economics

February 25, 2010

‘Volcker rule’ gives Goldman stark choice

Filed under: Uncategorized — ktetaichinh @ 9:27 pm
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By Chrystia Freeland and Francesco Guerrera in New York

Published: February 12 2010 00:44 | Last updated: February 12 2010 00:44

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// ]]>Goldman Sachs and other banks should give up their bank status if they want to avoid the ban on proprietary trading proposed by the White House, Paul Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said.

“The implication for Goldman Sachs or any other institution is, do you want to be a bank?” Mr Volcker said in a video interview with the Financial Times. “If you don’t want to follow those [banking] rules, you want to go out and do a lot of proprietary stuff, fine, but don’t do it with a banking licence.”

// // Mr Volcker, a former chairman of the Federal Reserve, was thrust into the centre of the financial reform debate last month, when Mr Obama endorsed his proposal to separate proprietary trading from commercial banking, naming the policy the “Volcker Rule”.

Markets are wondering how the rule would affect groups such as Goldman Sachs and JPMorgan Chase, which have proprietary trading desks and private equity units. The two groups also enjoy financial holding company status and the consequent right to borrow money from the Federal Reserve and accept retail deposits.

Institutions that give up their bank status to continue proprietary trading would lose “the special privileges of a bank”. “Don’t expect the support you would get from being a bank within the club of insured deposits and access to the Federal Reserve and all the loving attention you get as a bank organisation,” Mr Volcker said.

Goldman declined to comment but executives say that if the Volcker Rule is passed, it would probably sell its deposit-taking bank, which is an insignificant part of Goldman’s $900bn-plus balance sheet.

However, Goldman leaders do not believe they would have to give up the financial holding company status acquired at the height of the 2008 crisis to escape the rule’s ban on in-house trading.

Mr Volcker said giving up bank status would not allow financial institutions to “escape from all oversight and regulation . . . you’re going to be subject to some capital restraints, some leverage restraints, liquidity provisions”.

He argued that a key to drawing this distinction between banks and non-banks would be the creation of a robust “resolution authority” with the power and resources to take over and close down a non-bank. “The whole point of this is importantly to get at the moral hazard problem . . . these non-banks, if they get in trouble, are not going to be saved. Their creditors can’t sit there and say, I’m going to be protected. The management can’t expect to stay in office. The stockholders can expect to lose.”

Mr Volcker said the resolution process for non-banks would be “euthanasia rather than life support and that’s a big difference”. He said the US should press ahead with the Volcker Rule unilaterally if necessary, but that a consensus on the plan between the US, UK, Germany and France was both preferable and achievable.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

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