Goldman's memo on how to cash in on euro crisis


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Goldman Sachs showered its hedge fund clients with ideas on how to profit from financial chaos in the eurozone, as markets gyrated wildly last month.

The giant investment bank provided ideas for complicated derivatives trades that would pay off if confidence ebbed in the soundness of the European banking system, and a top trading strategist told clients he believed the banks would need $1 trillion of extra capital to weather the crisis.

Details of a 54-page strategy note originating from Goldman's trading desk and sent to favoured clients surfaced in a US newspaper yesterday, laying bare the bleak economic and financial outlook of at least one senior strategist inside the firm – not just for the eurozone but for the US, China and the rest of the global economy, too.

The alarming outlook was penned by Alan Brazil, a veteran strategist who sits on the Goldman trading desk, in a separate division to that which produces the bank's more formal and more widely disseminated economic and company research.

"Here we go again," Mr Brazil says in the report, amid pages of charts displaying negative statistics similar to those that portended problems before the 2007-09 financial panic. "Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world's base currency?" Mr Brazil penned his note on 16 August, amid the big vacillations on financial markets that followed the loss of the US government's AAA credit rating and the European Central Bank's attempt to stabilise interest rates for the Spanish and Italian governments.

The report, released by the Hedge Fund Strategies group in Goldman's securities division, is written in the plain language of the trading desk, whose strategists are often more sought after by short-term traders and speculators than the bank's other analysts. A copy was passed to The Wall Street Journal, which was first to publish details on its website.

The report includes detailed information ranking the leverage and capital cushions of 77 major European banks, to expose the weakest among them.

Mr Brazil's trading ideas included constructing a complicated currency options trade to profit from a decline in the euro, and using credit default swaps to bet against a bank-heavy index of European companies.

Goldman conducts business with many of the governments and banks implicitly criticised in Mr Brazil's report, and the company yesterday sought to downplay its contents. "As a matter of course, financial institutions publish reports suggesting strategies to fit clients' needs," it said. "Whether clients want to hedge existing exposures or take long or short market positions, our goal is to help them meet the challenges the markets present."