Lawmakers Question Goldman’s Profits, Privilege

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Monday, July 27, 2009 at 3:37 pm

Less than two weeks after Goldman Sachs posted record quarterly profits, some congressional lawmakers are wondering if the Wall Street giant isn’t taking dangerous risks in its investment strategy — risks similar to those that led to the recent financial collapse.

In a letter today to Federal Reserve Chairman Ben Bernanke, 10 House lawmakers are asking why Goldman — which last year converted to a bank holding company in order to tap bailout funds — is still allowed to behave largely unregulated, like the investment bank it previously was. The resulting dynamic, the lawmakers conclude, is that Goldman has been granted the best of all worlds: It’s bank status made it eligible for taxpayer-funded gifts — which it’s repaid — while a February exemption from bank regulations allowed it to invest those funds without the risk-limiting oversight of the government.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market.  The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money.  This is the very definition of “heads we win, tails the taxpayers lose.”

To its credit, Goldman at least is being honest about its unique position. The company’s Chief Financial Officer David Viniar told Bloomberg earlier this month that, “Our model really never changed.”

“We’ve said very consistently that our business model remained the same.”

Signing the letter were Reps. Alan Grayson (D-Fla.), Ron Paul (R-Texas), Walter Jones (R-N.C.), Brad Miller (D-N.C.), Dan Lipinski (D-Ill.), Elijah Cummings (D-Md.), Tom Perriello (D-Va.), Maxine Waters (D-Calif.), Jackie Speier (D-Cal.) and Maurice Hinchey (D-N.Y.).

The six questions from the lawmakers to Bernanke follow:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company.  Please justify this statement.

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that “As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders’ equity (common shareholders’ equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings.”  As a percentage of capital, that’s a lot of long-term unsecured debt.  Is any of this coming from the Government?  In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk.  What is your overall view of Taleb’s argument, and of the utility of Value-at-Risk models as regulatory tools?

Comments

1 Comment

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Comment posted July 28, 2009 @ 9:25 am

It's good to know someone is actually listening to Taleb.


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