Search Results
Goldman Sachs And The Republicans
I testified yesterday to the Senate Banking Committee hearing on the “Volcker Rules” (full pdf version; summary). My view is that while the principles behind these proposed rules are exactly on target – limiting the size of our largest banks and preventing any financial institution backed by the government, implicitly or explicitly, from taking big risks – the specific rule changes would need to be much tougher if they are to have any effect.
Wall Street is strongly opposed to the Volcker Rules (link to the written testimony; webcast) and the discussion elicited some classic Goldman Sachs moments. Gerry Corrigan, a senior executive at Goldman and former head of the New York Fed, suggested that Goldman Sachs has an impeccable approach to risk management and seemed to imply that the firm was not in trouble in fall 2008. When pressed on why Goldman requested and was granted a banking license – and access to the Fed’s discount window – in September 2008, he fell back slightly, “There is no question whatsoever that when you look at totality of the steps that were taken by central banks and government, particularly in 2008, that Goldman Sachs was a beneficiary of this.”
The public record is clear – Goldman Sachs would have failed in September 2008, were it not for the support provided by the government. The fact that some of this support did not involve direct use of taxpayer money speaks to the ingenuity of the people involved, but it should not distract us from the substance. Goldman Sachs was failing and it was saved.
Why is this so hard for Goldman to admit?
Tom Hoenig For Treasury
The White House is floating, ever so gently, the notion that they are open to nominations for the position of “Tim Geithner’s Successor.”
It’s not clear if they mean this job is likely to be advertised formally sometime in 2012 or 20 minutes after the November midterms. Nor is it obvious if this is a real request for proposals – it could be just an effort to make critics “put up or shut up.”
Fortunately, there is an entirely plausible successor already in waiting, ready now or whenever the president finally realizes the need to fundamentally change banking policy. Read the rest of this entry »
The Next Subpoena For Goldman Sachs
Yesterday’s release of detailed information regarding with whom AIG settled in full on credit default swaps (CDS) at the end of 2008 was helpful. We learned a great deal about the precise nature of transactions and the exact composition of counterparties involved.
We already knew, of course, that this “close out” at full price was partly about Goldman Sachs – and that SocGen was involved. There was also, it turns out, some Merrill Lynch exposure (affecting Bank of America, which was in the process of buying Merrill). Still, it’s striking that no other major banks had apparently much of this kind of insurance from AIG against their losses – Citi, Morgan Stanley, and JPMorgan, for example, are not on the list.
This information is useful because it will help the House Oversight and Government Reform Committee structure a follow up subpeona to be served on Goldman Sachs with the following purpose: Read the rest of this entry »
Good for Goldman
Searching through my RSS feed*, I observer that not many people have commented on Goldman Sachs’s stunning compensation announcement (except for Felix Salmon), perhaps because it came out on the same day as the “Volcker Rule,” perhaps because bloggers are not wired to say nice things about Goldman. But I’m going to make the sure-to-be-unpopular statement that Goldman did the right thing here.
We all know that Goldman made a lot of money last year: $35.0 billion before compensation and taxes, on my reading of the income statement (that’s pre-tax earnings plus compensation and benefits). Many people think that it made that money because of government support, but that’s beside the point here; right now, this is purely a question of dividing the spoils between employees and shareholders.
Sheila Bair’s Turn
Keith Epstein and David Heath of The Huffington Post have an in-depth article about how Sheila Bair got two mortgages on two different properties from Bank of America while she was discussing with them whether the bank could repay its TARP money to the government.
Let me start off by saying that I strongly, strongly doubt that Bair sought out a better deal on her mortgage because she is head of the FDIC or discussed her mortgage with any of the Bank of America bigwigs that she met with. That would be stupid, and it doesn’t fit with anything I know about her. (Granted, I know very little about her.)
That said, WHAT WAS SHE THINKING? Read the rest of this entry »
As Is?
The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all.
Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details. The banks are already hard at work, pushing in the other direction.
It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?
By Simon Johnson
The Citi Never Weeps
On the first day of the Financial Crisis Inquiry Commission, Phil Angelides demonstrated a gift for powerful and memorable metaphor: accusing Goldman Sachs of essentially selling defective cars and then taking out insurance on the buyers. Lloyd Blankfein and the other CEOs looked mildly uncomfortable, and this image reinforces the case for a tax on big banks – details to be provided by the president later today.
But the question is: How to keep up the pressure and move the debate forward? If we stop with a few verbal slaps on the wrist and a relatively minor new levy, then we have achieved basically nothing. We need people more broadly to grasp the dangerous financial “risk system” we have created and to agree that it needs to be dismantled completely.
One way to do this would be for the Commission to call key people from Citigroup to testify. Read the rest of this entry »
“Appalled, Disgusted, Ashamed and Hugely Embarrassed”
No, that’s not someone talking about the banking industry. That’s Howard Wheeldon of BGC Partners (a brokerage firm) responding to Adair Turner’s statement last September that “Some financial activities which proliferated over the last 10 years were socially useless, and some parts of the system were swollen beyond their optimal size.” (Turner is head of the FSA, the United Kingdom’s primary bank regulator.) That’s from a recent profile of Turner on Bloomberg.
“‘How dare he?’ Wheeldon now says. ‘Markets will decide if something is too big or too small. It’s not for an individual, however powerful, to slam and damn nearly 1 million people.’”
Do we really need to point out that markets don’t always make the right decisions? Markets didn’t break up Standard Oil or AT&T–people did. And how is it wrong for public figures to be publicly stating their beliefs about what the objectives of public policy should be?
But the point of this post isn’t to single out another free-market zealot who apparently doesn’t think about the words he is saying. It’s to talk about John Paulson and Malcolm Gladwell.
Countdown to January 18: Goldman’s Bonus Day
Sources say that Goldman Sachs’ bonuses will be announced on Monday, January 18, and actually paid sometime between February 4 and February 7. In previous years, the bonuses were paid in early January – but the financial year shifted when Goldman became a bank holding company.
For critics of the company and its fellow travelers, the timing could not be better.
Anxiety levels about the financial sector are on the increase, even on Capitol Hill. The tension between high profits in banking and stress in the rest of the economy becomes increasingly a topic of discussion across the nation.
And you are hard pressed to find any government official who has not by now woken up – in private – to the dangerous hubris of big banks. To add insult to injury (and many other insults), the Bank for International Settlements is holding a meeting to discuss excessive risk-taking in the financial sector; according to CNBC Thursday morning, Lloyd Blankfein of Goldman and Jamie Dimon of JPMorgan Chase were invited but did not show up (they really are very busy).
The smart strategy for Goldman in this context would be to pay no bonus for 2009 (in cash, stock or any other form), but this is not possible for three reasons. Read the rest of this entry »
Bankers and Athletes
Bill George, a director of Goldman Sachs, defending the bank’s compensation practices, said this: “The shareholder value is made up in people and you need the people there to do the job. If you don’t pay them for their performance, you’ll lose them. It’s much like professional athletes and movie stars.”
The idea that the level of inborn talent, hard work, dedication, and intelligence you need to be a banker is even remotely comparable to that of, say, NBA basketball players is ridiculous. But leaving aside the scale, there are some similarities. Most obviously, athletes on the free market–those eligible for free agency–are overpaid. John Vrooman in “The Baseball Players’ Labor Market Reconsidered” (JSTOR access required) goes over the basic reasons, but they should be familiar to any sports fan. There is the lemons problem made famous by George Akerlof: if a team gives up a player to the free agent market, it probably has a reason for doing so. There is the winner’s curse common to all auctions: estimates of the value of players follow some distribution around the actual value, and the person who is willing to bid the most is probably making a mistake on the high side.
If Wall Street Ran the Airlines …
New York Times headline: “U.S. Limits Tarmac Waits for Passengers to 3 Hours.” Just imagine …
***
Representatives of industry associations reacted negatively to the government action, warning that over-regulation would stifle innovation and harm the competitiveness of U.S. firms. “Requiring each plane to stock up on 0.5-ounce bags of pretzels and peanuts will only hurt passengers,” said Sam Tapscott of the Airline Roundtable. “Airlines will have no choice but to pass the higher costs on to consumers, who will see the price of excessive government intervention in every ticket they buy.”
More worryingly, some industry analysts warned of dire consequences for the U.S. economy. “Forcing airplanes to return to the terminal after three hours will reduce the efficiency of the entire air travel system,” said David Dell’amore, professor of flight operations at Harvard University. “Modern flight management algorithms minimize aggregate wait times and ensure the perfect balance of customer comfort and economic value-added.”
More Details
The financial reform bill that passed the House recently is full of surprises, not all of them bad. A contact pointed me toward an amendment introduced in committee by Brad Miler and Ed Perlmutter; it’s number 61 on this list. Basically, the amendment gives the Federal Reserve (“Board” in the text refers to the Board of Governors of the Fed) the power to prohibit a financial institution from engaging in proprietary trading not only if it decides that proprietary trading threatens of the soundness of the institution itself, but also if the Board of Governors decides that it threatens the financial stability of the country.
While this may seem overzealous, the point is to prevent a large financial institution with a government guarantee (of any kind) from putting most of its capital to work on its proprietary trading desks and taking lots of risks that might require a government bailout. The amendment does have exceptions allowing firms to, for example, make a market in securities that they underwrite, so securities underwriting is not in question here.
Jamie Dimon Has Another Good Year
In May, Jamie Dimon, the head of JP Morgan Chase, told his shareholders that the bank just had probably “our finest year ever.” Despite being close to the epicenter of the worst financial crisis since the Great Depression, Dimon’s bank was able to make a great deal of money, obtain government support when needed, and reduce that support level quickly when the overall situation stabilized – thus freeing the bank of constraints on its pay packages (and other activities).
It looks like the full year 2009 may turn out even better than Mr. Dimon expected in May. Speaking at the Goldman Sachs US Financial Services Conference on Tuesday (December 8), Jamie Dimon presented JP Morgan Chase’s third quarter results (year-to-date). His slides are informative, but if you want to pick up the nuances in his message, listen to the audio webcast (you have to register, but it’s free; here are back-up/alternative links). Read the rest of this entry »
Gerry Corrigan’s Case For Large Integrated Financial Groups
Increasingly, leading bankers repeat versions of the argument made recently by E. Gerald Corrigan in his Dolan Lecture at Fairfield University. Corrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points.
- “Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided. The economy needs these Groups.
- Breaking up such Groups would be extremely complex and almost certainly very disruptive.
- An “Enhanced Resolution Authority” can mitigate the problems that are likely to occur in the future, when one or more Group fails.
These assertions are all completely wrong. Read the rest of this entry »
The Importance of Capital Requirements
Arnold Kling of EconLog has done the hard work of setting out his theory of the financial crisis and what we should learn from it in a fifty-page but highly readable paper available here. I have some quibbles but think it is worth a read.
Here are the causes of the crisis in one table:
