Are 20.7 Billion Reasons Enough For Goldman To Continue Being A Bank Holding Company?

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

Comments

[Marvin the Mind...]

Goldman going private in 3, 2, 1 ...

[Hephasteus]

Wrong. They go private they isolate themselves. You have to entangle yourself with as much people as possible. Stick your tentacles in every whole or get as many people interested in your success as you are. Then pay them meager stock dividends for their guard duty.

Entangle, corrupt, confuse. Isolate those who won't entnagle corrupt or confuse.

[Careless Whisper]

Not so fast according to Barney Frank. He says it will take at least 3 - 5 lifetimes, errrr years.

[Oracle of Kypseli]

Mark this.

Citi will fall on GS lap (minus the radioactive assets deposited at the FED) at the opportune time.

[Anonymous]

Citi? Why in the world would Goldman want them?
Already a group is trying to buy Merrill from
B of A negotiations going on since Oct. You got it backwards.

[theadr]

Citi is the only international bank hq in the US.  Who do you think stepped in to fill the BCCI stuff for the CIA?

[theadr]

Agreed.  When C was 4, I said GS to pay 8.  When it gets to 2, they'll only have to pay 5.625.

[Anonymous]

People have overreacted. Goldman will come out of this unscathed as they always do. This has merely removed competition for Goldman. JPM and Wells won't shed their BHC, but Goldman will.

I would've thought that ZeroHedge would've learned by now, Goldman always wins. And there's a big difference between what Obama says and what he does. So watch this unfold. Goldman's prop trading desk is not worried. Believe that.

[Species8472]

there's a big difference between what Obama says and what he does.

Just like Nixon!

"Watch what we do, not what we say”  John Mitchell, Nixon's first Attorney General

[Anonymous]

Why would Goldman's prop desk be worried in any
outcome? If it passes they will take their activities offshore or if Goldman reverts they will get paid
all that much more. Your memory is short there
have been many times they didn't win you just don't
hear about it. Example do you think they won re
the mortgage mess? Hardly they had to be bailed out
like the rest of them albeit thru AIG. Maybe ZH has
learned something by now; no one is invincible.
Furthermore GS is already being hurt where it counts
most to them their personal pocketbook.

[Missing_Link]

I would've thought that ZeroHedge would've learned by now, Goldman always wins

On a long enough timeline, the survival rate for every bank holding company drops to zero.

[Anonymous]

I thought Cramer was going to cry on CNBC defending GS prop trading desk...pitiful.

[Ripped Chunk]

He can go on Glenn Beck later and they can both cry.

[Mr Lennon Hendrix]

"When I was a hedge fund manager at GS."  I love it when he says that!

[Rick64]

They can split the trading and the bank into two organizations and leave all the toxic debt with the banking side.

[credittrader]

That is the problem - this is not toxic debt! this is the super cheap FDIC-backed stuff that has allowed them to survive and cut their interest expense massively! If they change status then they will have to pay it back or see the Floaters jump to market levels. This will cause their interest expense to rise dramatically - not pretty...average yield on all of GS TLGP debt is 77bps (that is yield NOT spread).

[Rick64]

My point is the debt would be held by the bank which would still qualify and the the Investment Firm would be strictly trading. BTW appreciate the other info.

[FilthyBrit]

Wouldn't that make their "informational advantage" harder to implement (i.e., if you can't peer over your neighbor's shoulder)?

[Orly]

And you noticed that while toady we waited with bated breath for Golman to enter the market for the last-half-hour ramp job, they were not there.

I think they are sending us a message...

"Be careful what you wish for.  We may just take our ball and go home."

[Ripped Chunk]

Fuck them and their ball.

[ghostfaceinvestah]

yeah, i for one am glad to see the midday dip-buyers get their asses handed to them today.  what a stupid strategy that is.

[ghostfaceinvestah]

Thanks for the mention of the TLGP, people need to mention that more often, it really pisses me off that the banks crow about paying back TARP, but no one ever mentions the cheap guarantees they get from TLGP, guarantees that are not available to other corporations.

[Reggie Middleton]

They have a lot more to pay back than TARP and TLGP. From a post I made today (10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer!):

So, running down the list, the banks paid back TARP. That's a +, but....

1. What was the value for bank charter, to get cheap access to the Fed's funds? did they pay back this value yet? No!
2. How about the payment of interest on the banks' excess reserves at the Fed. Have the banks repaid that yet? No!
3. The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
4. How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
5. Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
6. Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
7. What about the PPIP? No!
8. Hey, there's the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
9. There's the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
10. Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?

How do you repay the synthetic bid that the Fed has created under MBS that has rescued the banks from balance sheet purgatory (for now)? How about the accounting fantasy football game that was authorized by FASB last year that has lost fundamental investors who actually count vast sums of money? Then there is those FDIC bond guarantees... Oops, I went way past 1 reasons, didn't I?

[Reggie Middleton]

They have a lot more to pay back than TARP and TLGP. From a post I made today (10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer!):

So, running down the list, the banks paid back TARP. That's a +, but....

1. What was the value for bank charter, to get cheap access to the Fed's funds? did they pay back this value yet? No!
2. How about the payment of interest on the banks' excess reserves at the Fed. Have the banks repaid that yet? No!
3. The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
4. How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
5. Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
6. Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
7. What about the PPIP? No!
8. Hey, there's the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
9. There's the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
10. Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?

How do you repay the synthetic bid that the Fed has created under MBS that has rescued the banks from balance sheet purgatory (for now)? How about the accounting fantasy football game that was authorized by FASB last year that has lost fundamental investors who actually count vast sums of money? Then there is those FDIC bond guarantees... Oops, I went way past 10 reasons, didn't I?

[deadhead]

That is an excellent article you wrote Reggie.

I think you should run for Congress out of Brooklyn.  I'm serious.

[Reggie Middleton]

One of my local guys is Ed Townes. I couldn't be a politician. It would end up like Warren Beatty in Bulworth. A hilarious movie, may I add.

[sickboy]

Hey Reggie, definitely very nice punchy piece and very easily digestable. Required laminating and reading.

I did always wonder though why in your "When the Bubble Bursts" series, why you did JPM, BoA etc...but didn't look into GS. With all their Whitehouse Property vehicles, Fleet tankers etc, they are a smorgasboard of off balance sheet activity. Thats why it took them so long to go public, all those very special interest vehicles around the world.

[Anonymous]

Reg i have been one of your critics.

But this post of your should be required reading for every american.

nice work

[Ripped Chunk]

Get them out of comercial banking.

Then get them out of investment banking.

Then get rid of them.

[THE DORK OF CORK]

Starbuck

I am game for his crooked jaw, and for the jaws of Death too, Captain Ahab, if it fairly comes in the way of the business we follow; but I came here to hunt whales, not my commander's vengeance. How many barrels will thy vengeance yield thee even if thou gettest it, Captain Ahab? it will not fetch thee much in our Nantucket market.

Captain Ahab

Nantucket market! Hoot! But come closer, Starbuck; thou requirest a little lower layer. If money's to be the measurer, man, and the accountants have computed their great counting-house the globe, by girdling it with guineas, one to every three parts of an inch; then, let me tell thee, that my vengeance will fetch a great premium here! He smites his chest

Captain Ahab

Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee; from hell's heart I stab at thee; for hate's sake I spit my last breath at thee.

[Orly]

Let them eat static!

[Dr. Richard Head]

So then why is NYSE:BRK.A jumping today?

http://www.google.com/finance?q=NYSE:BRK.A&client=news

[cocoablini]

You can see the repercussions of taking on Goldman Sachs. All the PPT/Bond to cash pump money to buy equities over the last 6 months or more was housed very nicely by the banks. It was a sweetheart deal. Take taxpayer money and buy equities with it-juts hold on to it and keep selling volume low.

The market kept churning higher as retailers bailed on the market. The only thing that could bring the market down was a full on dump by banks(which were under orders not to sell stock bought with taxpayer money.)

Itwas a big game of chicken of course-somebody had to blink and stab the other in the back.

Obama under political duress, starts talking about taking Goldman's bread and butter away-the prop desk and their bank status(does anyone have a goldman ATM card anyway?)

Goldman and Banks(like they did in 2008 after TARPwas defeated in the house)flush the market and pile drive it. Holding the economy and market hostage until they get what they want. As Max Keiser says,"They are a bunch of financial terrorists."

Obama looks like he's playing the populist for now, until 401ks plummet and then he backs off.

[SDRII]

if not msitaken TGLP has a risk weighting of zero which itself has implications if modest by subprime standards for bank capital. Focus on capital weightings as that is the enabling factor. Yet another reason why  FRNs in the form UST will never get downgraded or at least as far as the risk weighting standards go.  

[cocoablini]

Oh, and you know Goldman borrowed stock it knew it was going to shitcan and shorted the hell out of it. They never lose

[Anonymous]

Goldman is evil incarnate. And Evil usually defeats Good.

So betting against the scum at Goldman is a fools bet.

[Anonymous]

Ultimately no. Why would they once the stimulus package
ends and this plays out? Long term Goldman most likely will return to being a private partnership and continue being a hedge fund.Having said that you can bet the feasibilty study process has begun inside Broad Street. I think they are losing market share as we speak. Jasper head of EM trading for Goldman left to join Moore Capital last week. He voted with his feet and he's an insider. If Goldman wants to retain it's talent and no can longer compete in the compensation game as a bank like Washington can't attract best and brightest it doesn't pay. Goldman is now in their shoes to a certain extent. They will train the best
and brightest and they will jump ship to a HF or start their
own or be poached by a bigger competitor.

[Mr Lennon Hendrix]

Blankfein is Chief terrorist for the suicide bomber that is GS.  It is doomed to self destruct like building 7.  The plan all along...

[Anonymous]

GS 5yr unsecured is trading at L+100....it wouldn't be that expensive to refinance - say a point on $20bn ? $200m. Not going to break the bank...

[Anonymous]

I plan to profit on my GS position and trading. They are really good at what they do. Best to drop the Bank Holding Company status--and all the other stuff you all complain of--and continue to feed on the guppies.

All this is pandering to the public histeria and outrage. What BS. It is a smokescreen for the real problem of the hemoraging trillion $s losses at Fannie and Freddie.

Buy GS, short treasuries, short the market in general.

[Anonymous]

LT inv? The only people that benefit by Goldman is them and
Warren Buffett. They have been notorious for years
screwing the shareholders by taking out money in bonuses
rather than plowing it back into the firm. Did you see
Buffett say buy Goldman stock in this no he bought
into the firm. You can forget any price performance
for the time being keep clipping coupons while
they clip bigger coupons with your money. Why do they
have multiple lawsuits going from shareholders if
they were so happy with their treatment? Who would
initiate a position in that present hornets nest?

[demsco]

The would get an exemption on that debt till it matures. They might not even do that. They might just do nothing and let it mature because, well, hell who reads the small print or cares anymore? Legal, illegal it simply doesn't matter. Yup, I am cynical. 

[pak]

This would be a fun to watch. But there's no way Goldman can stop being a BHC and go back to where it was. If they do, it'll be like digging themselves into a grave, unless Blankfein & Co. just want to raid the company one last time and close the shop.

They are now like a terminator on life support.

Of course Obama may still chicken out, but it's not all about Obama.

It's this "Goldman always wins" hubris that leaves so many people willing to blow it to pieces - just for the sake of it. It has already spread to Congress. It's about to reach White House. And it makes US's (and by extension, GS's) creditors feel absolutely sick.

Buffett was on TV recently and said "the first stimulus" wasn't very efficient. Well, I don't think "the second stimulus" is coming. With the mortgage mess still ahead (subprime was a tip of an iceberg), no recovery to talk of, no chance of new stimulus, and all TBTF earnings blown away for bonuses - shouldn't we already discuss a "second TARP"?

The bansters gang understand nothing about politics. They just kiss their own reflection in the mirror every morning, and think they can get anything by twisting their paid lapdogs' balls in Washington, DC. Let's see.

[deadhead]

Thank you for bringing up the TLGP matter again, Tyler.

I'd like to remind folks that Lloyd Blankfein is on record as saying he wishes Goldman had never participated.  Though Goldman certainly has the funds to extricate itself from the TLGP, they have not.  Unless Blankfein has retracted his remarks (i've yet to see anything about this but if that is the case I'm confident ZH will allow space for a response), it shows that he is nothing more than a hypocrite in regards this matter.

I'd like to remind folks that CFO David Viniar has been quoted that he believes Goldman no longer is receiving government assistance.  He has been called out on that by ZH but never responded.  Either he is a moron (I'm sure he is not, he must be a very bright individual) or a prevaricator.

And for those who want to bring up the fact that it is a US gov't program that all BHCs can take advantage of and they would be foolish not to given the costs, please allow me to respond in advance by saying that you are absolutely correct.  The FDIC and that bullshit artist Sheila Bair (i'll debate  you publicly anytime, anywhere Sheila) has all the regulatory authority needed to force a conversion of profits into a payback of TLGP funds.  Then again, seeing that Sheila gave the banks another huge pass on needed capital allocation for one and one half years via her decision on FASB FAS 166/167, I can only conclude that she is a very weak kneed regulator and is ultimately costing the American taxpayer more as she continues to further place the FDIC's DIF at risk.

Once again, I'll call out Lloyd Blankfein and invite him to share his thoughts on TLGP on Zero Hedge. 

[THE DORK OF CORK]

Deadhead these guys don't go for the pistols at dawn thing , It is not their style

They stab you in the back.

[KidDynamite]

the bigger question is what impact the Administration's proposed rule changes will have on the businesses that are not clearly defined as prop trading.  as TD/ZH has pointed out, GS makes the majority of its money thru "trading", yet only defines a small portion of that (10% ?) as "proprietary trading."  Where is the line when it comes to market making desks taking on proprietary positions which may or may not be related to customer flow - THAT is the money question.

[Anonymous]

At the presser Geithner looks as if he was going to puke.

Let him try and scream obscenities at Papa Paul when they disagree.

[Anonymous]

He should be happy Washington insiders pegged Geithner
for a wing man anyway. Plus noone likes being a lameduck
in public. I doubt Geithner screams obscenities not
his style I'm told.

[Anonymous]

Doesn't this change have to run the gauntlet of Congress?

Why is everyone acting like TheBamster has issued an Executive Order?

[Anonymous]

At the presser Geithner looks as if he was going to puke.

Let him try and scream obscenities at Papa Paul when they disagree.

[Anonymous]

Um, the TLGP is going to run out (in terms of new issuance and refinancing) long before this law ever comes into force (in terms of banks actually having to get rid of their prop trading). So its interest cost would go up regardless. I can certainly see their debt costs being higher as a non-bank, but it's got nothing to do with the TLGP.

[Anonymous]

Would the announced limitations on the maximum size of institutions hit GS even if it gives up BHC status, or are they, like the prop-trading restrictions, meant to apply to depositary institutions only?

[Anonymous]

There is no end to the 'bail outs' per se, only another new facility or accounting rule to get out of the latest jam everyone is in. So, TARP, TALF and everything gets paid back and we'll enter a new Crappy Financial Deal, CFD, where money is printed, deals made and the public screwed.