The 'Goldman Sachs Amendment'

The New York Times reports that Nobel Stiglitz, a Nobel Prize-winning US economist, is calling for a bill to bar banks from flitting between bank charter status (which they may elect to have during a time of financial crisis as it puts firms under the wing of the Federal Reserve) and being a less-regulated investment bank (which might be attractive during boom times).

Stiglitz's call comes at a time when speculation is mounting that Morgan Stanley, and more particularly Goldman Sachs, are thinking of giving up their bank charters in order to avoid some of the restrictions that are coming down the track (in terms of capital, leverage, prop trading and derivatives) on the financial reform front.

The newspaper says that the economist is concerned that the firms 'could switch back and forth, giving up their charters as bank holding companies to partake risky activities on one day, and then reapplying for it the next if things go wrong and they need government help'. The proposal is already being dubbed 'The Goldman Sachs Amendment'.

In the meantime, Reuters reports that Australian hedge fund Basis Yield Alpha Fund is suing Goldman, aiming to recoup $56m in losses it sustained on the now infamous $1bn Timberwolf CDO deal, which hit the headlines at those recent Senate hearings.

A Goldman spokesperson said: 'The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world's most experienced CDO investors, to shift its investment losses to Goldman Sachs. At the time of the Timberwolf transaction, Basis specifically stated that it would not place any reliance on Goldman Sachs, and this decision formed part of the agreement Basis signed. Basis made its investment at market levels -- levels that it deemed attractive. These levels were substantially below the face value of the securities and consistent with where other investors were purchasing the same Timberwolf securities during the same time period.

Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions. A material fact worth noting is that Goldman Sachs also had substantial exposure to Timberwolf securities and lost several hundred million dollars as a result. We believe the lawsuit is without merit'.

Finally, Bloomberg reports that, according to its sources, the SEC is now also probing Goldman's 2006 $2bn Hudson Mezzanine CDO. The CDO is said to have imploded within 2 years, but Goldman is thought to have purchased credit protection and was paid off when it did so.

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