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How Goldman Quickly Found The Volcker Rule Loopholes

Tyler Durden's picture


The ink on the final Volcker Rule has not dried yet, and already the TBTF armies of lawyers have found all the loopholes in the rule they need to continue prop trading as if nothing has changed. Enter Goldman Sachs which as the WSJ reported, is raising a new fund, to which it will contribute 20% in capital, which will make investments in commercial real estate-backed loans including office buildings, hotels, and shopping centers. "Goldman has raised more than $1 billion for the new fund, according to people briefed on the matter. The fund aims to boost that total to $2 billion, and Goldman expects to invest "up to 20% of total equity commitments," according to September marketing documents reviewed by The Wall Street Journal." Just how did Goldman get the green light to allocated up to $400 million for what is clearly a prop trading bet: "because regulators excluded many real-estate loans from the tough restrictions on investment funds, allowing Wall Street firms to continue making concentrated bets—sometimes risky ones—with their own capital." In other words, when it comes to reflating the precious real estate bubble, anything goes.

The details from the WSJ:

Goldman also is making direct investments in real-estate assets, according to people familiar with the matter. Last year, it formed a partnership to purchase and upgrade a Chicago office building.


Both forays appear to navigate around new regulations mandated by the Volcker rule, a provision designed to limit how big banks risk their own capital in pursuit of profits from trading securities and investing in hedge funds and private equity.


"There's no way you're going to write enough rules to outlaw every conceivable type of risky investment a bank might make," said Michael Mayo, an analyst with CLSA Americas. "There's a balance between making sure banks don't blow themselves up and allowing them to take enough risks to help facilitate economic growth."


The new fund's focus on real-estate loans, and its status under previous U.S. investment-company laws, leaves it outside the Volcker rule's definition of hedge funds and private-equity funds, according to the rule and people familiar with Goldman's fund. The rule did compel Goldman to change the fund's name, removing the reference to "GS" that appears in a predecessor real-estate debt fund. Now it is called Broad Street Real Estate Credit Partners II, a nod to Goldman's former headquarters at 85 Broad Street.

Of course, that is not the only Volcker loophole Goldman has found:

In September 2011, it joined forces with investors to buy a portfolio of distressed property loans from a unit of Popular Inc., BPOP +0.79% one of Puerto Rico's largest banks, for about $173 million, or less than half the unpaid principal balance of the loans, according to Popular.


Goldman told investors in marketing documents in September that there is a big opportunity in real-estate lending, citing in fund documents an estimated $1.4 trillion of commercial-real-estate debt set to mature over the next five years. It said there are fewer real-estate lenders than in past years, and that remaining active lenders have a "lower risk tolerance."


The firm also said loans in the first real-estate fund average $121 million, which the documents say are "in excess of competitors and provide a competitive advantage."


As for Goldman's direct real-estate investments, people familiar with the firm's thinking said it held its direct debt and stock investments for a long enough time to avoid the label of "proprietary trading," an activity the Volcker rule limits.

So... held to maturity prop trading? Worked miracles for Zions. But don't worry: loans, unlike other securities, apparently don't go down in value and thus can be exempted from all regulation.

Let's hope this time Goldman times the commercial RE bubble well: the last time around things didn't work out quite as expected:

Goldman jumped into property investing in the 1990s, buying up distressed loans during the savings-and-loan crisis. Its Whitehall real-estate fund group raised billions of dollars over the years and made splashy equity investments, such as buying Manhattan's Rockefeller Center in 1996.


During the crisis, Whitehall wrote down big losses following top-of-the-market property deals like the Stratosphere, a Las Vegas casino.


In an investor letter this September, Whitehall said the equity value of its $4 billion fund that closed in 2007 had been marked down by 59%. That is Goldman's estimated value of the fund, about 41 cents on the dollar, as reported to its investors.

That's ok though: the very well connected hedge fund that is Goldman Sachs is insured by the FDIC. Probably thanks to all those Goldman ATMs strewn around the country...


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Mon, 12/23/2013 - 10:30 | Link to Comment insanelysane
insanelysane's picture

Found the loopholes???  More like paid someone to put in the loopholes.

Mon, 12/23/2013 - 10:30 | Link to Comment InjectTheVenom
InjectTheVenom's picture

i hope all top-level Goldman execs (and their families) get syphilis for Christmas.

Mon, 12/23/2013 - 10:39 | Link to Comment falak pema
falak pema's picture

in some quarters its called sparkling disease and its invariably pollonium.

Mon, 12/23/2013 - 10:57 | Link to Comment AlaricBalth
AlaricBalth's picture

Here is a list of GS's in house lobbyists. All but one have worked in government and many have been involved with legislative affairs concerning the real estate sector.


Total Lobbying Income: $2,970,000

Lobbyists working for Goldman Sachs: Lobbyist Client Brayboy, Joyce Goldman Sachs Connolly, Ken Goldman Sachs Malan, Todd M Goldman Sachs Niemeyer, Matt Goldman Sachs O'connor, Robert Goldman Sachs Overton, Amy E Goldman Sachs Paese, Michael Goldman Sachs Thompson, Michael D Goldman Sachs Thompson, Michael F Goldman Sachs Wall, Joseph Goldman Sachs
Mon, 12/23/2013 - 11:56 | Link to Comment falak pema
falak pema's picture

the skull n bones club of the financialista Nwo.

Funny thing the tea drinkers are part of that club. Just goes to show, behind the curtain its "me first" their only true motto. 

Mon, 12/23/2013 - 11:12 | Link to Comment CognacAndMencken
CognacAndMencken's picture



i hope all top-level Goldman execs (and their families) get syphilis for Christmas....

That's not a nice thing to wish for Ted Cruz and his wife.  Didn't you know that Ted Cruz's wife is a regional director for Goldman Sachs? You probably didn't because Cruz portrays himself as separate from the entrenched "establishment," when, in reality, he's just the latest sock puppet put in front of the American people for their distraction.  No wonder he hates government health insurance so much.... must be nice to have Goldman Sachs health insurance. 



Mon, 12/23/2013 - 13:16 | Link to Comment roadhazard
roadhazard's picture

Thank you. The more you know the more pissed off you can be.

Mon, 12/23/2013 - 11:57 | Link to Comment MarcusLCrassus
MarcusLCrassus's picture

Sounds like you might enjoy this cinematic masterpiece:



Mon, 12/23/2013 - 12:51 | Link to Comment gafgroocK
gafgroocK's picture



From the Director and Writer of the movie "Postal" !

Mon, 12/23/2013 - 10:32 | Link to Comment disabledvet
disabledvet's picture

"double billing." first write the law then "find loopholes." next up: "fixing the health plan."

Mon, 12/23/2013 - 10:48 | Link to Comment vxpatel
vxpatel's picture

exactly right, i was baffled by the author's premise.

Mon, 12/23/2013 - 10:55 | Link to Comment Jumbotron
Jumbotron's picture

It's easy to find ANY hole, much less loopholes when you have your hand up everybody's ASShole.

And we are suprised to find that the banks who helped shape the law have found the loopholes they set in place.


Mon, 12/23/2013 - 10:31 | Link to Comment pods
pods's picture

When you create the map, it is very easy to find what is on it.


Mon, 12/23/2013 - 10:34 | Link to Comment dick cheneys ghost
dick cheneys ghost's picture

right.............Golman Saks wrote the 'loopholes'

Mon, 12/23/2013 - 10:36 | Link to Comment RacerX
RacerX's picture

Right, that's like "finding" the easter eggs--when you were the one that hid them in the first place.

And somehow I don't think Goldman thinks this is "risky". Well, maybe risky for the average Joe, that will get the bill.

Mon, 12/23/2013 - 10:34 | Link to Comment falak pema
falak pema's picture

There is only one rule in realpolitik when you swim with the alligators :

Always use a technique that is proven instead of ad hoc stuff like Dodd Frank and Volcker compromise; as these crocs have sharp teeth and awesome tail swipes. 

What is proven as firewall is Glass Steagall, so why use doctored medecine when you have penicillin for the banker's diisease.

Mon, 12/23/2013 - 10:39 | Link to Comment BadDog
BadDog's picture

Reinstate Glass Steagall, it's the only way to make sure.

Mon, 12/23/2013 - 10:47 | Link to Comment Dewey Cheatum Howe
Dewey Cheatum Howe's picture

I say we take off and nuke the entire site from orbit. It's the only way to be sure.

Mon, 12/23/2013 - 11:06 | Link to Comment thatthingcanfly
thatthingcanfly's picture

"These bankers are coming in here and they're gonna come in here and kill us all man! Game over man, game over!"

"Janet Yellen survived for longer than that with no guns and no training."

"Why don't you put her in charge!"

Mon, 12/23/2013 - 10:53 | Link to Comment Jumbotron
Jumbotron's picture

Reinstate Lead Bullit, it's the only way to make sure.

Mon, 12/23/2013 - 10:49 | Link to Comment Rainman
Rainman's picture

Ever wonder why Volcker doesn't want his name associated with this piece of shit "rule" ?

Mon, 12/23/2013 - 10:41 | Link to Comment HamRove
HamRove's picture

Fuck lawyers, and Fuck Goldman Sachs....with a BIG F.

Mon, 12/23/2013 - 10:44 | Link to Comment curbyourrisk
curbyourrisk's picture

Burn the TBTF to the ground and start over.

Mon, 12/23/2013 - 10:46 | Link to Comment tradewithdave
tradewithdave's picture

How Tall Paul got his bikini bod back... Nomi Prins explains.

Mon, 12/23/2013 - 11:56 | Link to Comment NEOSERF
NEOSERF's picture

They didn't "find" the loophole ZH, they "inserted" the loophole.

Mon, 12/23/2013 - 12:04 | Link to Comment yogibear
yogibear's picture

Goldman made sure the loopholes were in the rule. No surprise here.

It would be  a surpise if Goldman had to adhere to the rule.

Goldman is the government. The World as  owned by Goldman Sachs.


Mon, 12/23/2013 - 12:08 | Link to Comment Peter Pan
Peter Pan's picture

Now everyone can understand why this legislation was 1000 pages long. It's easier to hide the loopholes.

Mon, 12/23/2013 - 12:37 | Link to Comment DR
DR's picture

Goldman is and has been since the 1900s a rentier parasite.

Mon, 12/23/2013 - 12:46 | Link to Comment gafgroocK
gafgroocK's picture



Loopholes are easy to find when you were the ones that help write them.

Mon, 12/23/2013 - 13:18 | Link to Comment spooz
spooz's picture

Amar Bhide on "How Following Hayak Leads to Regulating Banks Like Utilities, Looking Askance at Liquidity and Securitization".

Mon, 12/23/2013 - 21:04 | Link to Comment theprofromdover
theprofromdover's picture

Maybe the Squid could be told it ain't a bank no more.

Send  it on its way to stand on its own two feet (or eight tentacles)

Mon, 12/23/2013 - 22:26 | Link to Comment Larry Dallas
Larry Dallas's picture

I would love to see the pitch deck for this one...

Tue, 12/24/2013 - 17:53 | Link to Comment flyingcaveman
flyingcaveman's picture

The people have had it with the 'too big to fail' banks, so now its going to fall on the all important 'community' banks which are too important to fail.


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