Volcker Says Goldman Can’t Have Its Cake and Eat It, Too
Paul Volcker, former Fed chair and current Economic Recovery Advisory Board chair, says that it’s time for Goldman Sachs to make a choice: Either it’s a bank or it’s not.
In the midst of the financial crisis, Goldman Sachs and Morgan Stanley sought licenses to become bank holding companies in order to gain access to the Fed’s emergency lending capacity. Despite the increased regulation and capital requirements, they’ve stayed “banks” while continuing to use their cash reserves in proprietary trades (i.e., investing their own money in the stock and other markets). Volcker’s proposed banking rules would end that practice, as it has the potential to drain banks reserves — and then the Fed’s reserves and, in the case of failure, the FDIC’s coffers as well.
Upon hearing that Goldman Sachs had no intention of giving up its banking license, Volcker said:
“The implications for Goldman Sachs or any other institution is, do you want to be a bank?” Volcker, a former chairman of the Federal Reserve, told the Financial Times. “If you don’t want to follow those (banking) rules, you want to go out and do a lot of proprietary stuff, fine, but don’t do it with a banking license.”
Goldman, as likely comes as no surprise, wants to go out and take risks with its money and use the Fed (and taxpayer dollars) to limit the risk that its bets are faulty. The problem is that Volcker knows full well that the last time Goldman had an absolute hedge against loss was when it convinced AIG to insure investments that were destined to go bad in order to profit off the insurance payout. He doesn’t think they should be able to do the same thing to the Federal Reserve.