Bailout

Does Goldman?s Facebook investment violate the Volcker Rule?

By Felix Salmon

Bill Cohan raises an interesting point:

Goldman?s cost of capital is close to zero ? as a bank holding company, it can borrow from the Federal Reserve at negligible interest rates ? so any capital gain it makes on its venture in Facebook will be sheer profit.

Isn’t this the kind of thing the Volcker Rule was supposed to prevent? Goldman is a regulated bank, with access to essentially unlimited Federal Reserve funds at very low interest rates; it should not be using those funds for speculative bets on its own behalf. But that’s what the Facebook investment looks like.

I’m not saying that the Facebook investment is illegal — for one thing, the details of the Volcker Rule have yet to be fully hashed out, which means it doesn’t yet have the full force of law. But this does look like it violates the spirit of Dodd-Frank.

As Robert Cyran says, the deal “looks like classic merchant banking”, where banks invest as principals in client companies. Under the Volcker Rule, however, I thought that only investment banks could make such bets — not regulated bank holding companies with access to Federal Reserve funds.

Full post as published by Macroprudential on January 05, 2011 (boomark / email).