Morgan Stanley, Goldman Diverged on Value-at-Risk as 2011 Ended
January 22, 2012, 7:40 PM ESTBy Nicholas Dunbar
Jan. 20 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley reported diverging value-at-risk in the fourth quarter as volatility of some trading positions increased in the wake of the euro-zone crisis.
Morgan Stanley said so-called VaR was reduced to $123 million from $130 million in the previous quarter, the Bloomberg Risk newsletter reported today. Goldman Sachs said its average daily VaR increased to $135 million from $102 million amid heightened volatility. The firms, which released quarterly earnings this week, define VaR as their biggest anticipated one- day trading loss 95 percent of the time.
Banks came under increasing pressure during last year’s second half to manage risk linked to interest rates and Europe amid the region’s sovereign debt crisis. In the first days of this year, New York-based Morgan Stanley took another step, completing an amendment to derivative contracts it had with the Italian government as a counterparty. That reduced credit exposure by $3.38 billion before hedges.
Morgan Stanley cut its hedges against Italian default, reporting $591 million of credit-default-swap protection, down from $2.78 billion at the end of the third quarter. The bank doesn’t recognize hedges on Italy purchased from Italian banks.
The Italian treasury uses derivatives, mostly interest-rate swaps, to reduce the cost of interest payments on the country’s $2 trillion bond liabilities. Morgan Stanley said its net derivatives counterparty exposure to Italy was $4.2 billion before the restructuring, which settled on Jan. 3. Morgan Stanley didn’t disclose the notional amounts of its derivatives with Italy. European governments don’t normally post collateral on swap contracts with banks.
French Risk
Morgan Stanley’s disclosures also show that the bank has a short position on French sovereign debt, which it uses to offset a larger long exposure to French non-sovereign institutions. The short position was $1.7 billion on Dec. 31, down from $2.3 billion at the end of the third quarter, contributing to a net positive French exposure of $1.7 billion. The bank has a net $411 million short position on Portuguese sovereign debt, the filings show.
Morgan Stanley’s chief financial officer, Ruth Porat, said on a conference call with analysts yesterday that the fourth- quarter decline in VaR was due to reduced activity, especially in credit products, and the closing out of derivative positions with MBIA Inc. as part of its settlement with the bond insurer.
Goldman Sachs said its exposure to European sovereigns and companies before hedges was $3.9 billion, down by $300 million from the previous quarter, without providing details. The New York-based firm’s VaR increase was caused by “significantly greater volatility in the interest-rate category,” Chief Financial Officer David Viniar said on a Jan. 18 conference call with analysts.
The bank includes sovereign and corporate debt within the interest-rate category for VaR calculation purposes.
“A divergence between cash and derivative pricing impacted hedging and inventory management,” Viniar said. “Very unusual divergence made it very, very hard to manage.”
--With assistance from Michael J. Moore in New York. Editors: Deirdre Fretz, David Scheer
To contact the reporter on this story: Nicholas Dunbar in London at ndunbar1@bloomberg.net
To contact the editor responsible for this story: Ted Merz in New York at tmerz@bloomberg.net.
