Goldman Seeks Volcker Exemption For Mezzanine Funds

Feb 15 2012 | 2:45pm ET

With Wall Street uniting this week to decry the Volcker rule, which is set to take effect later this year, Goldman Sachs pushed for a loophole in the new regulation's restrictions on banks' investments in alternative investments funds.

Goldman met with Federal Reserve Board staff earlier this month to lobby for an exemption from the Volcker rule for mezzanine funds. According to the Fed, the four Goldman employees and three lawyers for the bank "expressed their view that the proposed rule does not permit a banking entity to acquire over 3% of the ownership interests in a 'credit fund' that is principally engaged in making or acquiring extensions of credits. GS explained that investors in credit funds require at least 5% 'skin in the game' from sponsors."

Goldman styles itself the owner of the world's largest family of mezzanine funds, having raised more than $28 billion over the past 16 years.

While many hedge fund engage in mezzanine lending, Goldman told the Fed that a line can be drawn between those funds that are "predominantly engaged" in mezzanine lending and that do not use "excess" leverage, and hedge funds.

Goldman's meeting with the Fed came as banks prepared a blistering series of letters to federal regulators, warning that the Volcker rule as written will have dire consequences for the U.S. financial system. The rule will have precisely the opposite effect than is intended, increasing risk in the system, letter after letter reads. The rule, which in addition to limiting hedge fund participation in alternative investments also bars proprietary trading, will also increase costs to investors, damage the country's competitiveness and could fall to a legal challenge.

The rule will limit liquidity, increasing "price uncertainty" and "market volatility" as well as leading to "higher transaction costs, and a reduced ability for corporations and other market participants to raise capital and hedge their risks," Morgan Stanley's Colm Kelleher and Jim Rosenthal warned. "Regardless of how the final rule turns out, it will be a shock to the U.S. financial system, as banking entities will need to take extraordinary measures to attempt to implement it," JPMorgan Chase's Barry Zubrow complained.

The dozens of comment letters are among the 14,000 received by the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Securities and Exchange Commission since October.

The rule's namesake submitted one, defending its provisions. Former Fed Chairman Paul Volcker wrote, "the recent years of financial crisis have seen spectacular trading losses in large commercial and investment banks here and abroad. Consequently, the stability of important banks was jeopardized, contributing to a financial crisis of historic dimension."


In Depth

Will Liquid Alts’ Performance Sustain Future Asset Flows?

Aug 25 2014 | 10:34am ET

Liquid alternative investment funds saw the highest percentage of capital inflows...

Lifestyle

Och Funds Women In Finance Initiative At U-M

Aug 28 2014 | 3:01pm ET

Och-Ziff Capital founder Daniel Och and his wife have made a "generous donation"...

Guest Contributor

Looking Ahead: What’s In Store For Managed Futures?

Aug 22 2014 | 12:52pm ET

The last five years were phenomenal for investors in equity indices. Will the next...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

July/August 2014 Cover

The time was right

Commodities/Futures magazine launched at the precipice of a revolution in the futures industry—really a revolution in the idea of risk management—that would move it from a small niche industry to ...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.