Bloomberg News

Goldman’s ‘Confusing’ Default Swaps Aren’t Wrong, Viniar Says

October 19, 2011

Oct. 19 (Bloomberg) -- Goldman Sachs Group Inc. Chief Financial Officer David A. Viniar said the increase in the cost to insure against a default by his company isn’t wrong. It’s just “confusing.”

“I don’t believe markets are wrong,” Viniar said in response to an analyst’s question during a conference call yesterday after the company reported a quarterly loss. “I think it’s confusing.”

Goldman Sachs executives including Viniar, 56, and Chairman and Chief Executive Officer Lloyd C. Blankfein, 57, have supported so-called mark-to-market accounting, arguing that risk-management depends on valuing assets according to market prices. In an April 2009 speech to the Council of Institutional Investors, Blankfein said New York-based Goldman Sachs “wouldn’t know how to assess or manage risk if market prices were not reflected on our books.”

Viniar said yesterday that Goldman Sachs executives have been “confused and disappointed” by the rising prices on the firm’s own credit-default swaps, which investors use to hedge against losses on the company’s debt or to speculate on its creditworthiness.

“Given how strong our capital is, our liquidity is, the maturity of our funding, the balance sheet, we kind of scratch our heads a little bit,” Viniar said. “But it really hasn’t affected anything other than our emotions. We don’t like seeing it but it hasn’t had a big effect.”

Yield Increase

The cost of insuring against a default of Goldman Sachs’s debt for five years climbed to 354 basis points, or $354,000 for every $10 million of debt insured, at 3:31 p.m. yesterday, from 207 basis points on Sept. 1, according to prices provided by London-based CMA. The cost rose above 430 basis points earlier this month. A basis point is one-hundredth of a percentage point.

The rise in the cost of CDS has been accompanied by an increase in the yield on the company’s corporate debt, Viniar said, adding that swings in the so-called cash market haven’t been as large.

The extra yield over Treasuries that investors demand to hold Goldman Sachs’s $3.85 billion of 3.625 percent bonds due in February 2016 has climbed to 355 basis points from 268 basis points on Sept. 1, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The increase in debt yields and CDS prices have “had minimal impact on our business, so far,” Viniar said.

The company booked $450 million of revenue in the third quarter from so-called debt-valuation adjustments, Viniar said. DVAs stem from a U.S. accounting rule that requires banks to record gains when the value of their own debt has declined on the theory that they could profit by buying it at a discount.

Goldman Sachs has about $5 billion of “plain vanilla” debt maturing by year-end, Viniar said.

Given the rise in the company’s spreads, “we’ll decide as the quarter goes on whether we want to replace it or we want to wait for a better time,” he said.

--With assistance from Shannon D. Harrington in New York. Editors: Peter Eichenbaum, William Ahearn

To contact the reporter on this story: Christine Harper in New York at

To contact the editor responsible for this story: David Scheer at

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