By Christine Harper
Oct. 10 (Bloomberg) -- Goldman Sachs Group Inc., the world's biggest securities firm, said its holdings backed by pools of bonds and loans dropped 53 percent in the third quarter, the second consecutive decline amid a global credit contraction.
The ``fair value'' of retained interests in collateralized debt obligations and loan obligations was $1.77 billion at the end of August, down from $3.79 billion three months earlier, the New York-based firm said in a regulatory filing. Investments in mortgage-backed securities fell 16 percent.
Wall Street firms including Goldman wrote down the value of mortgage-backed securities and high-yield loans during the third- quarter after record U.S. home foreclosures and the collapse of two Bear Stearns Cos. hedge funds that bet on home loans quashed investor demand for high-risk debt. Goldman was more adroit than Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns in trading to offset the losses, enabling the firm to post its highest-ever quarterly fixed-income revenue last month.
``I would be very happy to know that my exposure is 50-odd percent lower than it was,'' said David Castillo, who trades asset-backed bonds at Further Lane Securities in San Francisco.
Goldman's filing today doesn't say whether its holdings shrank because the firm marked them down, or sold them, or both.
``There was nothing in the mortgage space that didn't decline in value,'' David Viniar, Goldman's chief financial officer, said in an interview after the Sept. 20 earnings report. ``Anything we had was down.''
Diminished Appetite
Still, Goldman said at the time that mortgage profits rose ``significantly'' in the third quarter after the firm took offsetting positions that rose in value as the price of mortgages and related securities dropped.
Revenue in Goldman's fixed income, currency and commodities division, the firm's largest, rose 71 percent to a record $4.89 billion -- even after $1.48 billion of losses for marking to market the value of non-investment grade credits.
Today's filing with the U.S. Securities and Exchange Commission shows how dwindling investor appetite has drastically slowed Goldman's business of packaging home loans into bonds. The firm securitized $2.86 billion of residential mortgages during the three months ended Aug. 31, down from $18.63 billion a year earlier. For the first nine months of the year, securitization of residential mortgages totaled $22.9 billion, down by more than half from $55.2 billion a year earlier.
Off-Balance-Sheet
Goldman held $1.82 billion of subprime home loans and mortgage-backed securities and $6.8 billion of leveraged loans at the end of August, the filing said. They were counted as so- called Level 3 assets, which don't have active market prices to determine their value.
In off-balance-sheet entities, Goldman held $32.9 billion of CDOs and CLOs in August, down from $57 billion in May. The firm said its worst-case potential loss on those assets declined to $14.2 billion from $15.8 billion. Off-the-books holdings of mortgage- and asset-backed securities soared to $4 billion from $98 million in May, boosting the maximum potential loss to $1.1 billion from $70 million at the end of the second quarter.
``From my perspective, the best time to have been buying mortgage-backed securities as well as certain types of mortgages was over the last month or so,'' said Further Lane's Castillo.
The filing also disclosed that Goldman reaped more than $100 million from trading on 23 days during the quarter, up from 16 days in the second quarter and equal to 23 days in the first.
Value at Risk
Goldman made a loss on 18 days, including six when it lost more than $100 million, according to the filing. There were five days in the quarter when its losses overshot its calculation of average value at risk. That compares with three days when losses exceeded VAR estimates in all of fiscal 2006.
The 53 percent drop in the firm's retained interests in CDOs and CLOs follows a smaller decline last quarter, when the value of the holdings fell 29 percent to $3.79 billion from $5.35 billion three months earlier.
Goldman shares declined $3.26, or 1.4 percent, to $235.94 in New York Stock Exchange composite trading. They've gained about 18 percent this year.
Last Updated: October 10, 2007 19:49 EDT
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