Goldman’s Wednesday’s SEC filing shed some light on how the company can make massive profits right now, according to the Wall Street Journal.
The company’s interest cost for borrowing money long term right now comes to, on average, just 0.92%.
This is very much due to smart hedging whereby the firm converted fixed interest rate obligations into floating ones by using derivatives.
Thus as the Fed cut interest rates, the floating rates on some of Goldman’s debt adjusted downward.
It obviously doesn’t hurt either that the company has the U.S. government guaranteeing some of its debt. It is also implicitly backed as a “too big to fail” entity. These factors surely help bring down the interest rates Goldman creditors will demand from the firm.
Yet perhaps even beyond government support, Goldman deserves some credit. It’s low interest cost beats that of its also-government-supported competitors by a mile. And at 0.92% they can make easy money just by lending money back to the U.S. government at a higher interest rate.
WSJ: The low rate on long-term borrowings also appears to give Goldman a competitive edge. At 0.92%, the firm is well below J.P. Morgan Chase’s 2.09%. Since J.P. Morgan is funding a markedly different mix of assets from Goldman, the comparison mightn’t be apples-to-apples. Morgan Stanley is a closer comparison. It has yet to release its third-quarter long-term borrowing cost, but in the second quarter Goldman’s 1.26% was less than half of Morgan Stanley’s 3.2%.