WASHINGTON — The criticism by consumer advocates of Goldman Sachs' acquisition of GE Capital's online deposits has now given way to questions over how the Federal Reserve Board has handled the application.

The National Community Reinvestment Coalition and other groups charge that the Fed has bypassed its own guidance on the pre-filing of applications in a manner that favors Goldman. They also continue to call out the Fed over the level of transparency for the public to learn about and weigh in on pending deals.

"They're kind of preapproving something before the public can learn anything about it," said Matthew Lee, founder of Inner City Press and Fair Finance Watch. "This is not the way it's supposed to be. It's just wrong. Wrong, wrong, wrong."

The NCRC last month accused the Fed and Goldman of ignoring its own 2012 guidance on the pre-filing process for applications by which companies can seek the central bank's consultation on a potential deal before formally applying.

Under the 2012 guidance, Fed officials may review material about the deal as a courtesy to a potential applicant. But there "generally will be only one pre-filing review period [of no more than 60 days] for a potential application or notice," the guidance said. If further review of a proposal is needed, "a final application or notice should be filed."

John Taylor, NCRC's president, told the Fed in an Oct. 30 letter that the central bank provided Goldman with consultation on more than one occasion without requiring the bank to apply formally.

"In this pre-filing there were several phone meetings and consistent and extensive email correspondence that further suggests that this pre-filing went beyond the limited scope for initial consultation outlined [in the guidance]," Taylor wrote.

The application was formally filed in August for Goldman to buy more than $16 billion in online deposits held by GE Capital's Utah-based banking subsidiary. GE Capital wants to sell the funds to try to shake its designation by regulators as a "systemically important financial institution," which subjects it to tougher regulation.

But the deal has attracted public scrutiny from the start. The NCRC has said it is opposed to the transaction as long as regulators fail to provide guidance on how Community Reinvestment Act requirements should apply to online deposits. In response, the Fed and the New York Department of Financial Services, which regulates Goldman's bank subsidiary, granted NCRC's request to extend the initial 30-day comment period on the deal by another month to Oct. 30.

Despite that extension, Lee's organizations say the central bank has not been transparent enough. Inner City Press and Fair Finance Watch filed a Freedom of Information Act request for the Fed to make Goldman's application publicly available, saying the public version contained an "overbroad withholding of basic parts of Goldman's application."

Meanwhile, several groups urged both the Fed board and the Federal Reserve Bank of New York to prolong the comment period even further and hold public hearings on the transaction.

"The only formal notice [about the application] was published in tiny print at the end of August in the NY Post and a Utah paper. It took time after that for community organizations to secure a much redacted copy of the application to review such that the September 19th comment period leaves very little time to generate meaningful comments from the public," Benjamin Dulchin, executive director of the Association for Neighborhood and Housing Development, wrote in a Sept. 19 comment letter. "More of the document should also be made public."

The Fed opted to grant a longer comment period only for NCRC, until Nov. 30, and has not yet decided whether to hold a public hearing. NCRC argued it needed more time to review the proposed deal since a less-redacted version of the application was provided only on the final day of the previous application.

Yet in an interview, Taylor said irregularities and concerns about the effectiveness of Goldman's CRA program necessitate a more broadly extended comment period and series of public hearings in the affected assessment areas to determine what public benefit there might be from the deal.

"For us, there has to be a public benefit determined by the Federal Reserve when the financial institution chooses to acquire another institution or acquire their assets," Taylor said. "So what's the public benefit? Goldman gets these assets, they get to manage them, they don't necessarily have to do more investment or do anything in low- or moderate-income neighborhoods. It's a real benefit to Goldman Sachs — they get more money."

Goldman contested that claim in its initial application, saying that the purpose of acquiring the deposits would be to displace riskier sources of funding — namely short-term wholesale funding — from its liquidity supply.

"The proposed transaction is not expansionary, as it would have no impact on GS Bank's existing asset strategy," Goldman said. "Rather, it will result in a more diversified and stable funding of GS Bank's balance sheet in a manner that will enhance safety and soundness of its strategy."

Goldman has more extensively defended the application and how the process has been handled. (The Fed declined to comment on the record and Goldman Sachs declined to comment beyond what it has said in public materials.)

After Inner City Press and Fair Finance Watch filed a subsequent FOIA request with the Fed to seek the unredacted application, Goldman responded with a letter of its own providing additional material about its CRA program that was not included in the initial application.

The letter said the bank's "rating and record satisfy applicable requirements under the CRA." Goldman said it has provided more than $3 billion in housing, retail, health care and community space in low- and moderate-income neighborhoods in its CRA assessment areas since it became a bank holding company in 2008.

The bank said it has also invested hundreds of millions of dollars in similar projects in New Orleans, Philadelphia and Camden New Jersey, which are outside its assessment areas, and touted the institution's "10,000 Small Businesses" initiative. The program is meant to expand small entrepreneurs' access to "education, capital and business support services."

Goldman also issued a pair of response letters to public comments, the first on Oct. 14 and the most recent on Nov. 19. In the October letter, Goldman disclosed additional details about its application not included in the initial public version, but kept other information about both Goldman and GE redacted because disclosure would "reveal to their competitors their internal strategies, transactions and competitive positions."

Goldman's November letter, meanwhile, said that the statutory bases for the Fed to grant a comment deadline extension or a public hearing are laid out in the Bank Merger Act. For regulators to hold a hearing there must either be new substantive issues raised or material disputes of fact concerning the merger or acquisition, but the bank said neither has been convincingly raised in this case.

"GS Bank respectfully submits that the allegations in the Comment Letters do not merit a public hearing," the letter said. "GS Bank does not believe the Comment Letters identify any new substantive issues within the scope of the statutory factors set forth for Board consideration under the Bank Merger Act nor do they identify any genuine dispute of facts that would be material to the Board's decision and merit the need for a public hearing."

And not all of the commenters criticized the deal.

The National Community Action Foundation — a Washington-based coalition of community groups — said in a Sept. 28 letter to the New York Fed that Goldman Sachs has "been a leader in helping develop effective and innovative programs to better our fight against poverty." The Carver Federal Savings Bank, which describes itself as "one of the largest African- and Caribbean-American managed banks in the United States," said in its Sept. 30 letter that it supports Goldman's application based on its investment in Carver and support in construction investment in its service area in Brooklyn.

Some outside observers say the Fed has broad legal discretion to decide whether a public hearing is necessary, make it an uphill road for critics to compel the central bank to allow for more public review.

Mark Willis, a former director of CRA director at JPMorgan Chase and now a research fellow at New York University's Furman Center, said the central bank has already done more than it has to by extending the comment period.

"Once the Fed has met its procedural requirements regarding the timetable for comments, it still has the flexibility to extend deadlines as a way to go the extra mile in making sure the parties have enough time to comment," Willis said. "If the written submissions are sufficient to make an informed decision, the regulators have generally been reluctant to hold a public hearing, but they appear to have the discretion to do so."

Nonetheless, critics say that informal correspondence revealed by FOIA requests suggest that the Fed is using its discretion primarily in Goldman's favor and bending its rules to that end. Specifically, they say that informal correspondence between the bank and Fed officials after the first pre-filing consultation should have been prohibited under the guidance.

"The Federal Reserve Board's supervisory guidance makes it clear that if further review is desired on a pre-filing, then a final application should be filed," Taylor said in the group's Oct. 30 comment letter.

But in its response to the comment letters, Goldman said its contact with Fed officials was "both appropriate and ordinary in the context of the … guidance."

Bob Gnaizda, general counsel for the National Asian American Coalition and co-founder of CRA advocacy group Greenlining, said that in general the Fed is flexible in its review processes and takes pains to ensure that community groups' voices are heard. But that flexibility is not guaranteed, he said, and legal recourse is limited.

What case law exists in this sphere sets a high bar for members of the public to demonstrate "standing" to bring a complaint against the Fed for failure to consider CRA requirements. In a 1997 case, a federal appeals court determined that the CRA is meant to protect "communities", which are difficult to define and therefore establish a basis for standing.

But the more operative challenge that community groups face, Gnaizda said, is that community groups are poorly coordinated, poorly funded and lack the resources to coordinate action. That problem is compounded by the fact that the banks and Fed have far more resources to bring to bear in terms of funding and legal expertise.

"Every community group that's an activist in banking is underfunded, and some are grossly underfunded," Gnaizda said. "And of course, in banking, you're not going to get some big law firm to want to back you, because they either represent the banking industry, or related financial industry, or hope to do so."

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