A Short Answer For Simon Johnson

No one is better than our good friend Simon Johnson at being so smug and yet so completely, embarrassingly wrong. In a post titled, "A Short Question For Senior Officials Of The New York Fed," Johnson writes:

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.

Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Answer: There is no waiver. There is no regulation that prohibits Goldman from engaging in this kind of transaction. Bank holding companies can elect financial holding company (FHC) status, which allows them to engage in a broad range of financial activities, including private equity investments in nonfinancial companies. Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make "merchant banking investments" in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how "annoyed," wouldn't have known this. The FHC designation was what the whole Gramm-Leach-Bliley debate was about in the first place! Who in banking doesn't know this? I also find it difficult to believe that senior officials at the New York Fed waste their time answering questions that a first-year MBA would know.

How many times does Simon Johnson have to demonstrate that he has absolutely no clue what he's talking about, and frequently makes things up, before everyone stops taking him seriously? He's like Ben Stein, but with the veneer of credibility.