According to the following article in Bloomberg, Goldman Sachs hangs onto its bank holding status just in case the market comes round to letting investment banks fail when they become insolvent (the next time round)!
Soros Says Moral Hazard Looms; Volcker Says Banks Can Fail
by John Detrixhe - Bloomberg Businessweek
April 11 (Bloomberg) -- Moral hazard in the financial system “looms larger than ever before,” even after the Dodd- Frank law gave U.S. federal agencies tools to regulate institutions that may be deemed too big to fail, said billionaire investor George Soros.
“The evidence is overwhelming that the first priority of the authorities is to prevent a market collapse, and everything else has to take second place,” Soros, chairman of Soros Fund Management LLC, said yesterday at a conference in Bretton Woods, New Hampshire.
Paul Volcker, former Federal Reserve Chairman, challenged the notion that large financial institutions wouldn’t be allowed to collapse, and asked Soros whether the extra yield on Goldman Sachs Group Inc. bonds relative to Treasuries would widen if the firm gave up its bank license.
“Probably currently it wouldn’t go up very much, but it would go up,” Soros said.
The Fed allowed investment banks Goldman Sachs and Morgan Stanley to convert to bank holding companies in September 2008. Dodd-Frank, the financial-regulation law enacted in July, gave the Federal Deposit Insurance Corp. authority to wind down complex firms after the bankruptcy of Lehman Brothers Holdings Inc. exacerbated the credit crisis and forced the U.S. to bail out companies including American International Group Inc.
“So you’re not 100 percent sure,” Volcker replied. “You want a tough administrator, you get Sheila Bair up here and she’ll tell you what will happen if you fail on her watch.”
Federal Deposit Insurance Corporation Chairman Bair told bankers last month that while the Dodd-Frank law is not “perfect,” it will strengthen the sector by giving the agency tools to regulate “too-big-to-fail” institutions.
Goldman Sachs’ $1.5 billion of 5.15 percent notes due January 2014 traded at 107.21 cents on the dollar to yield 111.6 basis points more than similar-maturity Treasuries as of April 8, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities fell to a low of 75 cents in October 2008.
“It’s clear they’re clinging to this banking license they got during the crisis because they think the market would permit them to fail if they weren’t a bank,” Volcker said. “Otherwise, why would they be holding onto the banking license with all the additional regulation?”
Volcker, 83, is known for taming inflation in the 1980s as Fed chairman and he provided advice on economic issues as well as the rewriting of regulations for financial institutions. The law enacting those regulations included the so-called Volcker rule, which banned proprietary trading at banks and restricted their investments in private-equity and hedge funds.
He was President Barack Obama’s head of Obama’s Economic Recovery Advisory Board and was replaced by General Electric Co. Chief Executive Officer Jeffrey Immelt.
While the Volcker provision “was loosened up a bit,” it’s incorrect to say that it was completely watered down, the former Fed chairman said. There’s still “intense” lobbying by the banking industry to influence financial reform, he said.
Europe’s refusal to allow members of the monetary union to restructure their debt has added to moral hazard in the financial system, Soros said. Portugal will start negotiations with the European Union and the International Monetary Fund this week on a rescue package estimated at 80 billion euros ($116 billion). The country was forced to seek aid, following Greece and Ireland, after its budget gap helped drive up borrowing costs.
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