Goldman Needs Volcker Delay to Avoid Private-Equity LossesJesse Hamilton, Ian Katz and Cheyenne Hopkins
Goldman Sachs Group Inc. has $7 billion invested in private equity that it might have to sell at a loss. For Morgan Stanley, it’s $2.5 billion.
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.
Banks argue that if they dump holdings quickly, they will have to accept discount prices. Analysts and lawyers for the financial industry say Wall Street’s concerns have begun to make headway with the Federal Reserve, which plans to decide on an extension soon.
“There’s considerable pressure the Fed is feeling in that they don’t want institutions to have a bloodbath trying to divest funds,” said Kevin Petrasic, a partner in the global banking practice of Paul Hastings LLP in Washington. “The Fed has been indicating flexibility.”
The Volcker deadline underscores the tension regulators face between enforcing rules meant to curb risk-taking and responding to banks’ complaints that many Dodd-Frank Act reforms aren’t workable. The Fed is deciding what to do after lawmakers lambasted it at congressional hearings last month for weak oversight of Wall Street.
Before the 2008 financial crisis, banks purchased shares in thousands of private-equity and venture-capital funds. The money invested was used to buy stakes in private companies, meaning it’s locked up for years until the businesses are sold.
When Congress included the Volcker Rule in the 2010 Dodd-Frank law, it realized banks might have difficulty dumping holdings. As a result, lawmakers authorized the Fed to put the deadline off for several years.
Banks want an extension until 2022, which would allow them to keep their private-equity investments until they expire. Fed General Counsel Scott Alvarez told a conference of banking lawyers last month that the central bank will make a decision soon.
Eric Kollig, a Fed spokesman, declined to comment.
Good investment returns may be another reason why Wall Street wants to hold onto its private-equity stakes, as the value of the holdings has rallied in the past year.
Investors are willing to pay as much as 100 percent of the value of a buyout fund, up from a low of 40 percent in the first half of 2009, according to Cogent Partners, a Dallas-based investment bank that advises on the sale of private-equity stakes.
Banks can apply for more time on each individual fund they’ve invested in. Because there are thousands, securities lawyers say the Fed will have to grant a blanket extension to avoid getting buried in paperwork. If the Fed tries to go through each fund one-by-one, there’s no chance it finishes before July, said Douglas Landy, a partner at Milbank, Tweed, Hadley & McCloy LLP in New York.
The Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, released a survey in October showing that 14 of its members plan to seek extensions for about 3,000 funds.
Two Democratic senators, Jeff Merkley of Oregon and Mark Warner of Virginia, wrote an Oct. 29 letter to Fed Governor Daniel Tarullo asking for “an appropriate transition period” for banks to wind down illiquid funds to avoid “market disruptions.”
On banks’ Volcker Rule complaints, the Fed has already shown a willingness to bend. It’s given Wall Street a break on holding certain small-bank securities and collateralized loan obligations.
Citing pressure over Volcker, Citigroup Inc. spun off hedge-fund unit Napier Park Global Capital last year. Citigroup then agreed in August to sell 80 percent of its $1.5 billion stake in Metalmark Capital Partners II, a private-equity fund. Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment on how much money the bank received for Metalmark.
Goldman Sachs has reduced its investments in private funds by about $3 billion this year to $11.4 billion, according to a Nov. 5 regulatory filing. The bank said Volcker will force it to sell off the bulk of what’s left.
“The firm may receive a value for its investments that is less than the carrying value,” Goldman Sachs said in the filing. “There could be a limited secondary market for these investments, and the firm may be unable to sell them in orderly transactions.”
Morgan Stanley has $2.5 billion in private-equity funds and another $1.8 billion in real-estate funds, according to a Nov. 4 regulatory filing.
Spokesmen for Goldman Sachs and Morgan Stanley declined to comment.
Democratic lawmakers who helped write Dodd-Frank said they’re tired of banks dragging their feet on the Volcker Rule.
Wall Street says it’s too complicated, even though “they made it that way,” said Senator Sherrod Brown of Ohio. “The banks have slowed it” and don’t need more time, he said.