Is Goldman Sachs prepared to lose money on US Federal deposits in return for favours?

The problem with Goldman Sachs is that, as an institution, it conspires. So even for empiricist cynics like The Slogger, it’s impossible to ignore things when a contact points something out which is inexplicable. Below is another example.

US financial institutions currently get paid 0.25% on excess Federal deposits. These are monies over and above the amounts they have to have on deposit with the Government to operate as a first-line financial institution. The general idea is that one keeps the absolute mimimum in that place, because the payment rate (as with blackmail-cash from all but the most desperate governments) is awful. Thus at the end of 2008, Goldman Sachs kept a paltry $6 million there over and above the required amount: to Goldman, that’s a minor clerical error.

But a year later in December 2009, the bank’s loss-making amount held with the Federal Government was an eye-popping $26 billion.

If you work out the negative margin between what the Fed pays on deposits (and what Goldmans was lending other people last year) the annualised cost of this piece of apparent idiocy is well over $200 million. This is not a clerical error.

There are three reasonable explanations for such an ethics-free institution doing something which, at first sight, looks like commercial madness.

The first is that this ‘loss’ is a payment to Uncle Sam for services already rendered on behalf of the bank that always comes up smelling of roses. The second is that this is a down-payment by that very same fragrant-rose bank on future services to be rendered. The third is that it represents both.

The US Government is looking for loyal supporters with tons of cash at the moment. And Goldman is always looking for ways to get the inside track from government.

As the Americans say, “Go figure”.