The speed with which Goldman Sachs, JPMorgan – even Citi and Morgan Stanley – raised equity capital at the end of last month, even as stocks sold off, banks failed and Congress voted down the Paulson bail-out plan, shows that markets still function but are open only to the strong.
In the week when Dick Fuld led Lehman Brothers into bankruptcy, John Thain sold Merrill Lynch to Bank of America, and AIG collapsed, Goldman Sachs’s shares had been beaten down to the point where they traded at just 80% of book value. Even though the firm had just $1.7 billion of sub-prime and $1.6 billion of alt-A mortgages on a $1 trillion balance sheet, it didn’t take a genius to see where this might be heading.
What did CEO Lloyd Blankfein do? Two things. First, he asked the Federal Reserve to allow Goldman to convert to a bank holding company – something it had been discussing since the collapse of Bear Stearns and at this point felt a sudden urgency to get on with.
This amounted to no more than de jure recognition of the fact that Goldman had been subject to regulation by the Fed since March, with Fed staff permanently stationed in its offices and access to Fed funding and liquidity.