Goldman Trades Shouldn’t Get U.S. Aid, Volcker Says (Update1)
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By Simon Kennedy and Christine Harper
Dec. 12 (Bloomberg) -- Goldman Sachs Group Inc., which took $10 billion in U.S. bailout funds last year, shouldn’t get taxpayer support if the firm focuses on trading over banking, according to former Federal Reserve Chairman Paul Volcker.
The “safety net” provided by the U.S. government “should not be extended beyond the core commercial-banking business,” Volcker, 82, said in an interview yesterday at Deutsche Bank AG’s Berlin office, where he was attending a conference. “They can do trading and do anything they want, but then they shouldn’t have access to the safety net.”
Goldman Sachs, the most profitable investment bank in Wall Street history, has reaped more than 90 percent of its pretax earnings this year from trading and so-called principal investments, which include market bets on securities and stakes in companies. The other 10 percent came from advising clients on takeovers and capital-raising and from asset management, which includes managing hedge funds and buyout funds.
When the collapse of smaller rival Lehman Brothers Holdings Inc. triggered a crisis of investor confidence last year, regulators allowed Goldman Sachs and Morgan Stanley, another competitor, to convert into bank holding companies. That put the New York-based firms under the Fed’s purview and gave them access to cheap funding.
The two firms received federal guarantees on new debt issues, as did commercial banks and some companies with financing businesses, such as General Electric Co.
Must ‘Be Sorted Out’
Goldman Sachs does “a lot of proprietary trading” and General Electric “does a lot of kind of complicated financial services,” said Volcker, an economic adviser to President Barack Obama. “This is one of those kind of things that have to be sorted out.”
In a speech today in Berlin, Volcker said the financial crisis was still continuing and the U.S. economy is “pretty dependent” on government support. The test for policymakers now is to time the exit from their emergency fiscal and monetary stimulus, he said.
“You’ve not got much room for exiting right now,” Volcker said. “The difficult thing is to be ready to take the action before it becomes obvious and that’s a challenge.”
Limiting Support
Since January, Volcker, who was Fed chairman from 1979 to 1987, has called for regulators to provide government support only to banks that provide essential services like deposit- taking and business payments. He has suggested prohibiting them from owning or sponsoring hedge funds, private-equity funds or from engaging in proprietary trading.
Goldman Sachs returned the $10 billion it received from the U.S. Treasury last year with interest. As of September, $20.85 billion of the firm’s $189.7 billion of unsecured long-term borrowing was guaranteed by the Federal Deposit Insurance Corp., according to a company filing.
Lucas van Praag, a spokesman for Goldman Sachs, said that the majority of the firm’s trading revenue comes from transactions with clients and not from proprietary trading, or bets with the firm’s own money.
“Proprietary trading accounted for less than 10 percent of revenues and earnings this year,” van Praag said. “Since 2003, proprietary trading has accounted for just 12 percent of net revenues.”
Goldman Sachs generated $203 billion net revenue from 2003 through September, meaning that about $24 billion was proprietary trading.
‘Own Two Feet’
David Viniar, Goldman Sachs’s chief financial officer, said in October that the firm doesn’t benefit from any implicit government guarantee.
“We operate as an independent financial institution that stands on our own two feet,” Viniar said in a conference call with reporters on Oct. 15.
Anne Eisele, a spokeswoman for Fairfield, Connecticut-based General Electric, declined to comment. By the end of 2009 about $59 billion of the debt of GE Capital, General Electric’s finance subsidiary, will still be guaranteed by the FDIC, according to a company presentation.
Volcker said there is a “temptation” at some banks to return to the risk-taking practices that enable them to pay large bonuses. “It’s natural, you like to return to normalcy, make some money and get on with it,” he said.
“I’m very interested in using this crisis as a way to avoid the next one,” Volcker said. “This isn’t any time to go back to business as usual.”
To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.
Last Updated: December 12, 2009 16:13 EST
