Goldman probably won’t be hurt very much.
We’ve finally uncovered the answer to the mystery of how Goldman has limited its exposure to CIT. And what we’ve found indicates that Goldman really would have very little exposure to CIT’s failure. What’s more, this risk hasn’t been passed along to others in a way that might create broad ripples if counter-parties on hedges had to pay out following a CIT collapse.
That’s because Goldman’s lending facility is basically a fully-collateralized repo facility. Any money drawn down by CIT is collateralized with physical collateral. That is, not securities of unknown value but things like real estate and aircraft. In addition, Goldman has taken out a small amount of credit default swaps intended to cover any decrease in the value of the collateral.
This is great news, and evidence that the financial system is actually working quite well. Rather than a series of domino hedges that all may topple, Goldman has taken a very conservative approach to limiting its risk from CIT. It also means that if CIT is allowed to fail, we don’t have to worry about some counter-party collapsing because it had sold too much CDS on CIT.
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