Sunday, January 26, 2014

'Grandpa' Goldman Trots Out History to Justify Commodities Business

NEW YORK (TheStreet) -- History is chic, and Goldman Sachs (GS) hopes to make selective use of it to stay in the commodities business despite increased media and government scrutiny and plans by rival JPMorgan Chase (JPM) to exit the space.

"Our basis for being in the physical commodities business is having been grandfathered in it at the time we became a bank holding company," Blankfein told CNBC Wednesday. "We have a slightly different status than other banks in that because there is that legislative grandfathering solution. Embedded in that notion of being grandfathered is that we have been in it for a long time over 100 years. We were J. Aaron and Company."

Goldman, along with Morgan Stanley (MS), became a bank holding company in 2008 "based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding," Blankfein said in a prepared statement at the time of the change in status.

Access to funds was all that mattered to financial institutions in Sept. 2008 and regulators -- doing everything they could to prevent the financial crisis from deepening -- were eager to stave off the collapse of companies like Goldman. The fact that many of those regulators, such as then-Treasury Secretary Hank Paulson and then-New York Federal Reserve Chairman Stephen Friedman, were former Goldman executives, would prompt lots of questions soon after those emergency measures were taken. In other words, the fact that Goldman was allowed to keep its commodities business in 2008 when it became a bank holding company says little about whether it should be allowed to keep it today. Similarly, the fact that Goldman acquired J. Aaron in 1981, or that Blankfein and Goldman President Gary Cohn got their start there, does not mean Goldman has been in the commodities business for more than 100 years. Goldman, Morgan Stanley, JPMorgan and other financial companies have developed very large businesses in so-called "physical commodities." They own tankers, aluminum storage facilities and other industrial assets that give them keen insights into -- and perhaps control over -- prices. Legislators such as Elizabeth Warren (D., Mass.) want to return to the 1930s days of Glass Steagall when financial institutions had fewer tentacles. Using the word "grandfather" a lot and noting Goldman bought a 100-year-old company in the 1980s is unlikely to trick Warren and her ideological compatriots, but Blankfein apparently believes it's worth a try. -- Written by Dan Freed in New York. Follow @dan_freed

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