Goldman Sachs Quick Take: “The Bank Status” (GS)

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If you have watched the tone, reaction, expressions, and pointed questions today from the Senate Hearing on Goldman Sachs Group Inc. (NYSE: GS), how you interpret the whole stance of the issues under discussion and the issues at stake will probably depend today on how you feel about the financial system, banks and brokers, and which side of the political aisle you sit on.  If you smooth out all the questions and all the answers, today is only the beginning.  This will mark the first of many hearings.  And this is going to just be the start of trying cases in the public long before any trial comes up.

The first take so far is that the firm as a whole might not be at risk, but its classification, regulation, and even operations are entirely different…

There is a very obvious issue here.  Lawmakers are attempting to try Goldman Sachs long before any formal SEC trial.  In some cases rightfully so, and in some cases not.  Goldman Sachs’ employees testifying today are VERY mixed in how they have answered questions and how their body language comes across.  And anything said today could be used against them in court.

It would need another few thousand words and reviewing and re-reviewing tapes and transcripts to list all the blow-by-blow comments and questions.  As it stands now, on an individual email and individual point by point review there are some obvious problems here for Goldman Sachs.  However, if you take out the heat of passion and take out the rhetoric the law-makers’ points on any individual basis are going to be very difficult to show when this comes trial because Goldman Sachs is likely to represent this not as a single strategy, not as a single unit, and not even as a single direction.  The firm is likely to show a very different point in court and this will be “one theme in the sum of the parts” when it comes to trading, risk management, and ultimately in making money as a company with proprietary trading operations and with fiduciary responsibilities.

But there is at a minimum going to be the constant point of severe conflicts of interest, and that is a theme that will likely remain steady regardless of whether or not a final verdict goes for or against Goldman Sachs.

Goldman Sachs is now classified as a bank holding company, which many will point to as a classification of convenience when it came to getting US taxpayer money.  We have noted many times over that Goldman Sachs is a bank holding company that is truly no bank.  If you are Joe Public, go try to open an account there.  Chances are more likely that you can’t open an account there.

The conflict of interest issue is not going to go away.  We saw only one answer directly about whether the obligation is there to act in the best interest of customers.  Making any bold predictions over the future of Goldman Sachs today is far too premature because there will be many rounds fought through the media long before any trial. Many of today’s questions and many of today’s answers are likely to end up having zero relevance in any formal trial on specific charges.

More financial regulation is also coming.  In what form and what manner, that is still to be determined regardless of what preliminary votes indicate.

Whether one issue or the entirety of all issues end up in a fine or conviction is still a long way out.  If you believe in due process and in the legal system, today and future hearings that come up before any trial(s) will look and feel like a ‘perp-walk’ to many.

The biggest issue may boil down to who gets to regulate and govern Goldman Sachs and its many operations down the road.  This is no bank, not by a long shot.  It is more like a hedge fun.  Do not be surprised if the powers that be demand that this “bank holding company” status changes down the road.  That won’t mean less regulation.  Not at all.  In fact, depending upon how you interpret the risk management in proposed reform, firms that fall under the systemic risk category at any snapshot in time may never be able to get out from under certain regulation and oversight.

In theory, Goldman Sachs could be acquitted of all charges.  That might not keep it from being far more tightly regulated.  And that does not mean that it will be assured that it gets to keep its bank holding company status nor that it will be allowed to participate in all the current operations it is involved in.

This is far from over, and the outcome is far from known. Either way, go ask any group of Goldman Sachs employees today where there is a banking branch or if they know of any true ‘bankers’ inside the firm.  There are no public bank branches, and there are no real bank tellers or real loan officers like you would find in any other bank holding companies.

JON C. OGG

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