Facebook doesn’t care where Goldman gets its funds

By Felix Salmon
January 6, 2011
NYT is reporting that Goldman Sachs only made its $450 million investment in Facebook after its in-house private equity fund, Goldman Sachs Capital Partners, passed on the deal.

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The NYT is reporting that Goldman Sachs only made its $450 million investment in Facebook after its in-house private equity fund, Goldman Sachs Capital Partners, passed on the deal.

Many people — including the NYT — have been talking a lot in recent days about the “ancillary business” that Goldman is likely to get as a result of this investment, including fees from any future IPO and wealth-management fees for looking after Mark Zuckerberg’s fortune. There’s no formal agreement about any such things, I’m sure, but the general understanding seems to be that if Goldman scratches Facebook’s back by raising a couple of billion dollars for it now, then Facebook will scratch Goldman’s back in future with various lucrative bits of investment-banking business.

Goldman, it seems, would have loved to get all those fees without having to put its own money into the deal — and then when GSCP said no, it ponied up the requisite cash itself.

But that means something important: that from the point of view of Facebook, Goldman’s client, there’s really no difference between Goldman investing and GSCP investing — whether the money was borrowed from the Federal Reserve or invested by rich clients. Goldman Sachs and GSCP are two faces of the same company and either way Goldman is likely to end up with those ancillary fees.

That, in turn, makes a mockery of all the talk about Chinese Walls between banks’ sell-side and buy-side operations, or the idea that speculative trading is fine, the Volcker Rule notwithstanding, just so long as it takes place in the asset-management arm rather than the bank itself. (Ask Bear Stearns just how insulated a parent bank is from losses at a subsidiary fund.)

If an investment from a bank’s asset-management operation gives that bank all of the relationship-based upside of a principal investment by the bank itself, then it’s clearly silly to think of those investment subsidiaries as being divorced from the investment-banking business. It’s something regulators should think hard about, as they put together clear rules and guidelines about what kind of activity is acceptable where.

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Comments
2 comments so far

Bear Stearns CHOSE to bailout the creditors of their fund – which was not a subsidary – because it was “the right thing to do”. They didn’t have to unlike the SIVs Citi had.

To be clear the High Yield fund were completely separate legal entities from BSAM which was the ***management*** company for those funds. The ***funds*** were not subsidaries and have no recourse to BSAM or BSC, nor does BSC or BSAM have recourse to them.

Posted by Danny_Black | Report as abusive

If the purpose of the Volcker rule is to impede a highly-leveraged entity with a Federal Reserve backstop making risky investments, it would seem to matter enormously to regulators where the money came from. It appears here that it matters to GSAM as well; GSAM apparently didn’t feel under sufficient pressure from the bank itself to make the investment. And naturally Facebook doesn’t care who the ultimate investors are; it doesn’t affect them.

I guess it hadn’t occurred to me that the purpose of the Volcker rule might be to put fed-regulated entities at a competitive disadvantage; to the extent it did that, I figured it was epiphenomenal, and not the ultimate purpose. Perhaps I misunderstood.

Posted by dWj | Report as abusive
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