Goldman Sachs, JPMorgan require more collateral from funds

When the financial crisis started to clear, it was clear that the tolerance by many dealers to assume risk had fallen (credit crisis news). Into that void stepped Goldman Sachs (NYSE: GS), which willingly expanded its trading operations--much of it on an agency basis--and reaped the reward in the form of expanded spreads, higher commissions and less competition. It--along with JPMorgan --was also left as one of the more active dealers in over-the-counter derivatives markets.

Bloomberg notes that the two firms have reaped some big rewards. They are able to require hedge funds (hedge fund news) to post more collateral, while putting less collateral themselves. The result for Goldman Sachs, as of the end of December, was a $110 billion imbalance in its favor. You certainly can't blame anyone for wanting to extract more collateral from counterparties. That's prudent risk management.

In contrast, Bloomberg notes, Citigroup (NYSE: C) paid out $11 billion more in collateral on over-the-counter derivatives than it collected at the end of 2009. The issue here is whether the market will force collateral requirements any lower. In theory, other dealers could require less in collateral and thus win some business from Goldman Sachs. We'll just have to see. The reality may be that there are few firms with enough heft to be a massive market maker in OTC derivatives.

For more:
- here's the Bloomberg article

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