April 22, 2009

Mr. Michael Civitella

Chief Executive Officer and President

Goldman Sachs Bank USA

295 Chipeta Way, Fourth Floor

Salt Lake City, Utah 84108

Dear Mr. Civitella: 

This is in response to your request on behalf of Goldman Sachs Bank 

USA (“Goldman Bank”), Salt Lake City, Utah, for exemptions from section 23A 

of the Federal Reserve Act and the Board’s Regulation W1 and an exception from 

the anti-tying restrictions in section 106 of the Bank Holding Company Act 

Amendments of 1970.2

You have indicated that GSGI proposes to reorganize its business in 

connection with Goldman Bank’s conversion from an industrial loan company to a 

state member bank.

 Granting these requests would permit Goldman Bank to

acquire certain assets and businesses from its parent, Goldman Sachs Group, Inc.

(“GSGI”), New York, New York, and certain GSGI nonbank subsidiaries in 

connection with a proposed internal reorganization. 

3

In the reorganization, GSGI will transfer seven of its subsidiaries to 

the bank, as well as certain other assets, and these entities will become operating 

 As part of that reorganization, Goldman Bank proposes to 

acquire certain entities and assets (“Assets”) from GSGI and other affiliates and to 

extend credit to affiliates secured by the Assets on a transitional basis.

 

1

 12 U.S.C. § 371c; 12 CFR part 223. 

2

 12 U.S.C. § 1971 et seq. 

3

 Goldman Bank’s application for membership in the Federal Reserve System was 

approved on September 25, 2008. 
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subsidiaries of the bank. The subsidiaries included in the Assets to be transferred 

are listed in Appendix A. In addition, the Assets to be acquired by Goldman Bank 

include: 

• Certain loans, unfunded commitments, and securities totaling 

approximately $[ ]; and

• Mortgage servicing rights currently owned by Avelo Mortgage, L.L.C., a 

GSGI subsidiary. 

The Assets may include loans that contain conditions that would have violated the 

anti-tying restrictions in section 106 if the loans had been extended by a bank.

Section 23A Exemption Requests

Section 23A and Regulation W limit the amount of “covered 

transactions” between a bank and any single affiliate to 10 percent of the bank’s 

capital stock and surplus and limit the amount of covered transactions between a 

bank and all its affiliates to 20 percent of the bank’s capital stock and surplus. 4

 

“Covered transactions” include a bank’s purchase of assets from an affiliate, a 

bank’s extension of credit to an affiliate, the issuance of a guarantee by a bank on 

behalf of an affiliate, and certain other transactions.

5

 The statute and regulation 

also require a bank to secure its extensions of credit to, and certain other covered 

transactions with, affiliates with prescribed amounts of collateral.6

 In addition, 

section 23A and Regulation W prohibit a bank from purchasing low-quality assets 

from an affiliate7 and require that all covered transactions between a bank and an 

affiliate be on terms and conditions that are consistent with safe and sound banking 

practices.

8

Goldman Bank’s purchase of the Assets from GSGI and the bank’s 

extensions of credit to affiliates secured by the Assets would be covered 

transactions subject to the quantitative limits and qualitative requirements of 

 

4

 12 U.S.C. § 371c(a)(1) and 12 CFR 223.11 and 223.12.

5

 12 U.S.C. § 371c(b)(7) and 12 CFR 223.3(h).

6

 12 U.S.C. § 371c(c) and 12 CFR 223.14.

7

 12 U.S.C. § 371c(a)(3) and 12 CFR 223.15.

8

 12 U.S.C. § 371c(a)(4) and 12 CFR 223.13.
- 3 -

section 23A and Regulation W.9 The aggregate value of these covered transactions 

for purposes of Regulation W would be up to $[ ].

10

To facilitate the reorganization, Goldman Bank has requested 

exemptions from section 23A and Regulation W for these covered transactions. 

Section 23A and Regulation W specifically authorize the Board to exempt, in its 

discretion, transactions or relationships from the requirements of the statute and 

rule if the Board finds the exemption to be in the public interest and consistent with 

the purposes of section 23A.

 This amount would 

exceed the bank’s quantitative limits under the statute and rule. 

11 The Board previously has indicated that the twin 

purposes of section 23A are (i) to protect against a depository institution suffering 

losses in transactions with affiliates; and (ii) to limit the ability of an institution to 

transfer to its affiliates the subsidy arising from the institution’s access to the 

federal safety net.12

The Board previously has granted to other banks exemptions from 

section 23A and Regulation W that are similar to the exemptions requested by 

Goldman Bank. The Board routinely has approved exemptions under section 23A 

for one-time asset transfers that are part of a corporate reorganization and that are 

structured to ensure the quality of the transferred assets.

A. Asset Purchase Exemption Request

13

• The Assets must be externally rated B- or higher by a nationally 

registered statistical rating organization (“NSRO”) or, if unrated, of 

 To ensure the quality of 

the transferred Assets and to protect Goldman Bank, the Board has determined to 

impose several conditions in connection with this exemption: 

 

9

 See 12 U.S.C. § 371c(b)(7)(A) and (C); 12 CFR 223.3(h)(1) and (3). 

10 See 12 CFR 223.22(a).

11 12 U.S.C. § 371c(f)(2); 12 CFR 223.43(a).

12 67 Federal Register 76560 (Dec. 12, 2002).

13 See, e.g., Board letters dated July 1, 2008, to Kathryn V. McCulloch, Esq. 

(JPMorgan Chase & Co.); March 25, 2008, to Karen Grandstrand, Esq. (Minnwest 

Corporation); December 21, 2007, to Andres L. Navarette, Esq. (Capital One 

Financial Corporation); and June 30, 2007, to Carl Howard, Esq. (Citigroup Inc.). 
- 4 -

equivalent credit quality under the bank’s internal rating system. The 

Assets also must not be low-quality assets (as defined in Regulation W).

• GSGI must, at the request of the Federal Reserve, in the Federal 

Reserve’s full discretion, repurchase any transferred Asset from the bank 

at the bank’s original purchase price.

• For the life of each transferred Asset, GSGI must (i) reimburse the bank 

for any credit-related loss upon sale by the bank of a transferred Asset 

and (ii) repurchase any transferred Asset that becomes a low-quality asset 

(as defined in Regulation W)14 at the bank’s original purchase price.15

• In support of its guarantee, GSGI must pledge to Goldman Bank 

collateral that is acceptable to the Federal Reserve and in an amount 

equal to [ ] percent of the aggregate covered-transaction amount

 

Such reimbursements and repurchases must occur quarterly or more 

frequently. 

16

 

14 GSGI proposes to transfer certain mortgage servicing rights and derivatives to 

the bank as part of the Assets. Because of certain differences in the nature of these 

types of assets from the nature of loan assets, the definition of “low-quality asset” 

in Regulation W (designed primarily to address loans) does not adequately capture 

when these assets become low quality. See Appendix B for a description of when 

those assets would be considered “low quality” for purposes of CSGI’s guarantee. 

15 Some of the Assets may be transferred with credit default swap (“CDS”) 

protection from GSGI or another affiliate of the bank, or the bank may decide to 

obtain CDS protection for an Asset from an affiliate after it is transferred. 

Although the bank may obtain CDS protection from GSGI or another affiliate, the 

bank may not pay for this protection because the bank would already receive credit 

protection for the transferred Asset from GSGI under the guarantee described 

above. GSGI may, however, net payments to the bank under the CDS from any 

payment obligations to the bank under the guarantee.

16 The aggregate covered-transaction amount generally is equal to the bank’s 

purchase price for transferred Assets plus the face amount of committed but 

unfunded credit lines.

for the 

life of the transferred Assets. If a decline in value of the collateral causes 

GSGI to breach the [ ] percent collateral requirement, additional 
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collateral must be pledged to return GSGI to compliance with this

requirement.17

• Goldman Bank must maintain a tier 1 leverage capital ratio of at least 

6 percent, a tier 1 risk-based capital ratio of at least 8 percent, and a total 

risk-based capital ratio of at least 11 percent [ 

 ]. 

• The Assets must be transferred to the bank by [ ]. 

B. Financing Transactions Exemption Request

Goldman Bank also proposes to engage in certain financing transactions 

(secured by the Assets), such as loan participations, repurchase agreements, and 

securities-borrowing transactions (collectively, “Financing Transactions”), with 

affiliates in the transition period before GSGI transfers the Assets to the bank. 

Consistent with previous requests for exemptions from section 23A that the Board 

has granted to permit a bank to engage in certain securities financing transactions 

with its affiliates,

18

• The Financing Transactions must be overnight financing transactions that 

are fully secured, marked-to-market daily, and subject to daily marginmaintenance requirements. 

Goldman Bank may only engage in Financing Transactions 

that meet the following conditions:

• Collateral for the Financing Transactions must be obligations that are 

externally rated B- or higher by an NSRO or, for unrated assets, of 

equivalent credit quality and must not include any “low-quality assets” 

(as defined in Regulation W).

 

17 GSGI may release collateral to the extent that transferred Assets are sold or 

mature.

18 See, e.g., Board letters dated October 23, 2007, to Carl Howard, Esq. 

(Citigroup Inc.); October 12, 2007, to Jay Levine (The Royal Bank of 

Scotland plc); October 11, 2007, to Alan B. Kaplan, Esq. (Barclays Bank PLC); 

September 12, 2007, to Michael L. Kadish, Esq. (Deutsche Bank AG); 

August 20, 2007, to Kathleen A. Juhase, Esq. (JPMorgan Chase & Co.); 

August 20, 2007, to Patrick S. Antrim, Esq. (Bank of America Corporation); and 

August 20, 2007, to Carl Howard, Esq. (Citigroup Inc.). 
- 6 -

• GSGI must fully guarantee the prompt and full payment of obligations of 

the affiliate counterparty to each Financing Transaction. 

• In support of the guarantee, GSGI must provide collateral equal to 

[ ] percent of the amount of the affiliate’s obligation for each Financing 

Transaction.

In previous requests, the Board has permitted a bank to engage in financing 

transactions only if the transactions would be promptly collectable even in the case 

of bankruptcy of the affiliate. Because Goldman Bank proposes to engage in 

certain financing transactions where the bank cannot represent that it would be able 

to liquidate the transactions promptly in the event of the bankruptcy of the 

borrowing affiliate, the bank must comply with the following supplemental 

conditions to address this added risk:

• The aggregate amount of Goldman Bank’s Financing Transactions with 

all its affiliates must not exceed $[ ] at any time.

• Goldman Bank may enter into such transactions only until 

October 29, 2008. 

C. Statutory Standards for the Section 23A Exemption Requests

 

As noted, section 23A and Regulation W specifically authorize the 

Board to exempt, in its discretion, transactions or relationships from the 

requirements of the statute and rule if the Board finds the exemption to be in the 

public interest and consistent with the purposes of section 23A. According to 

Goldman Bank, these exemptions are in the public interest because the 

reorganization is expected to enhance the bank’s efficiency, thereby allowing it to 

extend additional credit into the market and serve its customers better. As with 

previous exemption requests, and consistent with the requirements for certain 

internal corporate reorganizations in Regulation W,19

The proposed asset purchase and Financing Transactions by Goldman 

Bank would be subject to the market-terms requirement of section 23B of the 

Federal Reserve Act. Section 23B generally requires that transactions between a 

the directors of Goldman 

Bank have reviewed and approved the transactions described above. 

 

19 12 CFR 223.41(d).
- 7 -

bank and its affiliates be on terms that are at least as favorable to the bank as the 

terms of comparable transactions between the bank and a third party.

20

Section 106 of the Bank Holding Company Act Amendments of 1970

generally prohibits a bank from conditioning the availability or price of a product 

on a requirement that the customer obtain another separate product from, or 

provide another separate product to, the bank or an affiliate of the bank. This 

statutory prohibition did not apply to products and services provided by the nonbank subsidiaries of Goldman Sachs that were offered or provided without 

reference to the products or services of Goldman Bank. A small number of loans 

included in the Assets to be transferred to Goldman Bank might contain conditions 

that would have violated anti-tying restrictions if the loans had been extended by a 

bank. As a general matter, it is a violation of section 106 for a bank to acquire 

such loans from an affiliate. Section 106 authorizes the Board to grant exceptions 

to the prohibition if the exception is not contrary to the purposes of this section.

 

In light of these considerations and all the facts and circumstances of 

this case, the proposed transactions appear to be consistent with safe and sound 

banking practices and on terms that will ensure the quality of the transferred 

Assets. Accordingly, the proposed transactions appear to be in the public interest 

and consistent with the purposes of section 23A. The Board, after consultation 

with staff of the Federal Deposit Insurance Corporation, hereby grants the 

requested exemptions. 

Anti-Tying Exception Request

21

The Board’s determinations are specifically conditioned on 

compliance by Goldman Bank and GSGI with all the commitments and 

 

In light of all the facts and circumstances of this case, the Board grants an 

exception from section 106 to permit Goldman Bank to acquire the Assets. Going 

forward, however, the bank and its subsidiaries will not be permitted to extend 

or renew any loans on terms that would violate the anti-tying restrictions in 

section 106. 

Conclusion

 

20 12 U.S.C. § 371c-1(a). 

21 12 U.S.C. § 1972(1).
- 8 -

representations made in connection with the requests and with the conditions 

discussed above. These commitments, representations, and conditions are deemed 

to be conditions imposed in writing in connection with granting the requests and, 

as such, may be enforced in proceedings under applicable law. The determinations 

are also based on the specific facts and circumstances surrounding the proposed 

transactions and may be revoked in the event of any material change in those facts 

and circumstances or any failure by Goldman Bank or GSGI to observe any of 

these commitments, representations, or conditions. Granting the requests does not

represent a determination concerning the permissibility of any other transactions 

engaged in by Goldman Bank or GSGI that are subject to section 23A, 

Regulation W, or section 106. 

Sincerely, 

(signed)

Robert deV. Frierson

Deputy Secretary of the Board

Attachments

cc: Ivan J. Hurvitz, Vice President

 Federal Reserve Bank of New York

Federal Deposit Insurance Corporation

 
- 9 -

Appendix A

The following subsidiaries are included in the transferred Assets:

• Goldman Sachs Capital Markets, L.P., a multipurpose dealer in 

over-the-counter fixed-income swaps and other derivatives, primarily 

interest rate, credit, and foreign exchange derivatives (approximately 

$[ ] in assets). 

• Goldman Sachs Credit Partners, a company that buys, sells, and originates 

secured and unsecured senior commercial loans and provides financing for 

the purchase of senior bank debt (approximately $[ ] in assets).

• Goldman Sachs Mortgage Company, a company that buys, sells, originates, 

and invests in commercial and residential mortgage loans and related 

instruments (approximately $[ ] in assets).

• William Street Commitment Corporation (“Commitment Corp”) and 

William Street Credit Corporation (“Credit Corp”), companies that provide 

unsecured syndicated loan facilities primarily with investment-grade 

corporate borrowers. Credit Corp holds funded loan assets and Commitment 

Corp extends commitments. Commitment Corp has approximately 

$[ ] in assets, and Credit Corp has approximately $[ ] in assets.

• Goldman Sachs Specialty Lending Holdings, Inc. (“Specialty Lending”) and 

Goldman Sachs Specialty Lending Holdings, Inc. II (“Specialty Lending 

II”), companies that originate secured loans to middle-market companies. 

Specialty Lending has approximately $[ ] in assets, and Specialty Lending II 

has approximately $[ ] in assets.
- 10 -

Appendix B

Transferred Assets that are Derivatives

If Goldman Bank downgrades a derivatives counterparty to a [ ] or below in the 

bank’s internal credit rating system in any calendar quarter during the five years 

after the proposed transfer, GSGI will promptly, after the end of that quarter, pay 

Goldman Bank an amount equal to any change in the credit-valuation adjustment 

of the counterparty (minus the value of any hedge by Goldman Bank that was 

purchased by GSGI) from the time of consummation of the transfer to the time of 

the downgrade. Moreover, if a derivatives counterparty defaults at any time during 

the five years after the proposed transfer, GSGI must promptly pay Goldman Bank 

an amount equal to the then-replacement cost of the bank’s derivative transactions 

with the counterparty (net of proceeds from any liquidation of collateral or 

amounts recovered from the defaulting counterparty). In calculating GSGI’s 

payment obligation to the bank upon counterparty default, GSGI may net any 

previous payment made by GSGI to the bank as a result of an internal rating 

downgrade of the counterparty.

As an alternative to GSGI’s making any such required payment, GSGI may, with 

the prior consent of the Federal Reserve, repurchase, or otherwise fully compensate 

Goldman Bank for, the derivative transaction. 

Transferred Assets that are Mortgage Servicing Rights

GSGI will make a cash payment to Goldman Bank equal to the amount of any 

impairment recognized or direct write-downs related to the mortgage servicing 

rights or servicing advances in that quarter. GSGI must make the cash payment 

within 30 days after the end of each calendar quarter. Goldman Bank will hold an 

amount of risk-based capital equal to the impairment recognized or direct writedown taken on any rights or advances so long as Goldman Bank retains ownership 

or control of the rights or advances. For example, the risk-based capital charge for 

each impairment recognized or direct write-down related to each right or advance 

would be 100 percent (equivalent to a 1250 percent risk weight) rather than the 

8 percent (equivalent to a 100 percent risk weight) that would apply to a similar 

asset that is not a part of the rights.

As an alternative to GSGI’s making any such required payment, GSGI may, with 

the consent of the Federal Reserve, repurchase such mortgage servicing rights or 

advances.