Goldman Sachs Recent VaR Trend: Gambling with Taxpayer Money?

The Huffington Post, in an article detailing a congressional group's 27 Jul 2009 letter to the Federal Reserve, questions whether recent trends in Goldman Sachs's Value-at-Risk (VaR) in fact indicate the company's more general and sinister willingness to "gamble" with taxpayer funds.

Goldman Sachs is using its new taxpayer-subsidized status to bring increased risk to the financial system, a group of House members charged Monday. They... sent a letter to the Fed asking for an explanation of why Goldman Sachs is being allowed to speculate wildly even while officially redesignating itself a bank holding company, which theoretically means stricter regulation... [T]he new designation [allows Goldman Sachs]... access to a host of valuable taxpayer subsidies; they are required to reduce the risk associated with their investment activity... [A risk exemption] was granted in February -- and Goldman went on to take even greater risks...

The new designation becomes quite important within the context of Bloomberg's Christine Harper's note regarding Goldman Sachs's capital costs:

Goldman Sachs’s value-at-risk, or VaR, has climbed in tandem with the buffer of capital the firm has at its disposal.

By most accounts (see bloomberg links above), the Goldman Sachs's increase in risk appetite so measured now stands at roughly 33% higher than May 2008's pre-bailout levels. This trend has held since the February exemption, despite competitor MorganStanley's explications that it will "scale back" trading risk.

It certainly seems like Goldman Sachs's has been unofficially granted a license to operate without regard to regulation or common sense. As such, it is good that congress appears interested in such operations.

The letter to the Federal Reserve Bank was signed by ten United States Congressmen, including eight Democrats and two Republicans, primarily from states on the country's eastern and western coasts, and it references a number of issues that have been circulating in the financial blogosphere of late:

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."...[G]iven 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.

I am nonetheless inclined to think that such a letter, regardless of how strongly worded, will have little or no effect on daily operations at the Fed, SEC or Goldman Sachs. More likely, real change might be effected as a result of President Obama's recent call for SEC investigation of Goldman Sachs, but if in fact this investigation comes to full fruition, it will be a lengthy and obscure procedure.

To read the congressional group's letter to the Fed (2009-07-27) in its entirety, click here.
To read the full Huffington Post article (2009-07-27), click here.
To read the full Bloomberg article (2009-07-15), click here.