The Goldman Whale: Insured Deposit Bank’s Wild Derivative Gambles

Jan. 1, 2020 (EIRNS)—In the third quarter, Goldman Sachs’ federally insured commercial banking unit, Goldman Sachs Bank USA—which this investment bank was permitted to open only in the Federal Reserve’s crazed responses to the 2008 financial crash—engaged in gargantuan speculation in derivatives markets backed by depositors’ funds. It lost $1.24 billion trading in interest-rate swaps; and made $1.14 billion gambling in foreign exchange (forex) derivatives.rThis wild speculation was engaged in by a bank which, over a decade, has managed to lure in about $150 billion in deposits—one-tenth to one-fifteenth of Wall Street’s biggest giants. But with that deposit base, Goldman Sachs Bank USA has become exposed to $49 trillion in notional value of derivatives; its value at risk alone, in derivatives markets, is close to $1 trillion, based on total deposits of one-sixth that, equity capital of one-fortieth.

While that was going on, bank lending to U.S. businesses—“commercial and industrial lending”—fell by 4% in 2019, with the biggest banks leading the drop, as business capital investment stagnated. Businesses instead went to the junk bond markets if they could, and junk issuance rose 60% in 2019.

The outrageous crash-mongering on Wall Street was exposed in the Dec. 26 “Wall Street on Parade” column of Pam and Russ Martens. They quote Phil Angelides, then-Chair of the Financial Crisis Inquiry Commission (FCIC), at a June 30, 2010 hearing to examine “The Role of Derivatives in the Financial Crisis”:

“As the financial crisis came to a head in the fall of 2008, no one knew what kind of derivative-related liabilities the other guys had. Our free markets work when participants have good information. When clarity mattered most, Wall Street and Washington were flying blind.... In June 2008, Goldman’s derivative book had a stunning notional value of $53 trillion.”

And then the banks stopped lending to each other over “counterparty risk,” and the Fed started gushing out “liquidity loans” everywhere.

The only difference today is that Goldman was given a federally insured deposit bank to gamble with. The conduct flies against not only the Glass-Steagall Act, but also Section 23A of the Federal Reserve Act of 1913. That section was added to the 1913 Act by the later Glass-Steagall Act, so it is still “in force”—if it were enforced. It prohibits a bank holding company from placing “low quality”—i.e., speculative or illiquid—securities on the books of a federally insured unit.