Tuesday, March 2, 2010

The 51% Rule of Trading

An oil trader friend once told me that his job was to make money 51% of the time. That way he would probably keep his job and his employer (an energy division at an investment bank) would be happy. If the 51% rule is the standard for traders then Goldman Sachs has nailed it. It made over $100m in net trading revenues on 131 out of 263 trading days in 2009. It lost money on only 19 days. Total earnings of more than $13bn came from net revenues of $45.2 bn that more than doubled the previous year's.
To make these record earnings Goldman Sachs also took on more risk. In VaR terms, the bank said it estimated the most it could lose on any given day was $218m, compared with $180m in 2008. The bank also noted in its financial statement that reputational risk (i.e. bad PR) might be a negative factor going forward. I'd say that if taking on more risk against the government's wishes and spinning it into gold while weathering some of the worst PR Goldman Sachs has ever had creates a profit of $13bn, then they are doing something right. The traders' jobs are safe - for the time being.

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