- Bronte Capital: Goldman’s Orphan Month
… the observant amongst you will notice that these three month periods are not contiguous. Indeed the three months to November 2008 and the three months to March 2009 conveniently forget the month of December 2008. That is right. Goldman Sachs changed its balance date – and there is a one month period not reported in the usual quarterlies. An “orphan month”. Now December 2008 was a pretty bad month. Probably the worst on record.The net loss applicable to common shareholders for the orphan month was just over a billion dollars. The four month period was just profitable. Am I surprised that Goldies had an “orphan month” and stuffed the bad news in it? No. If you were – then obviously you are new to investment banking.
Does any one still believe in fundamental analysis using publicly available financial statements?
Singapore’s central bank effectively devalued the city state’s currency as the Government warned that the global economic crisis would bring the worst economic plunge on record. Singapore’s unprecedented economic contraction between January and March was described by analysts as “horrendous”. First quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.
But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. A previous prediction of a contraction of between 2 and 5 per cent was revised to between 6 and 9 per cent. It was the third time forecasts have been adjusted in the past five months.
- Bank of England: Why banks failed the stress test
For at-the-money options on UK equities, the insurance premium would have been under-priced by around 45%; for options well out-of-the-money – say, 50% below equity prices at the time – the mis-pricing would have been nearer 90%. This is risk under-pricing on a dramatic scale.
First, the potential losses arising from under-pricing of risk are large. Consider the earlier example of a disaster-myopic writer of deep out-of-the-money put options on UK equities, priced using distributions drawn from the Golden Decade. Let’s say that, in June 2007, a five-year put had been written on the FTSE-100 with a strike price 40% below the prevailing market price. Today, that put would be at-the-money. Hedging that position would crystallise a loss roughly 60 times the income received from having written the option in the first place.