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Wednesday, June 09, 2010

Stiglitz and the "Goldman Sachs Rule"

From the NYT Dealbook:

"Joseph E. Stiglitz, the Nobel Prize-winning economist, wants the financial regulatory bill to bar financial firms that give up their government-backed bank charters from ever being able to seek government assistance again. 

The proposed rule, which Mr. Stiglitz said should be called the “Goldman Sachs Amendment,” would force these firms to choose whether they want to be regulated banks, with all the government protections and restrictions, or unregulated investment banks, allowed to trade as they wish without a safety net."

Absolutely.  But it should be much more than that - any firm that paid back TARP should be barred from ever being able to seek government assistance again.    Unfortunately, since the big boys are now "too bigger to fail,"  in reality I worry that the Government will be there with a backstop next time as well.  Back to the article:

"Mr. Stiglitz is concerned that banks like Goldman Sachs and Morgan Stanley, which do not have large retail banking operations, could switch back and forth, giving up their charters as bank holding companies to partake in risky activity on one day and then reapplying for it the next if things go wrong and they need government help."

Well, I'm really not worried about GS and MS giving up their BHC charters and then re-applying for them constantly, but anyway, make it a one way ticket once they give them up (which they may be incented to do, if any sort of semi-strict Volcker Rule is passed.)

"Goldman Sachs and Morgan Stanley became bank holding companies in the fall of 2008, at the height of the financial crisis, in order to gain access to cheap federal funds as liquidity dried up in the market. The government quickly granted the bank charters, even though the two investment firms did not have a significant retail banking presence, in order to prevent them from going under. They remain bank holding companies today, benefiting from cheap funding from the discount window. This has allowed them to juice up their returns in their trading and investment banking divisions."

As many people have already noted, this seems completely absurd.  The point of the protections for bank holding companies (commercial banks!) is to protect retail depositors!  That goal has been totally bastardized under the guise of bailing out these investment banks.  

Stiglitz's rule is just the beginning - we need to make sure that there is no TARP II.  The big boys paid back their TARP funds because they said they were healthy and didn't need the money.  There should be no second chance.

-KD

disclosure:  long a GS July 1x2 call spread (155-170) that is destined to expire worthless.

14 comments:

getyourselfconnected said...

Any rule or whatever will be rendered crap in the face of "tanks in the street" ot other such nonsense the next time. At least we could feel good for a bit if a new law was passed along the lines you mention, but it would just be tossed aside for systemic risk.

Kid Dynamite said...

and that is precisely the problem...

getyourselfconnected said...

Precisley indeed. We need grown ups in charge but thats another dream world.

call me ahab said...

exactly-

what a joke it all is-
GS and MS have the best of both worlds-

and guaranteed success- leveraged trading and zero percent financing-

they need to push on- and accept the risk for any profit potential-

or else be constrained by USG controls

Transor Z said...

Walked in to Citizens today and saw a posting saying they are no longer participating in the Transaction Account Guarantee Program (guarantees 100% of funds in non-interest bearing accounts). Back to the old $250k FDIC limit.

As I write this, waiting for my freaking Citizens accounts to load on another tab... 3 minutes...

Transor Z said...

Hey KD, maybe you should do a post on ratio spreads as an alternative to market orders.

Yangabanga said...

I never feel good about any new regulation because either the lobbyists have eviscerated it already or they will soon.

Even without them what starts as a good idea gets hopelessly lost in the horse-trading it takes to get it done. You end up with some feel good stuff that does very little except hurt the people who don't have someone to protect them (usually small businesses these days). oh and expands government, of course.

"It has been said that democracy is the worst form of government except all the others that have been tried."
Sir Winston Churchill

Kid Dynamite said...

yanga - you could make that same Churchill quote about Capitalism...

TZ - i'm not sure what you mean about ratio spreads as a market order substitute...

Ken said...

KD,

I am proud of you. No offense intended, but in the past, you have usual sounded like a shill on all matters related to the the giant vampire squid.

They need to take this one step further and revoke Goldman's status as a bank holding company immediately.

Kid Dynamite said...

ken - i think i've been a consistent advocate of CAPITALISM. That means that I believe if you buy dogshit from GS, you're responsible for knowing, digging deep, and finding out that it's dogshit, and don't have a right to cry to the government if you lose money.

It also means that i don't think the big banks (and non-banks!) should have been bailed out and allowed to continue to operate as usual.

Anonymous said...

@KD:

Ratio spreads and other trading tactics as a substitute for being a dope. -TZ

Kieran McCarthy said...

While the big banks may be too bigger to fail, I can't imagine that a second bank bailout would be politically palatable at this point. I think most Congressfolk would prefer collapse than to attach their names to a second bailout.

Daniel said...

I'm not even going to ask why you would go long GS. Ok, I'll ask. Why in the world would you go long GS?

Kid Dynamite said...

TZ - i'm trying to help people NOT do stupid things! oh - i get it - you're referring to my 1x2 call spread. 1x2s are HORRIBLE! do as i say, not as i do!

Daniel - i'm not long GS - i'm long a GS 1x2 call spread. it was a cheap way to get upside exposure, with the view that the SEC case is bullshit and the stock would bounce, but not bounce too far.

it didn't work! although i could still unwind it for only a small loss...