Goldman and M Stanley attack Fed proposal Goldman Sachs and Morgan Stanley have blasted proposed Federal Reserve rules limiting banks" exposure to each other, warning they could cost up to 300,000 jobs in the US and roil Japanese bond markets. In an unusually strident letter to its chief regulator, Goldman warned that the Fed's proposals to cap credit exposures were likely to "damage rather than strengthen the systemic safety of the US financial sector and ultimately the US economy." The comments come ahead of a meeting in New York on Wednesday between Daniel Tarullo, the Federal Reserve governor, and bank chief executives including Lloyd Blankfein of Goldman. In an effort to prevent dangerous domino collapses, the proposal restricts the amount of exposure banks can have to a single counterparty to 25 per cent of their regulatory capital. That is mandated by the Dodd-Frank financial reforms passed into law in 2010 and is due to come into force next year. But the Fed is proposing to go further, adding a 10 per cent limit on the amount of exposure that financial groups with more than $500bn in assets can have to each other. However, the banks argue that the 10 per cent limit is flawed - Goldman noted it was presented "without justification" - and that, more importantly, the way in which both limits were calculated, using regulators" models instead of the banks," exaggerated exposures. Morgan Stanley said its Japanese joint venture with Mitsubishi UFJ Financial Group would be hit hard by the proposal because of a requirement to add the joint venture's exposures to Morgan Stanley's own. "The illogical attribution of [the joint venture's] exposures to Morgan Stanley would, in practice, significantly constrain Morgan Stanley's ability to enter into new credit transactions not only with the Japanese government but also with Japanese and non-Japanese financial institutions and other Japanese counterparties and would very likely require the reduction of existing credit transactions with such counterparties," the bank wrote. Goldman said it estimated the real economy in the US would suffer because market liquidity would drop and corporate debt issuers would face higher funding costs, crimping growth and costing jobs. Officials are sceptical of the predicted impact on the economy. Proponents of the rule say the limit is appropriate and there is no reason why financial groups need to have tens of billions of dollars in exposure to a single counterparty. On one area the Fed has shown it might compromise by loosening the limit for exposure to "central counterparties" such as clearing houses, which are designed to reduce risk by standing between buyers and sellers. Banks have argued it is perverse to limit exposure to central counterparties because other new rules force them to push more over-the-counter derivatives through clearing houses in an effort to reduce risk.