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Speaking on the issue of increased financial regulation, Goldman's Jim O'Neill asks...
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Friday, May 25, 2012, 7:35 PM ETSpeaking on the issue of increased financial regulation, Goldman's Jim O'Neill asks rhetorically: “Is it really that entirely desirable to have financial stability at the expense of everything else? I sort of think you want your investment bank to be a little unstable.” - pure Goldman gold.
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Think about the Berkshire Hathaway approach to cat-exposure: They know that by providing a large amount of capacity to any 1 geographic area against cat-weather, they have some risk in the short term. They could bring in $10 in revenue but pay out $40-50 and be actuarially sound. Obviously, they diversify their risks to minimize these occurrences, but it still doesn't mean that every single year will be profitable for that business. If it does, it probably means they're leaving aside really good deals. If we expand the view on that specific coverage, it may be that it creates $0 in losses for 9 out of 10 years, but in that 1 other year, it creates that $40-50 of losses. Overall, they bring in $100 of business and pay out up to $50 - that's very reasonable. On any given year, it could look like things blew up, but over time, it's just fine.
I don't know the exact details on this issue being discussed, but I would lean in the direction of what Jim said. We can argue that any 1 industry could bring down the nation's system when you really think about it... steel/aluminum producers are *necessary* for any construction to occur, communication providers are *necessary* for business to get done (imagine life without a cell phone!), and so on. We can try to regulate all of them, but in the end, it will only place costs upon the system, because we'll still miss the big issues - it's human nature. The markets are better at protecting against these than any other, and just because we had 5 bad years, doesn't mean the system is flawed because it may have provided 45 good years prior to that.
Are changes needed? No doubt about this, in my opinion, especially if a bank wants to be FDIC insured. If they don't want to, let them do whatever they want, but I don't think FDIC coverage should be given to anyone and everyone doing whatever they want.
We let Lehman Brothers fail and it is initiated a financial firestorm.
Fighting moral hazard by letting the financial system is not a good idea.
And the oil companies seem to be doing ok...
With the Glass-Steagall Act, we had two types of banks, the national banks and the investment banks. Citizens' deposits in the national banks were insured by the FDIC while investors equity in the investment banks were at risk. That system worked very well for sixty years.
But then the Glass-Steagall Act was replaced by the Grahamm-Leach-Bliley Act in 1999 and when the Great Recession arrived because of reckless banking, the investment banks quickly converted to national banks so they could be bailed out by the taxpayers.
The investment banks should have eaten their own losses.
There is no way I want to pay for investment banks (under the guise of being national banks) gambling and losing my money and money of other depositors.
If the investment banks want to take risks, fine ... but first, let them stop being national banks and give up FDIC protection.
Then, if an investment bank takes too much risk and implodes, the employees and the shareholders can shoulder the entire loss.
One of the Silent Generation
Investment banks are highly leveraged. They are going to borrowing from somebody, mostly commercial banks.
So a fall of a huge investment bank will trigger the collapse of the commercial banks that lent to it.
Ipso facto, Glass Steagal would not solve the problem of highly leveraged financial intermediaries like Lehman Brothers or Goldman Sachs.
as a citizen, however, ...
Secondly....at the "expense of everything else" means what? Perhaps I should read the article. I would if I could find it.
You just have to know what "everything" is, from Goldman's perspective.
That's why you guys must either be put on a tight leash, or speculate with your own money.
saw the wipe out of hundreds of fdic
insured s/l's. resolution trust corp
took 8-10 years to unwind that fiasco.
there are no laws against stupidity.
Let's not forget the Abacus transactions and the muppets, not to mention doing God's work by helping Greece hide their financial problems from the EU.
I don't want investment banks destabilizing the system and defrauding their customers and passing the losses on out into the real economy. I've had enough of that.
Just end the de facto government backstop.
Stability means than when Lehman Brothers collapses, it doesn't crash the financial system; there is a perturbation, and then the system returns to regular operation without extraordinary measures.
Stability means that when the airliner hits turbulence, it doesn't correct more and more wildly and then break apart and crash.
Stability means that when your car hits a pothole, it doesn't leap into the car in the next lane in response.
He's making a straw man argument; that stability necessarily means that everything else is sacrificed (I suspect he defines everything else as outrageous bonuses for Jim ;-) ). He's doing this to protect the sinecure that finance has under the current financial system - for his own self interest. We've now had nearly 4 years of hardship for millions of people and general underperformance in the economy. Is the extra growth from an unstable system worth that, especially given that it was false growth, illusory output? From a societal and overall economy perspective, I say no. But of course, from his selfish perspective, the answer is yes. The unstable system transferred wealth from others to Jim, a state of affairs most desired by Jim; let everyone else go hang.
So, to summarize, he's saying a system that crashes and burns occasionally is worth it because Jim O'Neill makes out better under such a system. Well, we certainly wouldn't want to limit Jim in any way, so, sure, I buy that. Ha, ha, ha!