0 votes

Letter from Ron Paul & 9 Congressmen to Bernanke about Goldman Sachs

Letter from Ron Paul & 9 Congressmen to Bernanke about Goldman Sachs
IF YOU WANT A PDF COPY, SEND ME A P.M.
Message me if you want it in PDF

Ben Bernanke
Chairman
Federal Reserve System
20th Street & Constitution Avenue, NW
Washington, DC 20551

Dear Chairman Bernanke:

In the fall, Goldman Sachs secured access to government funding by converting from an investment bank into an ordinary bank. Despite this shift, the CFO of the company, David Viniar, said last week that the company is continuing to operate as if it were still a high-risk investment bank: “Our model really never changed,” he noted in a quote to Bloomberg. “We’ve said very consistently that our business model remained the same.”

This statement seems accurate. Earlier this year, the Federal Reserve granted a temporary exemption to Goldman Sachs from standard bank holding company Market Risk Rules, allowing the company to continue operating as if it were an investment bank. The company and its employees have taken full advantage of its new government subsidies, and the retained ability to bet big. In its most recent quarter, Goldman Sachs earned high profits of $2.7 billion on revenues of $13.76 billion, with 78 percent of this revenue derived from high-risk trading and principal investments. It paid out much of this revenue in compensation, setting aside a record $772,858 for each employee at an annualized rate. The company’s own measurement of risk, its Value-at-Risk model, recently showed potential trading losses at $245 million a day, up from $184 million last May.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market. The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money. This is the very definition of “heads we win, tails the taxpayers lose.”

It is worth noting that there sometimes might be good reasons to grant temporary regulatory exemptions, considering that companies cannot instantly change their business model. Still, given Goldman Sachs’s last quarter results and public statements that it is not changing its business model, we are worried that the company is using its regulatory freedom to evade capital requirements and take outsized risks with taxpayers on the hook for losses.

With this in mind, our questions are as follows:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company. Please justify this statement.

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that “As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders’ equity (common shareholders’ equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings.” As a percentage of capital, that’s a lot of long-term unsecured debt. Is any of this coming from the Government? In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk. What is your overall view of Taleb’s argument, and of the utility of Value-at-Risk models as regulatory tools?

As we work through legislative conversations regardling systemic risk, these questions are taking on increased significance. We appreciate your time and the efforts you are making to explain the actions of the Federal Reserve to Congress, and to taxpayers.

Sincerely,

Signers are Alan Grayson, Ron Paul, Walter Jones, Brad Miller, Dan Lipinski, Elijah Cummings, Tom Perriello, Maxine Waters, Jackie Speier, and Maurice Hinchey.
__________________

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

More coverage of the letter

Goldman Sachs' risk draws controversy

By jim
Created Jul 28 2009 - 2:35pm
Goldman Sachs just can't get out of the cross hairs when it comes to its earnings. People are still worked up over its big second quarter--they're either applauding or booing or just scratching their heads. Several members of Congress would like some answers to some pointed questions.

The New York Post reports that Reps. Alan Grayson, (D-Fla.), Ron Paul (R-Texas), Maxine Waters (D-Calif.) and Walter B. Jones (R-NC), have delivered a letter to the Federal Reserve, asking it to "explain why it granted a special exemption allowing Goldman to take on more risk over the past few quarters."

In their minds, the banks took taxpayer money and then used it to boost risky activity to make more money. This at a time when less risk might have been warranted. But most of the risk was assumed via trades for others--market making in liquid markets. I'm not sure this will go anywhere. Now, if Goldman had posted a big loss, things might have been different.

http://www.fiercefinance.com/story/goldman-sachs-risk-draws-...

http://www.nypost.com/seven/07282009/business/congress_debat...

Follow me on Twitter for breaking news on Ron Paul and the U.S. Economy:

www.twitter.com/AbolishTheFed

Follow me on Twitter for breaking news from a libertarian perspective

www.twitter.com/AbolishTheFed

Bump! Great letter but here should be many more ....

signatures on it......
"I prefer peace. But if trouble must come, let it come in my time, so that my children can live in peace".
Thomas Paine

"We need to attract people who create more light, than heat" (Fortune cookie-8/14/2001)

bump

Follow me on Twitter for breaking news on Ron Paul and the U.S. Economy:

www.twitter.com/AbolishTheFed

Follow me on Twitter for breaking news from a libertarian perspective

www.twitter.com/AbolishTheFed

Great article, thanks.

Like we will ever get any truthful answers.

The History of Goldman Sachs.

This company operates worldwide:

http://en.wikipedia.org/wiki/Goldman_Sachs

The firm has offices in all global financial centers and acts as a financial advisor and money manager for corporations, governments, and wealthy families around the world.

Comment : No wonder they don't want their operation governed by the "Laws" of the U.S. Constitution.

beesting

Bumpity Bump Bump!~

BUMP!

These Criminals....

Have to be stopped at any cost....enough is enough..GS needs to be shut down...end of story...

Is life so dear or peace so sweet as to be purchased at the price of chains and slavery? Forbid it, Almighty God. I know not what course others may take, but as for me, give me liberty or give me death.”
– Patrick Henry, speech to the Virginia Convention

“The Internet is the first thing that humanity has built that humanity doesn't understand, the largest experiment in anarchy that we have ever had." - Eric Schmidt

Front Page Material-

Just a glimpse at the type of questioning that will accompany an audit!

Yes Front Page!

Because inquiring mind's want to know!

bu

mp