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Irreconcilable Differences Between Goldman Sachs and CIT


One gets all the benefits; the other risks complete failure.

As a teenager, I hated those conversations with my father that began with him saying, "So let me get this straight…" during which my adolescent logic would be picked apart, thought by thought, until even I saw how clearly stupid I'd been. Bread crumb, bread crumb, bread crumb -- bear trap.

This morning as I saw Goldman Sachs' (GS) cup-runneth-over earnings and the headlines regarding CIT Group (CIT), I couldn't help but hear my father's voice once again. Only this time, he'd be saying:

"So let me get this straight. Last year, the government agrees to make Goldman Sachs a bank holding company. They move all of their counter-party derivatives business into a newly formed bank. They receive billions in TARP funds, and tens of billions in FDIC guarantees so they can issue debt.

"And now they report unbelievable earnings, but they don't have an asset category called "loans" on their balance sheet? And as Todd noted this morning, Goldman executives sold $700,000,000 worth of stock during the period when they received $10 billion in TARP money?

"And then on the other side, you have CIT, whose balance sheet is almost all loans, whom the government won't step up to support in a liquidity crisis -- even though the government allowed them to become a bank holding company and gave them TARP funds? And they're both 'banks'?"

To which my only response is: "Yes."

I've long felt that public policies make for strange bedfellows, and nowhere is this clearer than in today's headlines. Goldman Sachs receives all of the benefits of being a bank without lending money, while CIT -- which has been a small and midsize company lender for more than 100 years -- can't make the transition to "bank" fast enough and risks complete failure.

Don't get me wrong -- I understand the reasons the government had to stand behind Goldman Sachs: Its failure would have led to the failure of other financial-service firms. But to look through its financial statements today, it's very hard to see how its stepped up to the responsibilities of being a bank -- if it has as at all. Call me old-fashioned, but with the privilege of taking government-backed deposits must come the public responsibility of lending money.

Now, in the interest of full disclosure, Goldman is hardly alone in its arbitrage of government-banking regulations: Look at the balance sheets of State Street (STT) and Bank of New York Mellon (BNY) and they don't look much like banks either, yet they were quick to take full advantage of the government bank-bailout programs.

My point in all of this is that as Congress considers new banking regulation, I think it needs to think very hard about who is a bank, and more specifically, who should be entitled to issue deposits and receive FDIC deposit insurance. And in this regard, they might want to go back to their history books and reread why FDIC insurance was created in the first place -- "the illiquidity of loans."

And while Congress is looking at things, they might also consider what's happening to the commercial-paper market and MTN/bank-note markets for financials. Put simply, no one wants non-insured paper because it's considered too risky. This is what's killing CIT, and I'd offer several other newly minted bank holding companies which are quickly scrambling to find deposits to repay maturing non-deposit funding.

The market is sending a clear message: Be a bank and live. But it adds: If you can, just take the good parts of being a bank, and live large.
Position in JPM, SKF, SH, and SPY.
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