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?
Goldman Sachs was too big to fail in fall 2008, with assets over $1 trillion. It is still too big to fail, with assets closer to $800 billion. Everyone now says that “too big to fail” is a terrible problem and must be addressed.
But none of the ideas currently on the legislative table would have any real effect – in the sense that next time you will be able to let Goldman fail.
- The Republicans (and Goldman Sachs) want a “resolution authority” that would give the government greater power to take big banks through bankruptcy. But even assuming there were sufficient political will to use such power, as Mr Corrigan and John Reed conceded at yesterday’s hearing, because this would be only US-centric (and there is no prospect of a G20 or other international agreement anytime soon) it simply would not work for huge cross-border firms. When such a firm fails – and Mr Corrigan made a point of emphasizing that half of Goldman’s meteoric growth since 1997 has been “global” – a resolution authority will do you no good at all.
- The Federal Reserve leans towards “stronger regulation”. But every regulator sent to control big banks over the past 30 years has ended up completely captured – most recently the people who allowed Goldman to keep its bank license while retaining its full range of risky activities. You can add to the powers of the Fed or take them away completely but this will not change.
- The administration prefers a bipartisan approach – avoiding confrontation on the true nature of “too big to fail” or even explaining how much worse our problems became during the Bush years – but that just can’t work when the other side refuses to cooperate. Given Republican relationships with big banks, there will be no serious attempt to cut financial institutions down to a size at which they could be allowed to fail – no meaningful version of the Volcker Rules will make it into law.
Goldman and the other big Wall Street firms have already won big on this round. They will plow even more money into defeating political candidates who have opposed them – for example, on credit card legislation. The Republicans see this coming and are rubbing their hands with glee.
With their incentive structure intact – they get the upside and regular folk get the downside – and their closest friends on their way back to power, Big Finance is ready to roll into the next great global boom-bust cycle.
By Simon Johnson