Goldman could be a bank, for better or worse

NEW YORK/WASHINGTON Tue Mar 16, 2010 3:58pm EDT

Flags fly outside of the Goldman Sachs headquarters building in the financial district of New York January 21, 2010. REUTERS/Jessica Rinaldi

Flags fly outside of the Goldman Sachs headquarters building in the financial district of New York January 21, 2010.

Credit: Reuters/Jessica Rinaldi

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NEW YORK/WASHINGTON (Reuters) - Goldman Sachs Group Inc (GS.N) could not hand back its banking charter and shake off Federal Reserve policing even if it wanted to, under the "Hotel California" provision of the financial reform bill unveiled this week.

That's a shame, investors and analysts say.

Since Goldman traded in its investment banking charter for bank holding company status during the darkest hours of the financial crisis, Wall Street's dominant firm has never looked like a bank or acted like a bank. It has been a bank in charter only.

Goldman, for its part, has said repeatedly that it has no desire to hand back the banking charter it was granted, along with rival Morgan Stanley (MS.N).

The charter at the time was a sign of safety to investors as Goldman would be regulated more strictly by the U.S. Federal Reserve. It also gave Goldman access to the Fed's credit window and cheap funding sources.

"The main benefit of getting the bank charter is over. Now it may be more of a hindrance than a help," said Michael Wong, a stock analyst on the banking industry team at Morningstar, about Goldman Sachs.

Wong said for a firm like Goldman Sachs, being a highly regulated bank comes with more restrictions and lower profit possibilities.

Goldman, Morgan Stanley and other firms such as American Express (AXP.N) would be trapped under the Federal Reserve's thumb under a provision that Republican Senator Bob Corker championed in the financial reform bill Democratic Senator Christopher Dodd released on Monday. [nN15206128]

Corker's so-called Hotel California provision would prevent large firms that took Troubled Asset Relief Program (TARP) funds from escaping Fed supervision by handing back in their bank charters. Hotel California refers to a lyric from a 1970s Eagles song that says, "You can check out any time you like, but you can never leave."

To be sure, Goldman has not exactly been a pauper since gaining bank status in September 2008.

The firm came roaring back in 2009, reporting net earnings of $13.39 billion, compared to $2.3 billion in 2008, on strong trading momentum.

Such a quick bounceback has made Goldman a target. Perhaps coincidentally, President Barack Obama announced the so-called Volcker rule on the very day Goldman announced 2009 earnings.

The Volcker rule would prevent banks from engaging in proprietary trading for their own profits, and could strip Goldman of about 10 percent of its net revenues.

GOLDMAN SACHS CLAUSE

Investors see Corker's provision as punitive and another sign that the government was not a "good faith" partner in the bailout.

"You might as well call this the Goldman Sachs clause," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel.

"TARP is like the roach motel -- once you get in, in any way, shape or form, you can't get out of it."

He added, "Once you pay back the government every dime, they should have no more control."

Corker sees it differently. He said the provision is simply good housekeeping to prevent financial firms from scurrying back to their imprudent, risky ways.

"We had some companies that ran into the shade of the federal government," Corker said in an interview with Reuters. "What you don't want to have happen is when times get good, people start running out from under that."

Corker has been a key player on the Senate Banking Committee, working closely with Dodd to try to put forth a bipartisan financial reform bill before talks collapsed last week and Dodd went ahead with a mostly Democratic bill.

When asked if the Hotel California provision was tailored for Goldman Sachs, Corker said, "It sort of is."

Goldman, for its part, reiterated to Reuters on Tuesday that it has "no interest" in changing its status as a bank holding company.

Wong said analysts will be closely watching to see if that tune changes if legislative proposals such as the Volcker rule and other bank crackdowns approach the finish line.

He said firms such as Goldman will then have a short window to try to turn back in their charters.

"If I were a shareholder, I would like Goldman ... to have as many options as possible," Wong said.

(Reporting by Steve Eder in New York and Karey Wutkowski in Washington; Editing by Richard Chang)

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