Tag Archives: goldman sachs

The Volcker Principles Move Closer To Practice

By Simon Johnson

Senators Merkley and Levin, with support from colleagues, are proposing legislation that would apply Paul Volcker’s financial reform principles – actually, much more effectively than would the Treasury’s specific proposals.  (Link to the bill’s text.)

Volcker’s original idea, as you may recall, is that financial institutions with government guarantees (implicit or explicit) should not be allowed to engage in reckless risk-taking.  At least in part, that risk-taking takes the form of big banks committing their own capital in various kinds of gambles – whether or not they call this proprietary trading.

At the Senate Banking Committee hearing on this issue in early February, John Reed – former head of Citi – was adamant that a restriction on proprietary trading not only made sense, but was also long overdue.  Gerald Corrigan of Goldman Sachs and Barry Zubrow of JP Morgan Chase expressed strong opposition, which suggests that Paul Volcker is onto something.

Of course, Goldman – among others – may seek to turn in its (recently acquired) banking license and go back to being “just an investment bank”, not subject to Fed regulation.  But raising this possibility is a feature, not a bug of the Volcker-Merkley-Levin approach. Continue reading

Everyone Was Doing It

By James Kwak

Gerald Corrigan, a Goldman Sachs executive and a former president of the New York Fed, had a curious defense of the Greece-Goldman interest rate swaps. Here are some direct quotations from the Bloomberg story:

“[The swaps] did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” Gerald Corrigan, chairman of Goldman Sachs’s regulated bank subsidiary, told a panel of U.K. lawmakers today. The swaps were “in conformity with existing rules and procedures.” . . .

“There was nothing inappropriate,” Corrigan told Parliament’s Treasury Committee. “With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher.” . . .

Goldman Sachs was “by no means the only bank involved” in arranging the contracts, Corrigan said. . . .

“Governments on a fairly generalized basis do go to some lengths to try to ‘manage’ their budgetary deficit positions and manage their public debt positions,” Corrigan said. “There is nothing terribly new about this, unfortunately. Certainly, those practices have been around for decades, if not centuries. We have to keep that perspective.”

Continue reading

Bank of Italy Defends Draghi

By James Kwak

The Corriere della Sera, probably Italy’s most respected newspaper, relays a statement by the Banca d’Italia (Italy’s central bank) that its head, Mario Draghi, had “no role” in the Greece-Goldman Sachs interest rate swaps that have been reported by Der Spiegel and The New York Times. Here are some translated excerpts from the story:

“The transaction with Greece ‘was executed prior to the arrival of Draghi at Goldman Sachs,’ added sources from the [Banca d'Italia*], recalling that the governor [Draghi], who has headed the Banca d’Italia since the beginning of 2006, was vice president and managing director of Goldman Sachs in London from 2002 to 2005.

“On Tuesday, the former chief economist of the IMF, Simon Johnson, in his blog but picked up by other media, drew attention to Draghi, also calling into question the transaction by Italy, while [Draghi] was serving as director general of the [Italian] Treasury. . . . But it was in light of these possible connections, to avoid misunderstandings and rumors on the past role of Draghi, that the Banca d’Italia also chose to specify, on the subject of the Italian transactions in the 1990s, that ‘they had the goal of reducing the cost of the public debt and not to hide the true state of the public’s accounts.’”

The article is referring to this post by Simon asking whether Draghi had any connection to the Goldman-Greece or similar transactions with other governments.

* The actual text says “Istituto di via Nazionale.” The Banca d’Italia is located on the via Nazionale in Rome. This is similar to referring to the U.K. prime minister’s office as “Downing Street.”

Fallout From Goldman-Greece Affair Widens: Impact On The European Central Bank

By Simon Johnson

As controller of the euro, the European Central Bank (ECB) wields great power in Europe and has a wide global reach.  The race to become the ECB’s next president – with a term that starts next year – has been intense and hard fought.  The final selection is down to two men: the ultra hawkish Axel Weber, head of the Bundesbank, who sees inflation dangers at every turn; and the relatively more moderate Mario Draghi, head of the Bank of Italy, chair of the Financial Stability Board, and experienced international economic diplomat. 

Unfortunately for those hoping that Draghi could still prevail, he is also formerly senior management at Goldman Sachs and serious questions are emerging regarding what he knew and did during Goldman’s alleged “let’s help Greece circumvent EU budget rules” phase in the early 2000s.

Specifically, Draghi joined Goldman Sachs in January 2002, after a distinguished public service career – including 10 years in a key position (Director General) at the Italian Treasury.  His formal titles were Managing Director, Vice Chairman of Goldman Sachs International, and member of the “Group’s Commitment Committee”; his job, according to Goldman’s press release, was to “help the firm develop and execute business with major European corporations and with governments and government agencies worldwide.”

Did this involve Greece? Continue reading

Senior Goldman Adviser Criticizes Greece – Without Disclosing His Goldman Affiliation

 By Simon Johnson

Otmar Issing, a former senior European Central Bank official, came out strongly today against any kind of rescue package for Greece (FT op ed; Bloomberg report).

He hits hard to the core of the issue:

“Financial assistance for countries that violated the terms of their participation in EMU [European Monetary Union, i.e., the eurozone] would be a major blow for the credibility of the whole framework.”

Unfortunately, Mr. Issing’s article (and the subsequent coverage) neglected to mention that he is an adviser to Goldman Sachs (see also the FT archives).  This is a major issue for three reasons. Continue reading

Goldman Goes Rogue – Special European Audit To Follow

At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial.  Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability.  (The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November.  These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets.  When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings.  But a single rogue bank can bring down the world’s financial system.

Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House.  It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues.  Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients. Continue reading

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?

Continue reading

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.

Continue reading

The Case For A Supertax On Big Bank Bonuses

The big banks are pre-testing their main messages for bonus season, which starts in earnest next week.  Their payouts relative to profits will be “record lows”, their people won’t make as much as in 2007 (except for Goldman), and they will pay a higher proportion of the bonus in stock than usual.  Behind the scenes, leading executives are still arguing out the details of the optics.

As they justify their pay packages, the bankers open up a broader relevant question: How much bonus do they deserve in this situation?  After all, bonus time is when you decide who made what kind of relative contribution to your bottom line – and you are able to recognize unusually strong achievement. 

Seen in these terms, the answer is easy: people working at our largest banks – say over $100 bn in total assets – should get zero bonus for 2009. Continue reading

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 UniversityCorrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points.

  1. “Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided.  The economy needs these Groups.
  2. Breaking up such Groups would be extremely complex and almost certainly very disruptive.
  3. 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. Continue reading

More on Goldman and AIG

Thomas Adams, a lawyer and former bond insurer executive, wrote a guest post for naked capitalism on the question of why AIG was bailed out and the monoline bond insurers were not (wow, is it really almost two years since the monoline insurer crisis?). He estimates that the monolines together had roughly the same amount of exposure to CDOs that AIG did; in addition, since the monolines also insured trillions of dollars of municipal debt, there were potential spillover effects. (AIG, by contrast, insured tens of trillions of non-financial stuff — people’s lives, houses, cars, commercial liability, etc. — but that was in separately capitalized subsidiaries.)

The difference between the monolines and AIG, Adams posits, was Goldman Sachs.

Continue reading

Blankfein Defends Goldman Sachs Against Breakup Advocates

That’s the title of a Bloomberg article that also cites Bernie Sanders and Simon. Here are the direct quotes from Blankfein:

“Our business is very complex, and I won’t deny that, but it’s far, far simpler than most of the competitors. I wonder myself how some of these things get managed.”

“Most of the activities we do, and you can be confused if you read the pop press, serve a real purpose. It wouldn’t be better for the world or the financial system [to change the firm’s activities].”

“We pretty much stuck to our investment-banking knitting. That’s why we have 30,000 people and many of our competitors have well over 200,000 or 300,000 people.”

Continue reading

Fox, Henhouse?

One of our readers emailed in a link to this Bloomberg story about the new “chief operating officer” of the enforcement division of the SEC: Adam Storch, “a 29-year-old from Goldman Sachs Group Inc.’s business intelligence unit” who “had worked since 2004 in a unit at that reviewed contracts and transactions for signs of fraud.”

I went back and forth about posting this because, as far as I can tell, it’s not that important a job; according to the WSJ, “Mr. Storch will oversee division operations that include budget, information technology and administrative services. He will also supervise the workflow associated with the collection and distribution of fair funds to harmed investors.” It’s back-office administration, not deciding whom the SEC is going to pursue. I don’t think this is in the same league as, say, Goldman’s chief lobbyist becoming the Treasury secretary’s chief of staff. (Note, however, that Zero Hedge says it is “arguably the most critical post at the SEC.”)

But still, even if it is a routine back-office job, why someone from Goldman who makes Neel Kashkari look like an elder statesman? As our reader pointed out, there are some relevant themes here. One is the revolving door. Another is cognitive capture: why does the SEC think it needs a Goldmanite to handle its budget, IT, and administrative services? There are other good companies out there, really, somewhere, or we have a much bigger problem on its hands.

Maybe he’s independently wealthy and immune to job offers from Wall Street. Maybe he’s a genius and aced his job interview. You’d think there must be something special about him that convinced the SEC to give him the job despite all the additional “Government Sachs” fodder it creates. I hope he does a wonderful job.

By James Kwak

Good for You, Barney

With the waves of criticism that come out of this website, I wanted to acknowledge someone for doing the right thing. Bloomberg reports that Barney Frank, chair of the House Financial Services Committee, barred Michael Paese, a former committee staff member and now Goldman Sachs lobbyist, from lobbying anyone on the Democratic side of the committee until the end of 2010. Paese was already barred from lobbying his old committee for one year after he left the staff in September 2008, so Frank is effectively extending the ban for another year and a bit.

The government-lobbyist revolving door has been around for a long time, and a one-year prohibition is just not long enough; it shifts the incentives too far to the side of using government service as a way to build friendly contacts in industry. Conceptually, I think the ban should be longer and pay for government employees should go up, in order to push the incentives the other way. But I’m not holding my breath.

By James Kwak

How To Blow A Bubble

Matt Taibbi has rightly directed our attention towards the talent, organization, and power that together produce damaging (for us) yet profitable (for a few) bubbles.  Most of Taibbi’s best points are about market microstructure – not the technological variety usually studied in mainstream finance, but more the politics of how you construct a multi-billion dollar opportunity so that you can get in, pull others after you, and then get out before it all collapses.  (This is also, by the way, how things work in Pakistan.)

In addition, of course, all good bubble-blowing needs ideology.  Someone needs to persuade policymakers and the investing public that we are looking at a change in fundamentals, rather than an unsustainable and dangerous surge in the price of some assets.

It used to be that the Federal Reserve was the bubble-maker-in-chief. In the Big Housing Boom/Bust, Alan Greenspan was ably assisted by Ben Bernanke – culminating in the latter’s argument to cut interest rates to zero in August 2003 and to state that interest rates would be held low for “a considerable period”.  (David Wessel’s new book is very good on this period and the Bernanke-Greenspan relationship.)

Now it seems the ideological initiative may be shifting towards Goldman Sachs. Continue reading