By Carrick Mollenkamp and Lauren Tara LaCapra
NEW YORK Feb 9 Goldman Sachs Group Inc's
purchase of a $6.2 billion portfolio of subprime bonds on
Wednesday illustrates the difficulty regulators may have in
stopping banks from making bets with their own money.
Goldman purchased the portfolio from the Federal Reserve
Bank of New York, which is selling mortgage securities acquired
in 2008 through the bailout of American International Group Inc
Goldman held the bulk of the portfolio overnight before
moving to sell the bonds en masse, according to bond-trading
data and people familiar with the situation. While there was
strong demand from Goldman clients, by doing so the Wall Street
bank took the risk of events in Europe roiling markets and the
value of those assets falling in a short period of time.
Rival banks and mortgage investors said Goldman profited
when it sold the bonds at a higher price than what it paid, but
it is not clear how much overall profit Goldman will make from
Goldman's decision to hold the securities was in contrast to
a similar New York Fed sale in January to Credit Suisse Group AG
. The Swiss bank almost immediately sold the securities
to investors eager for higher-yielding bonds, removing its
holding risk, according to a person familiar with the situation.
A Goldman spokesman said, "Our intention has always been to
place the portfolio with our clients globally and we are in the
process of doing that."
The bonds were held in a New York Fed portfolio called
Maiden Lane II. The New York Fed didn't disclose its sales
Bond-trading data for Wednesday shows that $6.9 billion in
mortgage bonds -- underpinned by loans to borrowers with poor
credit history -- were sold while only $961 million was bought,
according to the Financial Industry Regulatory Authority.
That data suggests a large portfolio of bonds was injected
onto a buyer's balance sheet and then held, mortgage traders
The Goldman trade highlighted the problems regulators will
have as they roll out a new rule aimed at limiting the risks
banks take on as they make so-called proprietary bets using
house money. A harsh interpretation of the rule, due to go into
effect in July, could ban speculative bets. Riskier bets also
require more capital to cushion against potential losses.
Investment banks that oppose a stringent Volcker rule --
named for former Federal Reserve Chairman Paul Volcker -- argue
that they provide important liquidity in a market, just as
Goldman did in facilitating Wednesday's trade.
"If the Volcker rule had been in place, would this have run
up against it? That is exactly what is being debated right now.
Are trades like this going to be viewed as consistent with the
proposed implementation of the Volcker rule or not?" said
Darrell Duffie, a finance professor at Stanford University.
"My own view is that the definition of legitimate
market-making under the Volcker rule should be fairly broad and
include trades like this," Duffie said.
To be sure, Goldman was assured it would receive strong
demand for the subprime bonds. This week's auction of the
mortgage bonds generated bids from Goldman, Credit Suisse,
Barclays Plc, Morgan Stanley and Royal Bank of
Scotland Group Plc, according to the New York Fed.
Each of the brokers, in bidding for the portfolio of bonds,
lined up customer bids for the bonds. In an indication of the
demand, one bank received more than 1,000 bids.
In the bailout of AIG, Goldman and 15 other banks were fully
paid for $62 billion of credit-insurance agreements they had
held with AIG, according to a 2009 report by the special
inspector general for the Troubled Asset Relief Program.