Goldman Sachs has been insisting that its exposure to troubled bank CIT Group is limited thanks to collateral and hedges. But a person familiar with the matter tells us that Goldman has not been a big buyers of credit default swaps on CIT debt. So the question is: how has Goldman hedged its CIT exposure.
There is some evidence that Goldman’s CDS purchases on CIT amount to less than 35 mlllion, according to a source. That’s a drop in the bucket compared to Goldman’s $3 billion loan agreement with CIT Group.
So how has Goldman hedged itself against CIT? It’s a mystery that echoes the enigma of how Goldman had hedged its exposure to AIG. That hedge never got explained, and many were left sceptical that it was even possible. We don’t doubt that Goldman may have some creative way of hedging against CIT’s failure but we’re not smart enough to figure out what it is.
One possibility is that Goldman simply syndicated out all of its loan commitments to CIT. In the past, Goldman has been a very active sydnicator of its loans, pushing far larger portions of loans out than many other lenders. Of course, you have to imagine that if this is Goldman’s “hedge,” the buyers of that loans might be damn angry.
In any case, we’re once again left with Goldman’s mystery hedging practices butting up against the potential bailout of another failed financial firm. If Goldman wants to get away from the now widespread idea that it is a vampire squid on the face of the American economy, it might start by explaining away this mystery.
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