Goldman Sitting On Extra $110 Billion In Collateral It Squeezes From Hedge Fund Clients

goldman lloyd blankfein

At least that’s the gist of this possibly-overdramatic Bloomberg article by Michael J. Moore and Christine harper titled: Goldman Sachs Demands Derivatives Collateral It Won’t Dish Out.

The article actually cites Goldman Sachs (GS) and JPMorgan (JPM) — though JPMorgan doesn’t make for as good headlines.

Both New York-based banks are demanding unequal arrangements with hedge-fund firms, forcing them to post more cash collateral to offset risks on trades while putting up less on their own wagers. At the end of December this imbalance furnished Goldman Sachs with $110 billion, according to a filing. That’s money it can reinvest in higher-yielding assets.

“If you’re seen as a major player and you have a product that people can’t get elsewhere, you have the negotiating power,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who ran the prime brokerage unit at Bear Stearns Cos. from 1999 to 2006. “Goldman and a handful of other banks are the places where people can get over-the-counter products today.”

Basically, it sounds good that clients are being forced to post more collateral.

And here’s how the maths works out for Goldman:

Goldman Sachs’s $110 billion net collateral balance in December was almost three times the amount it had attracted from depositors at its regulated bank subsidiaries. The collateral could earn the bank an annual return of $439 million, assuming it’s financed at the current Fed funds effective rate of 0.15 per cent and that half is reinvested at the same rate and half in two-year Treasury notes yielding 0.948 per cent.

Read the whole story at Bloomberg >

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at