A blockbuster Bloomberg news story today (“Secret Goldman Team Sidesteps Volcker [Rule Ban on Prop Trading] After Blankfein Vow”) is even more explosive than first appears. What got all the attention was Goldman’s past and ongoing proprietary trading, arguably in violation of the proposed Volcker Rule prohibition and the CEO’s “vow” that Goldman “shut off all that activity.” The article details how Goldman “has worked around regulations curbing proprietary bets at banks.” (Prop trading is discussed in greater detail below.)
That’s bad enough, but even more shocking buried at the end of the article is Goldman’s CEO, Lloyd Blankfein’s, apparent admission that “the bulk of [Goldman’s] profits [are] from proprietary trading instead of client work.”
The CEO’s apparent admission that Goldman is not only “working around” vital financial reform rules, but doing so in such large amounts is critically important because it is the 5th largest bank in the US by assets. It is a too-big-to-fail Wall Street bank, which was bailed out by the US taxpayers in 2008 and not just by getting tens of billions of TARP money. It was also allowed to convert to a bank holding company in record time (about a week) and, thereby, given full access to the Fed’s discount window (unlimited and immediate liquidity, cheap money, etc.). But, that wasn’t all: it also took advantage of other rescue programs the Fed set up to bailout the Wall Street banks. (See our Cost of the Crisis report for details on some of these programs.)
Goldman Sachs and all the other Wall Street banks would have failed and gone bankrupt if the US government and the US taxpayers didn’t bail them out in 2008 and 2009. The financial reform law was passed and the rules, including the Volcker Rule, are all being put in place to reduce the likelihood that Wall Street ever again threatens our financial system and economy due to their reckless investments and trading. That includes, importantly, proprietary trading, the very activity Goldman is still reportedly doing lots of.
Today, we sent the attached letter personally to each regulator at the five agencies (the Federal Reserve Board, FDIC, SEC, CFTC and OCC) who are right now considering finalizing the currently pending proposed Volcker Rule bringing this news and apparent admission to their attention. Here’s the text of the letter:
“Regarding your ongoing consideration of the Volcker Rule, Better Markets would like to call your attention to the attached article, ‘Secret Goldman Team Sidesteps Volcker After Blankfein Vow,’ from Bloomberg News. The article describes strategies, reportedly already in place at Goldman Sachs, to evade or game the Volcker Rule prohibitions on proprietary trading and hedge fund operation as they are set forth in the currently proposed rule. For example, as described in the article, these strategies include taking trading positions purportedly for periods longer than 60 days, which would allow a bank to claim their trades are technically not a violation of the Volcker Rule because the proposed rule has a presumption that prohibited trading takes place within 60 days.
“These activities are reported to already be very substantial, even just a few years after the financial crisis. For example, Goldman’s ‘proprietary stock holdings were so large that markdowns on stakes in Asia helped wipe out revenue from client work there in 2011, according to data compiled by Bloomberg.’ Goldman’s CEO, Lloyd Blankfein, appears to confirm such significant proprietary trading when he was asked does ‘Goldman Sachs make the bulk of its profit from proprietary [trading] instead of client work?’ Blankfein didn’t say ‘no.’ He merely says Goldman ‘no longer wages its own money without client interaction.’ Whatever that means, it was not a ‘no,’ meaning that directly or indirectly Goldman appears to still be making ‘the bulk of its profit from proprietary [trading] instead of client work.’
“As we set forth in comment letters submitted to you earlier, two changes to the proposed rule would effectively reduce bank incentives to evade the Volcker Rule. The first is to break the link between trader bonuses and gains from trading, no matter what the time period involved in the trade. The second is to back up the Volcker Rule prohibitions with swift, certain and meaningful penalties for traders, supervisors and executives who violate them. Such provisions would not only be relatively easier to implement, monitor and enforce by regulators and market participants, but it would also reduce the opportunities for evasion and gaming while enacting the rule as required by the law.
In light of the Bloomberg story, which illustrates just one way banks have already maneuvered around parts of the rule as drafted, we urge you to consider strengthening the proposed rule to eliminate their incentives for evasion.
(“Prop trading” is when Wall Street banks make huge, leveraged, high risk, complex bets that generate bonuses so large that it would make the Pharaohs of Egypt envious. JP Morgan’s so-called London Whale Trade is a recent example, although the hoped-for bonus became a run-a-way loss of between $6 and $9 billion. And, that’s the problem with prop trading: astronomical riches for the traders when the bets score, but even bigger losses when the bets lose, which can threaten the too-big-to-fail banks and lead to taxpayer bailouts. Read here for “Everything You Need to Know About the Volcker Rule.”)