Goldman Sachs Group Inc. (GS) has $7 billion invested in private equity that it might have to sell at a loss. For Morgan Stanley (MS), it’s $2.5 billion.This makes it sound like bank money is invested in a myriad of private equity funds, as opposed to the bank having a private equity subsidiary within the holding company. Banks frequently spin off and sell subsidiaries. Why not their PEU divisions?
The big sums explain why Wall Street has been lobbying regulators to delay a July deadline for complying with the Volcker Rule, which restricts banks from investing in private equity as part of a ban on making market bets with their own capital.
HuffPo noted the second barbarian run at Dodd-Frank's gate:
Wall Street lobbyists are trying to secure taxpayer backing for many derivatives trades as part of budget talks to avert a government shutdown.
According to multiple Democratic sources, banks are pushing hard to include the controversial provision in funding legislation that would keep the government operating after Dec. 11. Top negotiators in the House are taking the derivatives provision seriously, and may include it in the final bill, the sources said.
The bank perks are not a traditional budget item. They would allow financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. -- potentially putting taxpayers on the hook for losses caused by the risky contracts. Big Wall Street banks had typically traded derivatives from these FDIC-backed units, but the 2010 Dodd-Frank financial reform law required them to move many of the transactions to other subsidiaries that are not insured by taxpayers.
Four banks dominate the derivatives market, J.P. Morgan, Bank of America, Citi and Goldman Sachs.
Big banks may get to keep their PEU stakes and keep public backing for risky derivative trades. Time reported last year.
While there’s no way of knowing for sure, estimates of the face value of all derivatives outstanding tops a quadrillion (1,000 trillion) dollars, or more than 14 times the entire world’s annual GDP.
The risk underlying derivatives is they are sold for little to no money relative to the underlying bet.
Each actual dollar in the derivatives market is supporting between $35 and $70 of nominal value. Losses of only a few percent of face value therefore would be enough to wipe out even the best-capitalized derivatives traders.Leverage of 35 to one (potential risk to underlying fund) brings to mind Carlyle Capital Corporation which levered 36 to 1 (debt to equity). CCC was the canary in the financial services coal mine imploding in Spring 2008, months before Lehman Brothers fall.
The more things change the more they stay the same. Same sponsors, same political system which requires huge fundraising to be elected.
Politicians Red and Blue love PEU.
Update 2-14-15: The best bankster lament comes from across the pond. "I’m sick of this stuff. I’m sick of hearing about rich people avoiding and evading tax. I’m sick of rich companies paying next to no tax and bleating that they are doing nothing illegal. And I’m sick of hearing about powerful people presiding over these malpractices and swanning ever onwards and upwards to yet more power and riches."