Fact and Fiction Behind Too Big to Fail

The Fed and the FDIC: Building Goldman Sachs’ Fortress

Jamie Dimon, CEO of JPMorgan Chase, claimed his big bank has a “fortress balance sheet.” JPMorgan Chase’s balance sheet was managed better than others over the past decade. But a mighty fortress isn’t quite what the world’s top regulators would call the biggest banks’ derivatives portfolios — contractual promises of future performance that are booked OFF their balance sheets. Weird things continue to happen. Goldman Sachs’ derivatives are a case in point. Taxpayers and Congress, beware.

During 2004, the year in which the Securities and Exchange Commission approved a new regulatory regime for the five largest U.S.-headquartered investment banks, Goldman Sachs established a small banking subsidiary, chartered in the state of Utah. The little banking subsidiary carried the U.S. government backing of the Federal Deposit Insurance Corporation. While the SEC declared the new regulatory regime defunct after the collapse of Lehman Brothers, Goldman’s little bank, Goldman Sachs Bank USA, soldiers on to this day, with some amazing developments.

An FDIC-guaranteed bank must file a call report quarterly with the FDIC. Take a look at the year end amounts of this FDIC-guaranteed bank’s assets, net income and derivatives as reported to its regulator. The total assets and net income are single amounts. The regulatory report has a detailed presentation of derivatives, captured in the spreadsheet. I provided the subtotals and totals. Note that the FDIC separates credit derivatives including credit default swaps from other types of derivatives (as does the Fed). (No small issue, but too big for this post.) (Click on the PDF file.)

  Goldman_Sachs_Bank_USA_Derivs_Income_Assets_Thru_2012.pdf (53.0 KiB, 294 hits)

It’s the size of the derivatives dumped into this little bank in 2008 during the meltdown that catches the eye. Note also the change in the state of the charter, from Utah to New York. When Goldman Sachs was approved as a bank holding company to bring it under Federal Reserve regulation in 2008, this change was part of what allowed the Fed to inject funds into the Goldman Sachs group. Another issue to note is the comparative size of derivatives held for trading and those held for other purposes (like hedging). Nearly all are held for trading.

A financial analyst would want to know how the size of these financial features in the bank compares to the parent corporation’s consolidated financial profile. Are these derivatives a small portion of the parent total compared to the portion of its income or assets? The answer follows. The Goldman Sachs Group, Inc., is also required to report quarterly to its regulator. In fact, the regulatory report submitted to the Federal Reserve follows the same format as the FDIC’s call report. The FDIC’s call report can be accessed through the FDIC itself. The similar Federal Reserve regulatory report is called Form FR Y-9C. The Fed’s report is very easy to access. Kudos to the Fed in this regard, by the way. Just search for “Top Bank Holding Companies” on the web. The Fed’s list of the top fifty should appear, by asset size. Each name is a hyperlink to that bank’s Federal Reserve regulatory reports, including the FR Y-9C.

The following spreadsheet shows the 2011 and 2012 assets, net income and derivatives for The Goldman Sachs Group, Inc., as reported to the Fed. I use the same layout.

  Goldman_Sachs_Inc_Consolidated_Derivs_Income_Assets_2011_2012.pdf (47.4 KiB, 339 hits)

The next short spreadsheet shows the percentages — the amount of assets, net income and derivatives in the Goldman Sachs Bank USA divided by the amounts in the parent’s consolidated regulatory report. The percentages vary. Their FDIC-guaranteed bank held less than 15% of their assets. It comprised more of Goldman’s net income. But it held and still holds all of its derivatives.

  GS_Bank_USA_vs_Consolidated_Percentages_2011_2012.pdf (29.1 KiB, 351 hits)

When one looks at all the biggest banks’ derivatives portfolios and the amounts booked in their FDIC-guaranteed subsidiaries, many questions arise. Since Goldman’s executives have testified to Congress that their firm serves institutional customers, not the general public, the immediate question here is why a very sophisticated Goldman continues to need taxpayer backing for its trading of derivatives, instruments used by sophisticated financial players, not the general public. Of course this makes Goldman’s counterparties on the other side of all these derivatives more comfortable. A knowledgeable analyst might want to understand the impact on Goldman’s collateral it has to post against its derivatives. Goldman Sachs Bank USA carries a one-notch better credit rating than its parent. Collateral is real money.

Those who claim that the financial bubble wasn’t about trading and eliminating the separation between investment and commercial banking need to explain what these spreadsheets reveal. They claim that the largest banks were already doing this in 1999 when Glass-Steagall was repealed. The repeal encouraged the growth of derivatives to the point where the government is backing derivatives trading, not just guaranteeing deposits to protect commercial loans.

 

Fairy Tale Capitalism: Fact and Fiction Behind Too Big to Fail

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Was the mortgage debacle the sole cause of the financial bubble's collapse? Do you believe those who say the elimination of Glass-Steagall barriers didn't contribute to its building? Fairy Tale Capitalism: Fact and Fiction Behind Too Big To Fail places the mortgage mess into a broader perspective. It explains how the Federal deposit guarantee was married to investment banking's trading intensity, why the Fed had no choice but to bail out the biggest banks and how derivatives played a poorly-understood, but equally important role in the crisis. In simple terms Emily Eisenlohr walks with those who live on Main Street down Wall Street's darker alleys.

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