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Blankfein’s blind spot

September 9, 2009

Just look at who is in favor of compensation clawbacks, more transparency on derivatives and greater coordination among financial regulators.

Would you believe Lloyd Blankfein, the chief executive of Goldman Sachs?

While Goldman is being cast as the case study of everything that is wrong and retro about Wall Street, the firm itself is aware that the public debate about financial regulation has changed, even if Congress has yet to move on it.

The latest indication of that new-found sensitivity was an address today (full text below) by Blankfein at a financial conference in Frankfurt. As the anniversary of Lehman’s collapse approached, the Goldman CEO touched on many of the topics that have stirred up anger since.

“Compensation continues to generate controversy and anger,” he told the conference. β€œAnd, in many respects, much of it is understandable and appropriate. There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year.” Bankers should receive the bulk of their compensation in deferred equity, he said.

Blankfein also urged that derivatives be traded on exchanges and the trades handled by centralized clearinghouses. And he supported coordination among national regulators: “Turf battles between regulators shouldn’t be allowed to overwhelm a focus on what’s in the system’s best interest.”

That is all very reasonable and good. But the point of his address was to draw a line in the sand against overregulation. Regulate the business, sure, but Goldman and other firms must not be inhibited from taking risks.

We know from economic history that innovation and the new industries and new jobs that result from it require risk taking.

That free market argument for the dynamic of taking risks is no longer convincing for a firm that like every other big financial institution, is implicitly backed by the federal government. Goldman could have collapsed last year if not for the government’s intervention.

Until we can get to the point where a big firm can blow up without endangering the entire financial system, any regulatory overhaul should be focused on reducing the ability of regulated banks like Goldman to take risks.

It may dampen growth and hurt Goldman’s profits, but banking needs to be boring again.

Comments

Thank you for making this excellent point.

Goldman Sachs is concerned about things of concern to Goldman Sachs. Taxpayers are concerned about having to repeat bailouts for companies deemed ‘too big’ to fail.

Posted by dom youngross | Report as abusive
 

“Too big to fail” needs to become “Too big to bail”. If the mega-international institutions get the message that being just that they will be duty bound to their investors to have adequate reserves. Those that then do fall will be absorbed by the survivors of their collapse.

It has been reported that many companies receiving TARP have to paid out total bonus money in excess of their earnings. A substantial tax penalty (70% or better?) on these bonuses would net $Billions which could be used to buy back outstanding US Bond debt and discourage future feeding frenzies.

 

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