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."


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