I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I’m not reading tone well these days. After all:
Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make “merchant banking investments” in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.
I find it very difficult to believe that any serious bankers, no matter how “annoyed,” wouldn’t have known this. [links in original]
is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.
Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.
Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, “murdered” we’re now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.
So the weekend was going to be a rocky one. And various plans in various stages were executed:
- Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
- Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
- Endangered IB #5, The Vampire Squid, called its buddies at Treasury.
Maybe it didn’t go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to
lootsupport from the U.S. Treasury.
And now we are told—in answer to the question Simon Johnson initially raised:
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? [italics mine; links, again, from the original]
The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.
But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?