In the maze of subsidiaries that make up Goldman Sachs Group, two in London have nearly identical names: Goldman Sachs International and Goldman Sachs International Bank, the New York Times reported. Both trade financial instruments known as derivatives with hedge funds, insurers, governments and other clients. U.S. regulators, however, get detailed information only about the derivatives traded by Goldman Sachs International. Thanks to a loophole in laws enacted in response to the financial crisis, trades by Goldman Sachs International Bank don’t have to be reported. A decade after a financial crisis fueled in part by a tangled web of derivatives, regulators still have an incomplete picture of who holds what in this $600 trillion market. “It’s a global market, so you really have to have a global set of data,” said Werner Bijkerk, the former head of research at the International Organization of Securities Commissions. “You can start running ‘stress tests’ and see where the weaknesses are. With this kind of patchwork, you will never be able to see that.” The 2010 Dodd-Frank law was supposed to improve regulators’ ability to monitor derivatives. American banks had to start reporting specifics about their trades, including whom they traded with, to the Commodity Futures Trading Commission. The goal was to prevent a recurrence of the financial crisis, when fatal problems at Lehman Brothers caused a tidal wave of troubles at other banks that were connected through derivatives. In part because nobody could map out those connections, nobody knew where problems lurked, and fearful banks stopped lending to one another. But the Dodd-Frank Act contained a big gap: Banks don’t have to disclose to American regulators their holdings of derivatives housed in certain offshore entities. The critical variable is whether the American parent company is legally on the hook to bail out its foreign subsidiary if it gets into trouble. As long as the answer is “no,” the foreign entity isn’t subject to the Dodd-Frank requirements.
