The Private Equity for Families Blog

To Live With The Classes, Sell To The Masses

I was waiting at a traffic light in Naples Florida, and a radio jingle about “going first class” with Marcus by Goldman Sachs captured my attention.  Goldman is selling savings accounts called “Marcus” to the masses and advertising on the radio????

This wasn’t the Goldman Sachs I remember. The feared counterparty no one wanted to trade against is now offering poor schlubs a chance to piggyback on Goldman’s vast reservoir of financial advantage, and maybe offering a toaster oven to the first 30 depositors?? This was too good to be true for the consumer. Clearly someone at Goldman had lost their money-making compass?

Then I remembered something I read in the Saturday edition of the WSJ about the FDIC voting 3-1 to suspend the Volker rule which was reenacted as part of Dodd Frank reforms in 2008. Was Goldman just looking for cheap funding for a new product line?

Banks Trading Is Good For America

That rule basically prohibits banks from using depositor funds to invest in proprietary trading, venture capital, hedge funds and private equity. After 2010 when the banks could no longer trade in stocks or bonds, liquidity in the bond market really suffered, but at least Goldman was not speculating with depositor funds guaranteed by the taxpayer. Banks had been a large source of trading liquidity, and bond trading was an important revenue source for banks. Letting banks trade again will be good for America.

It suddenly became crystal clear why Goldman Sachs is willing to borrow cheaply from the masses.

Goldman is now a bank. They became a bank in 2009 for many of the same reasons Jesse James robbed them – that’s where the money is.

When they accepted TARP in 2009, and agreed to be regulated as a bank most people saw an end to Goldie’s greed, hubris and arrogance. However, Matt Taibbi writing for The Rolling Stone in July 2009, saw it as another trap play of x’s and o’s from the timeless Goldman money making playbook. 

Tabbi’s article points out that Goldman became a commercial bank, borrowed $10 Billion in TARP from The US Treasury and repaid it one year later. In the interim it picked up some new financial tools reserved only for banks like the ability to borrow cheaply from the Fed in periods of market meltdown:

“The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.”

Mr. Taibbi points out Goldman used the Big Recession to get rid of its fiercest rival, Lehman Bros, engineer TARP for AIG, which was Goldman’s largest counterparty in the CDO market, and as a result, collected $13 Billion from AIG that was essentially worthless had AIG failed and finally escaped regulatory scrutiny imposed on other banks by paying off TARP early.

This doesn’t seem like a humbled and repentant Goldman to me?

The Taibbi article is “must read” for anyone who is listening to Goldman’s radio adds about going first class with Marcus by Goldman Sachs by becoming a depositor. It is also a harbinger of the likely outcome of the Volker Rule debate.

Back To Self Reporting and Self Supervision

The Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency have already approved the changes to the Volcker rule. The Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission also have to approve them, and are expected to endorse the changes without any significant revisions. The most significant change relates to presumptions about the safety of proprietary trading. As I read the changes, large banks like Goldman and Morgan Stanley will once again police themselves rather than being subjected to proctological examinations by bank examiners. Are you kidding?

The proprietary trading profit center, Goldman’s wheelhouse, has risen from the ashes of the old Goldman partnership structure and has been reborn as a commercial bank getting its deposits from retail oriented radio ads. One thing for sure is this will be good for Goldman.

It might be smarter for Marcus depositors to own Goldman’s equity rather than being their counterparty. The yields are the same and there is a little more alignment?

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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