Saturday, September 13, 2008

There's still faith on Wall Street despite deflationary returns

Almost 70 per cent of Britain’s biggest equity pension funds have lost savers money in real terms over the past decade.

Seventeen of the biggest 25 funds have returned less than the FTSE All-Share index over the past three, five and ten years, data compiled by adviser Hargreaves Lansdown for The Sunday Times shows.

That means that a staggering £17 billion of pension savers’ money is languishing in dismal funds. They have increased by an average of only 22 per cent since 1998, while inflation has run at 33 per cent, meaning investments are losing money in real terms.

But the biggest deflation is in the value of Level 3 assets. Let's look at the sacred Goldman Sachs, and their pricing of Level 3 assets, since they are supposed to have the most Phd's ascertaining the value of them.

In Goldman's latest quarter, ending May 2008 their Level 3 losses on cash instruments was $944 million.

In their previous quarter, ending February 2008, their Level 3 losses on cash instruments was $3.23 billion.

Goldman, however has been able to offset these losses with Level 3 gains on derivatives. As of their latest quarterly report Goldman had economic exposure to these derivative contracts of $78.7 billion dollars after all netting and cash collateral has been subtracted out. So it's true counterparty exposure.

What is the ratings of Goldman's counterparties to these derivaties, in May, before the all holy hell which is now currently engulfing Wall Street?

AAA 11%
AA 33%
A 27%
BBB 12%
BB 15%
Unrated 2%

Anyone know AIG's current rating? Isn't Lehman still rated A and still nobody can find a buyer for their dreck?

What good is a hedge, if who you are hedged with can't pay? Ask those who cut a deal with the monolines. Isn't that the problem with AIG? If they get downgraded, they'll have to pony up another $15 billion for swaps they have already written.

Goldman reports this week, and everybody seems to think it will help stabilize the financials. With $78.08 billion of Level 3 assets, and $78.7 billion of derivative exposure to counterparties, it shows there is still some companies that have some faith on Wall Street.

I'm not buying it though.

But I didn't buy their $147 year end barrel of oil call either!