With the prop ban hitting Bank Holding Companies (despite what various politicians who have long outlived their welcome, their tenure, their dentures and even their corrupt status, say on CNBC) soon, the generic response has been: "Bah, not an issue - Goldman will just cease being a BHC. Done and done." Not so simple. Why? One acronym - TLGP. Of course, it is a joke that Goldman was ever allowed to be a bank holding company in the first place (we still can't wait to deposit our meager savings with Lloyd Blankfein's organization. When, oh when, will Goldman open a deposit branch on Paper Street?). Yet it is. The problem however, is that the TLGP is only eligible for bank holding companies and other FDIC-insured depository institutions. Should Goldman shed its BHC aura, say bye-bye to the TLGP guarantee.
From the TLGP eligibility criteria:
Eligible entities include FDIC-insured depository institutions, any U.S. bank holding company or financial holding company, and any U.S. savings and loan holding company that either engages only in activities that are permissible for financial holding companies to conduct under section (4)(k) of the Bank Holding Company Act of 1956 (BHCA) or has at least one insured depository institution subsidiary that is the subject of an application that was pending on October 13, 2008, pursuant to section 4(c)(8) of the BHCA, or any other affiliate of an insured depository institution that the FDIC, after written request and positive recommendation by the appropriate federal banking agency, designates as an eligible entity.
At last check, Goldman, which only became a BHC to have access to FDIC taxpayer funding conduits, had underwritten $20.7 billion in TLGP-guaranteed debt, at a ludicrously low yield of 77 bps. Which means that should the company need to roll that debt tomorrow or in three years when it matures, it will have to pay up a boatload in additional annual interest (although tomorrow would likely seem more attractive if indeed concerns about hyperinflation are rampant at squidquarters). Furthermore, should it be forced to refi, it is certain that Goldman will end up having to pay a lot more once investors smell blood.
Some material disclosure from a recent Goldman TLGP prospectus:
In response to the current bank liquidity crisis and resulting economic turmoil, the Secretary of the Treasury of the United States, in consultation with the President of the United States and upon the recommendation of the Boards of the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve, has invoked the systemic risk exception of the Federal Deposit Insurance Improvement Act of 1991. This action permits the FDIC to provide a guarantee for newly issued senior unsecured debt of U.S. bank holding companies under the Temporary Liquidity Guarantee Program. The FDIC is an independent agency of the U.S. federal government created to preserve and promote public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions, by identifying, monitoring and addressing risks to the deposit insurance funds, and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.
And the money language:
You May Lose the Right to Payment under the FDIC Guarantee If the Fiscal Agent Fails to Follow the FDIC Claims Process. In order to recover payment under the FDIC Guarantee after our failure to pay on your notes, the fiscal agent of your notes must make a written demand, with the required proof of claim, to the FDIC within 60 days of the occurrence of our failure to pay. As described above in the subsection entitled “Terms of the FDIC Guarantee”, if the fiscal agent fails to follow the FDIC claims process pursuant to the TLG Program, you may be deprived of all rights and remedies with respect to the guarantee claim.
Yet nowhere is there a mention of the contingency of what happens should a BHC cease to be a BHC. Did the FDIC assume that banks would be mooching off taxpayers in perpetuity?
It would appear the fate of Goldman's prop desk will now depend on whether or not Sheila Bair will grandfather BHC status to firms that have absolutely no depository operations, yet merely wish to continue their hedge fund status. If, for once, the FDIC chair does the right thing, and does not exempt Goldman from the loss of an FDIC guarantee, then Lloyd will likely take a long, hard look to decide whether the incremental interest rate on the $21 billion in current TLGP is worth the "10% of revenue" that Goldman prop traders generate (Mr. van Praag, we would love to get some color on what the Net Income margin on this 10% of revenue is?). Something tells us that continuing to have unfettered visibility over global market flow and being able to exploit it using your own prop trading strategies will surely be worth the several hundred million in addition interest over time. Yet we may very well be wrong.
h/t Credit Trader