In a NYTimes Op/Ed piece, columnist William Cohan points out that Goldman’s cost of capital in the Facebook deal is close to zero - as a bank holding company, it can borrow from the Federal Reserve at negligible interest rates - so any capital gain it makes on its venture in Facebook will be sheer profit.  For a full read, go to:  [NYTimes, 1/5/11,"Goldman’s Mutual Friend"]

Mr. Cohan's observation leads Reuters's Felix Salmon to ponder whether the deal, at the very least, violates the spirit of the Volcker Rule under the Dodd-Frank Reform Act. 

Isn’t this the kind of thing the Volcker Rule was supposed to prevent?  Goldman is a regulated bank, with access to essentially unlimited Federal Reserve funds at very low interest rates;  it should not be using those funds for speculative bets on its own behalf.  But that’s what the Facebook investment looks like.

Mr. Salmon notes he isn't saying the Facebook deal is illegal - for one thing, the details of the Volcker Rule have yet to be fully hashed out.  In referring to the spirit of the rule, Mr. Salmon cites Robert Cyran, who said the deal "looks like classic merchant banking," where banks invest as principals in client companies - and under the Volcker Rule, it's widely understood that only investment banks could make such bets - not regulated bank holding companies. 

The idea behind the Volcker Rule is to try and limit the risk exposure of bank holding companies, a rather simple premise, especially for a bank that's considered "too big to fail."  If such a bank had access to virtually unlimited funds at nominal rates, it shouldn't be able to gorge itself on risky assets and highly speculative trades.  Many observers agree, and CNBC Senior Editor John Carney thinks that Salmon is onto something here - something that's bigger than capital requirements - which the Volcker Rule is largely about.

On the flip side, most of the Volcker proposals to date seem to be based around the notion of limiting banks risk exposure to a fraction of some of capital ratio - i.e., ensuring that banks maintain adequate capitalization for, say, risky investments. And the $450 million investment will not expose Goldman to undue risk.

Which leads us to this last question - yes, no further rebuttals:  "Why should Goldman Sachs have virtually unlimited access to taxpayer subsidized funding – and still get to do risky merchant banking deals involving private companies that average taxpayers can't buy on any exchange?"

Good question!   For further details, go to:   [CNBC NetNet, 1/6; "Is Goldman Breaching .."]  and  [Reuters, 1/5;  "Felix Salmon: Does Goldman's  .."]