LDN - Business

Basel battle: Goldman's unlikely foot soldiers in the fight against bank capital hikes

[May 16, 2024] By Pete Schroeder

WASHINGTON (Reuters) - Jeff Riggs, a Montana businessman who owns a small data center, flew to Washington D.C. in November to meet with his U.S. Senator Steve Daines.

The trip wasn't his idea. It was arranged, paid for and scripted by Goldman Sachs as part of the bank's aggressive campaign to water down a proposal to raise capital requirements for big banks.

Riggs was one of dozens of small business owners Goldman recruited from all over the country in its battle against the so-called Basel Endgame. Their task in Washington was to urge lawmakers to sign a letter asking the Fed to reconsider the proposal.

The Wall Street bank set up meetings with members of Congress who have sway over financial regulation, providing employee escorts, talking points, and an agenda timed down to the minute. Goldman's schedule even suggested the tone the entrepreneurs should adopt in the meetings: "A balance between optimism about growth prospects and difficulty accessing capital."

A Reuters review of private Goldman documents, interviews with program participants and public disclosures show how Goldman leveraged its philanthropic 10,000 Small Businesses program to advocate for its own interests.

Others have reported on banks' efforts to enlist small business owners to lobby against Basel, but this is the first full account of Goldman's grassroots campaign. It illustrates the extreme lengths big U.S banks have taken to try to kill the Basel proposal which they say will force them to overhaul or shut down a range of products and businesses.

As drafted by the country's top bank regulators, the rule would impose one of the biggest regulatory burdens on the industry since the global financial crisis of 2007-09, raising aggregate capital for the largest U.S. banks by around 16%.

Among its chief targets are Wall Street banks' lucrative capital markets businesses, which will be subject to stricter risk management measures. The proposal aims to make banks more resilient to potential losses, lowering the risk of failures or bailouts. Banks say that they are already highly capitalized and the changes are unnecessary.

The rule would not apply to banks with less than $100 billion in assets, which provide around 60% of small business bank loans, according to 2020 data from the Small Business Administration (SBA).

A spokesperson for Goldman Sachs said it created the 10,000 Small Businesses program to address challenges entrepreneurs face, including their access to capital, and that visiting Washington has been a productive way for them to raise concerns.

"We'll continue to lift their voices on issues that matter to them for years to come."

The program has previously advocated on major small business issues, including COVID-19 aid and federal procurement reform, according to its website.

EVERYDAY ADVOCATES 'MAKE THE ASK'

While companies sometimes mobilize everyday Americans to advocate on popular issues in Congress, the strategy is unusual for Wall Street banks, which typically rely on ranks of experts, lawyers and lobbyists to win concessions on highly technical financial rules.

"To enlist non-financial people and organizations that have nothing to do with the intricacies of financial and bank regulation to come to Washington and plead the case that that regulation is somehow by extension hurting them is something very new," said Camden Fine, the former CEO of the Independent Community Bankers of America, a bank lobby group.

Reuters was unable to determine how much Goldman spent to fly small business owners to Washington, but its fourth quarter federal lobbying costs of $2.68 million were up roughly fivefold on both the previous quarter and the fourth quarter of 2022, OpenSecrets data shows.

Two thirds of that amount was spent on "grassroots lobbying" for its small business program, Goldman disclosed in a January filing, although it did not provide more details.

Lobbying by Goldman and other big banks may have worked. Jerome Powell, chair of the Federal Reserve which is leading the Basel draft alongside other regulators, said in March they were planning major changes. Reuters had reported hours earlier that the Fed planned to significantly reduce the proposed capital hikes.

While participating in the 10,000 Small Businesses program for the second time last year, Riggs mentioned in a program survey that he was struggling to find funding for a project.

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People walk in the Goldman Sachs global headquarters in Manhattan, New York, U.S., November 15, 2021. REUTERS/Andrew Kelly

"So they reached out and said 'would you be interested in coming to Washington D.C. and representing small businesses in Montana'," said Riggs, noting Goldman paid his travel costs.

Shepherded by a Goldman executive, Riggs and others from the program also met on the morning of Nov. 14 with Montana's other Senator Jon Tester and its Representative Ryan Zinke, Riggs said. The Senate meetings were scheduled just before bank regulators, including the Fed's top regulatory official, Michael Barr, were due to testify before Congress.

Goldman's agenda allowed four to five minutes for introductions and two to three minutes to frame the Basel conversation within the context of other challenges small businesses have faced, including inflation, a tight labor market and recession worries.

Goldman offered talking points but "wanted it in our own words," said Riggs. He and others then had around 10 minutes to share their experiences before asking lawmakers to sign the letter to the Fed, Goldman's agenda showed.

"Make the ask, and GS will follow up," the bank wrote.

It also suggested asking for a group photo.

"This proposal will limit credit availability to small businesses," Senator Daines told Barr and the other officials later that morning at the hearing.

"We had four Montana small business owners in the office here this morning who flew in to express their frustration with this regulation."

That day, Goldman also escorted some of its small business delegates to meet Fed officials, public records show.

Spokespeople for Daines, Tester, Zinke and the Fed either declined or did not respond to requests for comment.

'LEND BETTER'

Unveiled in 2009 when Goldman was embroiled in a political firestorm over its role in the financial crisis, the 10,000 Small Businesses program provides training, education and access to capital for small businesses.

In 2020, the bank launched 10,000 Small Businesses Voices to help entrepreneurs "advocate for policy changes" that will benefit them. The bank tapped that initiative to fight Basel.

Riggs said that he does have concerns about accessing affordable capital, but that he banks with small lenders that are not covered by the Basel proposal. Goldman was up front about how it stood to benefit from a less stringent rule when recruiting him, he said.

Two other small business owners who participated in the meetings told Reuters they rely on a variety of small and large banks, and spoke positively of the Washington experience.

A handful of the country's biggest banks will be hardest hit by Basel. Goldman pointed to data compiled by Washington bank group the Financial Services Forum showing the eight largest U.S. lenders provide 35% of business loans under $100,000. They also meet two-thirds of the bank funding needs of other financial institutions which in turn provide important services to businesses, according to the data.

But advocates for the rule point out that small business loans account for only around 3.3% of the total assets of banks with $50 billion or more in assets, according to the SBA study.

They say big banks could easily continue lending to small businesses at the same rates if they reduced dividends, bonuses and stock buybacks.

According to Stephen Cecchetti, a professor at the Brandeis International Business School who analyzed aggregate Fed loan data going back more than a decade, there is no clear evidence that higher bank capital requirements have resulted in U.S. banks lending less.

Cecchetti, who worked on the international Basel capital standards when he was an economist at the Bank for International Settlements, added in an email: "There is now increasing evidence that higher capitalized banks lend more and lend better."

(Reporting by Pete Schroeder; writing and additional reporting by Michelle Price; editing by Megan Davies and Anna Driver)

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