Goldman Sachs wins largest concessions on Volcker rule
Bank gets permission to hold on to $6.2bn of illiquid asset
Goldman Sachs has emerged as a big beneficiary from US regulators’ decision to grant banks more time to comply with parts of the Volcker rule, which was aimed at forcing them to wind down risky activities.
While best known for its clampdown on banks’ ability to trade with their own money, the rule — part of the Dodd-Frank financial overhaul instituted after the financial crisis — also restricted them from owning hedge funds and private equity assets.
Several big banks have disclosed in their most recent quarterly filings that the Federal Reserve has granted them extra time to sell “illiquid” investments, and none has disclosed greater relief than Goldman.
A filing this week confirmed it had received an extension for “substantially all” of its investments in $6.2bn worth of so-called legacy covered funds — $4.5bn worth of private equity funds, as well as credit, real estate and hedge funds.
For critics, the regulatory concession is the latest example that Volcker has been watered down. Banking lobbyists, meanwhile, are trying to persuade the US government to reconsider the rule.
“Banks have been gaming the Volcker rule deadlines from the beginning,” said Dennis Kelleher of the advocacy group Better Markets. “There is now a multi-pronged attack by the biggest banks on Wall Street to kill the Volcker rule, this is just one of the prongs.”
Among other banks, Citi disclosed this week that it has also been granted its request for an extension, although its investments in the illiquid assets were much lower than Goldman at $416m.
Morgan Stanley has said it had asked for an extension of $1.9bn worth of illiquid funds but it has yet to say it has been granted the extra time. PNC Financial Services, the sixth-biggest US bank by assets, said earlier this year that it had been granted a five-year extension covering $300m worth of funds.
Lawyers and analysts said banks had long-term contractual commitments to some of their investments and could be forced into fire-sales if they were not given more time.
The Federal Reserve agreed in December to grant extensions. But each bank was required to make an individual application showing how the assets were illiquid and describe “specific efforts” to divest.
Kevin Petrasic, head of Financial Institutions at White & Case, said: “There certainly could be a perception that this is kicking the can down the road.
“But it’s important to remember that when Congress put the law in place the intent was ultimately to give banks sufficient time to dispose of illiquid assets without causing undue harm.”
David Fanger, a former New York Federal Reserve official who is now senior vice-president at the rating agency Moody’s, said that before the crisis Goldman was more focused than most of its peers on private equity sponsorship and alternative investment management.
Regulators will only give banks more time to dispose of such investments if they were made before 2014. Private equity or hedge fund investments made since then need to be “Volcker compliant”, subjecting them to restrictions including size caps.
Volcker compliance has been causing a regulatory headache for banks. Last month Deutsche Bank became the first big bank to be penalised for alleged violations of the rule.
The Fed said Deutsche had failed to adequately monitor whether its traders were dealing on behalf of clients, or putting the bank’s own money on the line.