Blankfein’s disingenuousness

September 23, 2009
Spiegel has a good interview with Lloyd Blankfein. They started out by asking him about his astronomical pay, and whether such sums promote greed:

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Spiegel has a good interview with Lloyd Blankfein. They started out by asking him about his astronomical pay, and whether such sums promote greed:

Blankfein: I think we all know that greed can drive behavior, but it tends to be short term and ultimately destructive. Our leadership team stands out because most of our people have built their whole career at the firm and stayed through many years and many changes in the market. When our people leave they tend to go on to other positions — whether in government or other forms of public service — that no one would do if their were motives were financial. Those characteristics don’t make me think of “greed.”

SPIEGEL: So only modest, good people work for Goldman Sachs? We hardly believe that.

Blankfein: I have stated my honest view of things.

Of course, for every Rubin, Corzine, or Paulson — someone who made it to the very top of Goldman Sachs, became dynastically wealthy, and then went on to amass power commensurate with their wealth — there’s a John Thain or Chris Flowers, who left Goldman to make even more money elsewhere. And besides, if the motives of Goldman employees weren’t financial, why would the firm pay them such exorbitant amounts of money?

Then Blankfein tries to deflect the too-big-to-fail question:

SPIEGEL: Wouldn’t it be much easier to simply limit the size of banks? After all, the danger of systemic contagion is less when the banks are smaller.

Blankfein: So what is “too big to fail”?

SPIEGEL: When a bank is so large that in the event of insolvency, it could take the entire financial and the entire economic system along with it into the abyss. The state would then rescue the financial institution with taxpayer money.

Blankfein: The size of the bank is not the most important factor. Whether a certain risk is bundled at a single bank or spread across several is completely irrelevant. That doesn’t diminish the size of the risk. In fact, this would only change the problem from “too big to fail” to “too many to fail.”

When you have “too many to fail” — as we saw during the S&L crisis of the 1980s — the repercussions are manageable, in the way that the repercussions from the collapse of a Fannie Mae or AIG, say, really aren’t. Of course it’s relevant if a systemically-devastating risk is bundled at a single bank: then one bank’s errors can cause chaos. Besides, banks which are too big to fail — like Goldman — benefit from the moral hazard play: you can lend to them at low rates, safe in the knowledge that they’ll be bailed out if they ever get into trouble. The result, of course, is higher profits for Goldman. And more risk for the taxpayer. That doesn’t happen with small-enough-to-fail banks.

(Via TED)


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