Goldman Should Be Barred From Returning More Capital, Bair Says

Bloomberg reports:

Goldman Sachs Group Inc. (GS) should be prohibited from boosting its dividend or repurchasing stock because Federal Reserve stress tests showed the investment bank is too leveraged, according to former regulator Sheila Bair.

The leverage ratios of four financial firms dropped below 4 percent under the stressed scenario, according to test results the Fed released this week. Two of those firms, Citigroup Inc. (C) and MetLife Inc. (MET), were prohibited from raising dividends or repurchasing shares. The central bank approved the capital plans of two others, Goldman Sachs and Morgan Stanley.

“No distribution should have been approved that would bring the leverage ratio below 4 percent,” Bair, the former chairman of the Federal Deposit Insurance Corp., said yesterday in an interview. “With leverage of 25-to-1, during a crisis, these banks would likely suffer a run.”

Bair, before leaving the FDIC in July, fought for the leverage ratio to be more central in U.S. and international bank regulations. Even though her ideas were accepted initially at the Basel Committee on Banking Supervision, the European Union has since balked at implementing a leverage ratio in addition to other capital requirements.

Let them go bankrupt next time.