THE PLANK OCTOBER 3, 2009
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At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point)--hence the brouhaha over Steven Friedman’s shareholdings.
Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). U.S. banks or bank holding companies would not generally be allowed to undertake such transactions--in fact, it is annoyed bankers who have asked me to take this up.
Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion?
If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)
Increasingly, the issue of “too big to regulate” in the public interest is being brought up--an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?
Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.
In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging U.S. bank balance sheets and all American taxpayers?
[Cross-posted at The Baseline Scenario.]
3 comments
SJ: Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? GW: After a year in which the intimate bond between Congress, the White House, Wall Street, Paulson, Geithner, the New York Fed and Goldman Sachs have been exposed in ways never before imagined by those who actually believed these kinds of things do not happen in our democracy, how could anyone ask this except rhetorically? Why in the world would anyone still grapple with the "precise nature" of these relationships given the manner in which they are deeply embedded in the very systemic relationship itself between economic wealth and political power in America? That's like asking, "would someone please explain to me the precise nature of the right wing's barely disguised attacks against Obama" without mentioning racism or the Southern Strategy in the Republican party. Johnson focuses on the technical anomalies, as though if we looked these words up in a dictionary the definitions wouldn't quite jibe with the stuff we are reading in the media. Furthermore, we are expected to believe that The Fed "slipped up" many times over the past decade without delving into how one person might perceive these "slip ups" from very different pecuniary vantage points. Will the Congress "slip up" too and pretty much leave the current healthcare system alone? It's as though the expression "political economy" had long since been established to be just one more Marxist fairy tale. Really, what this sounds like to me is the embodiment of a mainstream media having to reconcile the past year with the belief that crony capitalism itself is still the anomaly here----that the system is basically on the level and if we can stop Goldman Sachs from operating in this manner things will get back to, uh, normal. george walton [d/a/j]
- iambiguous
October 3, 2009 at 7:12pm
"....China's largest independent carmaker Geely Automobile Holdings Ltd announced Wednesday it will raise 2.59 billion Hong Kong dollars (334 million U.S. dollars) selling convertible bonds and warrants to a fund managed by Goldman Sachs Group Inc..." At the margin, it sure looks as if Goldman Sachs is using its preferential access to capital through borrowing directly from the Federal Reserve to invest in a Chinese automaker. That somebody would give them a regulatory waiver to do so, sure suggests that somebody's got some 'splainin'.
- malahat
October 3, 2009 at 8:04pm
Re: Dr. Johnson's comment that, "...there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging U.S. bank balance sheets and all American taxpayers?" I think it has also led to financial asset inflation in developed markets that, for instance, has caused US equity prices to jump about 50% while the US economy was shedding about 2 million jobs. Some might think that the speculative bubble has already arrived.
- malahat
October 3, 2009 at 8:10pm