|Goldman Sachs has slashed its exposure to hard-hit leveraged loans and mortgages, letting it jump on distressed opportunities now emerging in the market, Chief Financial Officer David Viniar said on Tuesday.
"We have been focused on strengthening our capital and liquidity levels while simultaneously right-sizing troubled asset classes, such as leveraged loans," he told reporters in a briefing.
Goldman has cut funded and unfunded leveraged-buyout loan exposure to $14 billion from a peak of $52 billion last August, when investors suddenly balked at the easy terms and low rates brokers were offering.
The recently announced sale of Alltel by investors including Goldman Sachs' private equity arm to Verizon Wireless reduced that exposure further to $11 billion, he said.
Likewise Goldman shed residential mortgage securities, which sparked the broader credit crisis last summer, to about $15 billion on Goldman's balance sheet from $19 billion at the end of February.
Goldman's holdings of "prime" mortgages dropped the most, to $8.5 billion at the end of May from $12.2 billion in February. Exposure to Alt-A loans, which require less documentation from borrowers, and "subprime" mortgages were little changed at about $5 billion and $1.8 billion, respectively.
Meanwhile commercial mortgages, another troubled area as the United States economy weakens, were reduced to $17 billion from $19.4 billion during the quarter. Viniar said virtually everything sold for more than their marked-down values on Goldman's books.
Yet Viniar stressed that Goldman is also actively adding assets, using its balance sheet to pick up bargains in markets when many investors remain stuck to the sidelines.
Goldman deployed capital from distressed investment funds as well as from its own balance sheet to pick up sour bank loans, mortgages and other securities.
"In the residential market, particularly, we make active markets. So while there was a net reduction of about $4 billion, multiples of that were bought and sold during the quarter," he said.
Viniar's comment about increased trading activity, combined with Lehman's recent disclosure that it sold $147 billion of assets during the second quarter, offers some signs that frozen debt markets are starting to thaw.
"It feels like from a credit market point of view, we're a ways through what happened. I think there's a lot (of the crisis) behind us. There is less to come than there was," said Viniar, who declined to guess how long the crisis would last.
"Clearly, the first weeks of March were the bottom, at least up to now. Right now there is less concern about systemic illiquidity risk. People are focused on individual investments and credits," he said.
"There is a better tone, in that way."
Market movement also helped Goldman reduce the scale of its level 3 assets -- a designation for real estate, investments and other rarely-traded assets that don't have a reliable market value.
Viniar said Goldman's level 3 assets fell to $78 billion, or 7 percent of total assets at the end of May, from $96 billion at the end of February. About half the decrease represents asset sales, with the remainder upgraded to level 2, he said.