On Wednesday, Reuters Breakingviews launched Goldman’s trial balloon about a possible BNY-Mellon acquisition. Even with all the talk of Washington’s deregulatory mood, I have never heard of a deal with greater political risk, and I’ve worked on the first hostile-takeover in recent U.S. banking and a slew of other way-out-there M&A transactions. The Reuters column lays out a potentially-impeccable business rationale for the Goldman transaction, but wanting won’t make it so. Not only are the political obstacles likely to prove insurmountable regardless of all of Goldman’s friends in high places, but any realistic understanding of the regulatory framework sure to apply to any such behemoth will either kill the transaction before it’s consummated or doom it thereafter. Goldman might well want this deal, but I suspect it’s too smart to do it.
Although Reuters does mention the challenges of turning two GSIBs into one, it does so only in passing as it lauds all the tempting benefits of a merger. Whomever wants this transaction surely sees this sunny-side, at least for the short-term when an activist investor or hedge fund has its fun, but there are structural impediments to transactions of this sort. Goldman’s name resonates all too well with many conspiracy theorists and Democrats like to point to it due to all the Goldman alum embedded around the Trump Administration. But big banks as a group are ill-loved and more concentration in them will be much feared on both the left and right even if neither of the companies involved is Goldman Sachs. Democrats who have highlighted defeating large-firm consolidation as a top campaign priority will surely mount the barricades to block a deal such as this. They won’t be able to stop it, but they sure can enjoy it and they will.
Leaving politics aside, the thinking behind the deal likely rests on the fact that, even though both Goldman and BNY-Mellon are GSIBs, neither has a large asset footprint. As a result, the transaction would not transgress limits in Dodd-Frank designed to block really big deals above asset and liability thresholds. FSOC’s hands-off mood is likely also to let a deal like this slide by. However, Dodd-Frank also gives the Fed clear authority to stifle transactions that pose threats to financial stability. It’s already very nervous about BNY-Mellon’s monopoly over government clearing. Pairing this with a major government trader would probably give it conniptions.
I can’t imagine that the deal could go forward without the acquirer being forced to agree to divest either clearing or trading. Doing one or the other would destroy many of the putative synergies touted in the Reuters article.
But, even if I’m wrong and the deal makes sense following such a divestiture, who would buy businesses this big? BlackRock or Blackstone or a more multi-colored gigantic non-bank? All this would do is make the Fed’s conniptions go apoplectic. Talk about deep shadows!
But assume I’m wrong and the deal goes through without a dent in government-clearing. No divestiture is required and the putative synergies stand, but does the business even then make sense under applicable rules?
Leaving aside what custody clients think of merging custody banking with trading, subprime risk-taking, and Goldman’s merchant banking business, the Fed will take a hard look and I suspect not a happy one. Custody banking is critical financial infrastructure and it’s thus usually associated with only limited contact to risk-taking that puts the custody bank’s balance sheet at risk. State Street for example is the other huge global custodian and pretty much all it does is asset management – i.e., playing with other people’s money. It does do more than a bit of securities financing, but not in the higher-risk activities that could put huge cash deposits at risk. BNY-Mellon does a bit of risk-taking in commercial banking and both JPM and Citibank also have custody operations, but their structure is considerably different and their market position far smaller than the one Goldman would assume if it acquired BNY-Mellon. At the very least, the Fed would require significant firewalls and internal controls. I think it would go a good deal farther though, and also mandate ring-fencing, high leverage ratios, and a bunch of other sanctions that not only curtail Goldman’s ambitions, but also hobble other custody banks in a new rulemaking framework then made applicable across the entire sector.
The GSIB surcharge for a GSIB such as a combined Goldman/BNY-Mellon should also make even those accustomed to formidable GSIB surcharges pale. The new company might still be compact in terms of asset size, but what about complexity? Inter-connectedness? Derivatives operations? Cross-border resolution challenges? The Fed will surely see red, especially given the notorious complexity of combining two big, but simple BHCs into one still bigger one. Deals closed at the height of the business cycle blessed by the Fed – First Union/Wachovia just for starters – have not exactly gone all that well. Deregulatory mood notwithstanding, a chastened Fed is a wary Fed.
But assume again I’m wrong again and the Fed is in fact gung-ho for a giant GSIB. No divestitures are mandated, the Fed holds a face-saving CRA hearing, and then the Goldman/BNY-Mellon combo is complete. Back again to political risk.
What if the House or Senate come under Democratic control this November? Ranking Member Waters (D-MA) already has a “mega-bank” break-up bill in the hopper. It’s aimed at Wells Fargo, but would be quickly rebuilt to suit. Sen. Warren? Don’t even think about it and the 2020 election.