Is Goldman Breaching The Volcker Rule With Its Facebook Deal?
Felix Salmon raises some interesting questions about Goldman Sachs' stake in Facebook.
The basic question he asks regards the letter and spirit of the Volcker Rule, which prohibits banking institutions from engaging in proprietary trading and other investments as principals.
Salmon writes "I’m not saying that the Facebook investment is illegal — for one thing, the details of the Volcker Rule have yet to be fully hashed out, which means it doesn’t yet have the full force of law. But this does look like it violates the spirit of Dodd-Frank."
The Volcker Rule, of course, is intended to limit the risk exposure of bank holding companies.
The idea behind it is pretty simple: If a bank is too big to fail — if it has access to virtually unlimited funds at nominal rates — it should not be able to gorge itself on risky assets and highly speculative trades.
Many observers, even those who don't typically consider themselves friends of financial regulation, seem to think this is a good idea.
Salmon is of course correct in saying that the details of the Volcker Rule are not fully fleshed out yet.
Most of the proposals that I've read about seem based around the notion of limiting banks risk exposure to a fraction of some of capital ratio.
The thinking being that banks require adequate capitalization — and the best way to maintain that capitalization is to limit risk exposure to small fraction of their capital. Most plans that I've heard discussed use tier 1 capital as the basis for the risk calculation.
By any standard, $500 million is a small proportion of Goldman Sachs' total capital.
But Salmon is on to something here — and it's bigger than capital requirements.
Salmon points out: "As Robert Cyran says, the deal “looks like classic merchant banking”, where banks invest as principals in client companies. Under the Volcker Rule, however, I thought that only investment banks could make such bets — not regulated bank holding companies with access to Federal Reserve funds."
It's not about a risk ratios — it's about tone.
Why should Goldman Sachs have virtually unlimited access to taxpayer subsidized funding – and still get to do risky merchant banking deals involving private companies that average taxpayers can't buy on any exchange?
If someone asked you that, how would you answer the question?
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