A Dear Ben Letter

It seems a few in Congress are really wondering why Goldman Sachs is being enabled to gamble with taxpayer money and how it is they were given exemption to the normal rules to limit risks of bank holding companies. Will Congress get a Dear John Letter in response?

Ben Bernanke
Federal Reserve System
20th Street & Constitution Avenue, NW
Washington, DC 20551


Dear Chairman Bernanke:


In the fall, Goldman Sachs secured access to government funding by converting from an investment bank into an ordinary bank.  Despite this shift, the CFO of the company, David Viniar, said last week that the company is continuing to operate as if it were still a high-risk investment bank: “Our model really never changed,” he noted in a quote to Bloomberg.  “We’ve said very consistently that our business model remained the same.” 


This statement seems accurate.  Earlier this year, the Federal Reserve granted a temporary exemption to Goldman Sachs from standard bank holding company Market Risk Rules, allowing the company to continue operating as if it were an investment bank.  The company and its employees have taken full advantage of its new government subsidies, and the retained ability to bet big.  In its most recent quarter, Goldman Sachs earned high profits of $2.7 billion on revenues of $13.76 billion, with 78 percent of this revenue derived from high-risk trading and principal investments.  It paid out much of this revenue in compensation, setting aside a record $772,858 for each employee at an annualized rate.  The company’s own measurement of risk, its Value-at-Risk model, recently showed potential trading losses at $245 million a day, up from $184 million last May. 


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.” 


It is worth noting that there sometimes might be good reasons to grant temporary regulatory exemptions, considering that companies cannot instantly change their business model.  Still, given Goldman Sachs’s last quarter results and public statements that it is not changing its business model, we are worried that the company is using its regulatory freedom to evade capital requirements and take outsized risks with taxpayers on the hook for losses. 


With this in mind, our questions are as follows:


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?

As we work through legislative conversations regardling systemic risk, these questions are taking on increased significance.  We appreciate your time and the efforts you are making to explain the actions of the Federal Reserve to Congress, and to taxpayers. 



The signers are: Alan Grayson, Ron Paul, Walter Jones, Brad Miller, Dan Lipinski, Elijah Cummings, Tom Perriello, Maxine Waters, Jackie Speier, and Maurice Hinchey.

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Goldman Sachs is an example of a larger problem.

Financial conglomerates going back to their old ways but with a new twist: desperation. Desperation to achieve high returns and take on more risk with taxpayer money. For example: Wells Fargo.

Wells Fargo & Co., the bank that boosted its U.S. property-related holdings by acquiring rival Wachovia Corp., is adding to those investments with purchases of mortgage-backed bonds, even as Federal Reserve Chairman Ben S. Bernanke warns of another wave of defaults.

Wells Fargo, who still has not paid back its TARP money, is taking on additional risks. It is betting that it deeply discounted assets for a song and just maybe these assets will pay off despite more defaults in commercial real estate. Sad thing is that since TARP money is allegedly so fungible they could be doing this with taxpayer gift.

Check this quote out from the Bloomberg article and this is priceless:

Banks buying mortgage-backed debt, which caused much of the $1.5 trillion of writedowns and credit losses at the world’s largest financial companies since 2007, can be looked at “two ways,” said Thomas Atteberry at First Pacific Advisors LLC in Los Angeles.

“One is: Your past history tells me you don’t know how to assess this risk that well,” he said in an interview. “The other is: Well, you’re bright people, you won’t make that same mistake again. Personally, I’m not convinced of the latter.” Atteberry was Morningstar Inc.’s fixed-income manager of the year in 2008

The joke is on us. Financial conglomerates have not learned their lesson.

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