THE BLOG

Goldman Sachs Clears the Air

06/13/2010 05:12 am ET | Updated May 25, 2011
  • Raymond J. Learsy Author, 'Ruminations on the Distortion of Oil Prices and Crony Capitalism'

Excuse me, I'm not a banker so this may sound dumb. But as my experience has it, a bank was a bank because they accessed their deposit base, as well as their capital to lend to creditworthy borrowers, be they individuals or institutions. That's how homes were built and bought, how businesses grew through the liquidity provided; and the myriad financial accommodations and services, banks accorded their customer base for fees and at interest rates that provided a fair measure of profit.

As a bank this was their societal responsibility, a responsibility that was a cornerstone to our economy and its prosperity. To assist the banks in their mandate the government initiated and maintained such key programs as federal insurance for customer deposits and ample liquidity to viable banking institutions at low interest rates through the Federal Reserve. This, as well as many other programs that assisted the banks in performing their core responsibility of making money available to the nation's consumers and businesses. This was the essence, at least in my understanding, of the compact between banking and society, helped along by government programs that facilitated the vital roles they were meant to play.

However, on Tuesday the Financial Times printed a letter from Lucas van Prag, Managing Director and public voice of Goldman Sachs: "Goldman doesn't assume any government guarantee," he wrote responding to the FT's editorial "Goldman on Trial". The editorial alleges that Goldman not only benefited -- perhaps was even saved by "Uncle Sam" -- but continues to " enjoy an implicit government guarantee" resulting in lower funding costs.

Mr. Van Prag's response contains the following, at least in my estimation, remarkable paragraph:

"Second, unlike a commercial bank, our profitability is not a function of net interest rate margin. In other words, we are not in the business of borrowing cheaply and lending at a higher rate."

"Unlike a commercial bank..." Really. Then why exactly is Goldman permitted to be classified as a 'Bank Holding Company' enjoying all the benefits and access to government programs that such categorization entails without fulfilling its societal responsibility of engaging in commercial banking, while still deriving benefits meant to assist commercial banking institutions?

Other 'Bank Holding Companies', be they JPMorgan Chase, Citigroup, etc. at least have commercial banking as their core business. All those other adjuncts such as proprietary trading, be it in oil or other commodities, bundled mortgages, various formats of financial engineering, etc. make up the full gamut of their activities. But a least there is some rationale to categorize them as 'Bank Holding Companies.'

Given Mr. Van Prag's curious comments, how does the categorization of 'Bank Holding Company' then apply to Goldman?

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