Staff at Goldman Sachs staff [sic] can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.and
A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.
Until the release of its first quarter profits in April, it seemed inconceivable that a firm owing the US government $10bn would be looking to break all-time records in 2009.
David Williams, an investment banking analyst at Fox Pitt Kelton, said: "This year is shaping up to be the best year ever for investment banks, or at least those that have emerged relatively unscathed from the credit crisis.
"These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business."
Last week, the firm predicted that President Barack Obama's government could issue $3.25tn of debt before September, almost four times last year's sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.
Well, first congratulations are in order. This couldn't have happened without the help of Henry Paulson, Stephen Friedman, Robert Zoellick, and Neel Kashkar, former Goldman Sachs employers who in their roles as Treasury Secretary, NY Fed Chairman, World Bank President, and Head of the Treasury's TARP created Office of Financial Stability respectively have done such a wonderful job of protecting and advancing the interests of Goldman Sachs. I am sure some generous "consulting" fees are in their future.
Eliminate competition, socialize losses, raise prices, secure government favor, create demand, collect record bonuses. Check, check, check, check, check, and check.
I have previously expressed my disgust with the banking industry and specifically Goldman Sachs. The question posed by the New York Times is "If It’s Too Big to Fail, Is It Too Big to Exist?", and my answer is yes.
This is not about right or left, but is a fundamental issue of national security. When collectivists groups, be it terrorist militias, corporations, or lobbyists groups can threaten the stability of our society or economic systems, they have grown too large, and must be either eliminated or brought under control. As Francis Cianfrocca summarizes in an excellent essay:
I worry that those on the Right, with their emphasis on low regulation and fragmented government power, are enabling the Goldmans of the world to keep gaming the system in their favor. The proper alternative would not be a system of government control over the economy, but rather a system of strict financial regulation that makes it largely impossible for people to take risks with other people’s money.
How to do that without suffering the evil of government corruption, a risk that is underestimated on the Left? That’s another story.
7 comments:
I think you're overblowing this a bit. Goldman Sachs bet correctly that the Obama administration's policies would force the United States to sell bonds. Sounds like a pretty good prediction (and investment) to me.
I dislike some aspects of Goldman, such as the revolving door between its executives and high-ranking government office. This story, however, just reflects an investment bank doing its job, and it's not any sort of restriction to market entry (as was proposed with the toxic asset purchase plan).
I also think equating terrorists with corporations is a little absurd. Terrorists try to incite fear in the public at large; most corporations try to make money. I generally think the latter is better for society.
You quote Francis Cianfrocca for the argument that pushing for lower regulation enables Goldman to be nefarious and make money. If anything, broad regulations are what limit entry into the market and give Goldman an incentive to "game" the system. That is, regulations sometimes become so onerous that only the large firms can take on the liability risks, and this is particularly notable in the bond and IPO market. Furthermore, when you have regulations, companies are always looking for loopholes, and Goldman has made a lot of money in the past because it found ways to navigate regulatory rules in a legitimate manner. With each new rule, it becomes harder for other players to match.
The terms "prediction" and "investment" should be reserved for actual entrepreneurial activity wich involves risk. Please explain the risk or gamble they made.
From what I see:
It certainly was NOT much of a risk in getting $18.4bn in government money, of which Goldman only has to pay back $10bn, keeping the $8.4 received indirectly through AIG.
It certainly was NOT much of a prediction knowing that the US government was running a huge deficit and would have to run further deficits and post bonds to pay Goldman and others the (Bush and Obama!) money.
It was certainly NOT the entrepreneurial free market at work when Goldman's old boss, now running a government agency, determined chief competitor Lehman should be allowed to fail, further strengthening Goldman and giving them a bigger seat at the US bonds sale trough.
The revolving door that you dislike is why they find themselves among the privileged investment banks that came through the financial crisis "relatively unscathed." This is precisely why I framed the issue as big corporations needing big government. It is a major theme of economics that much smarter men than I, including Adam Smith and FA Hayek, spent significant time discussing. The bigger a corporation is, the less real risk it is usually willing to take if it can find ways not to, and the more they prefer to eliminate, externalize, and socialize that risk, and make the laws/government work in their favor. It is simply human nature on a larger scale - why take risk when you don't have to?
The comparison of terrorist groups and corporations is not intended to be universal, but any collectivist entity, whether its goals are money, power, morality, or any combination thereof, can threaten national stability/security if they determine themselves above the law or makers of the law. I would no sooner label every corporation "evil" than I would every religious or political group. But I stand by my basic belief that the ambitions of any collectivist group should be held in tension, with maximum liberty afforded to the extent that does not infringe negatively on the rights or property of those outside the group. And since I consider money to be the property of those who earn it, I am all for restrictions on the bets that banks can make with people's money.
I believe strongly in separation of church and state, and also for separation of corporation and state.
There are many different types of regulations, but I will not accept any position that tells me all regulations are bad. If you believe that, please feel free to start a business in Somalia, a regulation-free utopia. Otherwise, you should be enter into a discussion on how to create or improve a framework of laws, standards, and regulations that can be beneficial and provide assurance to all parties involved.
I agree wholeheartedly that there are numerous examples of bad, unnecessary, expensive, and anti-competitive regulation. See my rebuke of CPSIA elsewhere on this blog. Still, just because bad regulation exists, it doesn't mean we need to resist all regulation. It means we need better regulation that closes loopholes, provides stability, and helps open markets to competition.
I think John's partly right on this issue. Firms like Goldman are sharks - they don't think, they don't feel, they just do what they do. They can't help it if they're raking in record profits so soon after begging the government to bail them out - they're just corporations doing what corporations do. After all, a corporation, or in Goldman's instance a Partnership, exists only for the benefit of the shareholders/partners, and nothing benefits the shareholders/partners like record profits made off of taxpayer dollars.
Be that as it may, I share Justus' rage about the apparent inequity of the situation. It certainly smacks of self-dealing, considering the prominent positions held by so many former Goldman partners. I don't buy the argument that regulation is too costly and chilling to the market. Here's why: we have local, state and federal laws that regulate personal behavior: criminal laws, traffic laws, when you can buy your alcohol laws, where you dump your waste laws, and the list goes on and on. Admittedly, these laws curtail freedom, but they also keep us safe, keep our water clean, keep traffic flowing, and provide a mechanism for punishing those that don't follow the law. They also prevent absolute anarchy. Of course, following the law may be inefficient and costly for individuals, but that's the trade off that comes with being a member of an organized society.
Corporations are no different - if they want to reap state-sanctioned benefits associated with one of the various corporate forms, then they should be willing to accept any and all regulation the state imposes as the cost of doing business and avoiding unlimited personal liability for the principles. If these regulations are too burdensome, then there is an alternative option: form a general partnership and take on the unlimited risk that comes with it. Otherwise, why should a corporation get all of the benefits of the law without having to "pay" for it by submitting to regulation?
This doesn't mean I want regulation for the sake of regulation. It only means I think for society to work properly, the behavior of corporations and individuals must submit to a certain extent, and sometimes that regulation is uncomfortable (like the fact that I can't buy supplies for fuzzy navels on Sundays.)
I don't think Justus equated BigCorp with Terrorist. He only said they both pose threats to our society and economic system. I tend to agree.
You seem too inclined to find cronyism or other conspiratorial behavior at work.
AIG: The AIG funds were not some bailout to Goldman Sachs. The federal government decided that AIG’s obligations needed to be honored or else honest players who tried to hedge against risk would be burned. GS was owed money by AIG and was compensated, along with many others, as an outgrowth of that separate decision for the federal government to honor AIG’s obligations. It’s not an act of cronyism.
Lehman: As for Lehman, you have to remember the context. The Bush administration was reluctant to do anything more than rely on the Federal Reserve, and conservatives (and Ron Paul) would generally agree that the federal government should not be directly involved in financial markets. Ironically, you later opposed TARP, but you’re here criticizing the federal government for not finding a TARP-like way to help Lehman.
Risk: Everyone tries to reduce their costs and liabilities, whether it’s a corporation or an individual. In fact, the entire healthcare debate is, in large part, about trying to get the federal government to take on the health expenses of individual American citizens.
Church and state: The idea that the separation of church and state has an equivalent in a purported separation of corporations and state is a misreading the former. God created Man, but Man could never agree on what God wanted. In Western civilization, we developed a notion that governments and nations could survive regardless of the religious differences among their peoples. Corporations are legal creations of the state. They aren’t some God-created entity for which people will die as part of their beliefs about how the universe was created.
Regulation: I never said all regulation was bad. In fact, I generally support regulation in the financial markets that is intended to bring out more information to investors in those markets. I simply note that regulation can invite even more gaming of the system and raise the entry barriers for new players to the market. The second paragraph of the Cianfrocca excerpt goes more toward the perils of regulation.
Corporations and terrorists: Equating terrorists with corporations, regardless of the grounds makes them unfair equals. Terrorists offer no benefit whatsoever to our economy. Meanwhile, corporations help make our economy go by employing millions and providing goods and services.
John,
You seem set on extending the analogies and situations I use beyond their intent.
My points are simple:
1)Any collectivist group needs to be given freedom only to the extent that they do not threaten or impact the security of others in that group. All other comparisons or differences between those groups is irrelevant for the sake of this discussion.
2)When government gets involved in picking losers and winners, or making case-by-case decisions, it helps to have guys on the inside. Government has been entangled with outside interests since government came to man.
3) I objected to you calling the profits of Goldman the result of great bets, risks, or gambles. Regardless of the motives of the AIG, Lehman, TARP, and the resulting deficits, the result was as close as a sure thing as possible, which I listed in my original post as decreased competition, socialized losses, ability to raise prices, security of government favor, and guaranteed demand. I did not state my position for or against any of the AIG, Lehman, TARP, or other policies, just noted that each of them resulted in a better position for Goldman.
Perhaps I do lean too fast to corruption and cronyism, but my starting point is to understand human nature, and from that vantage point, I would be a fool not to at least entertain the notion. Perhaps it is just coincidence that Goldman escaped the crisis as the only independent major investment bank.
I appreciate your clarification on your position on regulation, your first comment took a posture that seems more dismissive and negative, and I am glad to see we have much common ground.
I disagree with the assumption behind (1), but let's focus on (2) and (3) as that's closest your posting.
If you want to complain about cronyism, look at the toxic assets purchase plan that limited participation to a few players with the government offering to absorb some of the risk. That situation evokes many legitimate fears of a government picking winners and losers, and how a powerful entity will seek to influence the government's decision. Cap and trade is another example of the government's potentially picking winners and losers.
Here, you have bonds traded on an open market, and GS in some instances creating a market for the securities in a perfectly legitimate fashion. That's not cronyism or favoritism. It's just an investment activity that GS has long been involved in.
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