Can Goldman dodge the Volcker rule?
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The Volcker rule is an attempt to ensure that banks which are too big or interconnected to fail — institutions which will certainly get bailed out if they blow up — don’t take inordinate risks on their own account. So this worries me:
Some institutions will be able to avoid facing the Volcker rule by shedding their insured deposits, according to U.S. Deputy Treasury Secretary Neal Wolin on Monday.
Goldman Sachs Group, which funds fewer than 5 percent of its assets with deposits, could easily change its funding profile to get out from under the rule.
Why should an enormous bank like Goldman get out from under the Volcker rule just by dint of not taking deposits? If it’s a leveraged institution with a risk of systemically-damaging failure, then it’s exactly the kind of bank which should be subject to the rule. Or is Treasury, here, trying to weaken Volcker’s intent?
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My impression is that insured depositors greatly contribute to a financial institution’s classification as “too big to fail”. That the government (for political or perhaps other reasons) would have an easier time forcing haircuts on both equity and debtholders (via cramdown, say) if depositors weren’t affected.
I think there’s something to an argument along the lines of: “It’s good to have FDIC insurance because it’s unrealistic to expect/undesirable to promote the idea that dispersed individual savers would assess banks’ financial health before choosing a place to deposit. However, we do not want abandon the hope/expectation that large, sophisticated lenders would be careful regarding whom they lend money to. And we should promote the expectation that they will not be made whole in the event of future meltdown.”
I wonder how that works for other dispersed and (financially) unsophisticated parties like warranty holders. It seems they’re another class that is likely to be made whole above other lenders.
They could make having a banking charter the trigger for being covered by the Rule – and since GS would have to pay back FDIC debt before jettisoning its banking charter, and the government says who can pay back that debt, the government could, theoretically, force GS to submit to the Volcker Rule.
I think it’s wrong for Goldman to take FDIC money and borrow from the Fed window to engage in “risky” transactions. I find nothing wrong with them giving up that status to engage in riskier transactions provided they know THEY CAN NEVER CHANGE THEIR MIND. That said their dealings in high frequency trading need to stop regardless.
Volcker dealt with this in his NYT op-ed. He acknowledged that there would still be some big capital markets banks, but that these could be made safe through capital rules, leverage limits and the introduction of “living wills”
Whether it is credible that the US authorities would really allow Goldman to fail is another matter.
http://www.nytimes.com/2010/01/31/opinio n/31volcker.html?pagewanted=2&ref=opinio n
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