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Speaking on the issue of increased financial regulation, Goldman's Jim O'Neill asks...

Speaking 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.
Comments (22)
  • haruglory12
    , contributor
    Comments (54) | Send Message
    He is right. Everything has an opportunity cost(s). Nobody ever asks the question of whether it is more desirable for "stability" (which is never defined) and growth that comes with more volatility. Perhaps we should have had this argument before we concluded that everyone needs to own a home and that banks were Red Lining.
    25 May 2012, 07:55 PM Reply Like
  • Patient Capital
    , contributor
    Comments (176) | Send Message
    I think he makes a good point actually - his point is that if the investment bank is *so* stable, then they are probably avoiding things they _should_ get into.


    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.
    25 May 2012, 07:56 PM Reply Like
  • Canary Cash
    , contributor
    Comments (471) | Send Message
    25 May 2012, 08:03 PM Reply Like
  • Whitehawk
    , contributor
    Comments (3129) | Send Message
    Taking risks always invites the possibility of instability and failure. That is why the government ought not be backstopping any of these bank holding/investment banking companies (TBTF or not), and that fact must be clearly and widely disseminated. As long as the government is a backstop, moral hazard will remain. Owners that do not and never will reap a moral hazard benefit, but are instead a liability, must start to take strong issue with this rigged game and reverse the pattern.
    25 May 2012, 08:08 PM Reply Like
  • davidingeorgia
    , contributor
    Comments (2713) | Send Message
    That's the thing. Take risks? Sure. Do it on your own damn dime, not the taxpayers'.
    25 May 2012, 08:28 PM Reply Like
  • American in Paris
    , contributor
    Comments (5504) | Send Message


    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.
    26 May 2012, 06:24 AM Reply Like
  • SoldHigh
    , contributor
    Comments (1013) | Send Message
    Time for TBTF to = break 'em up, similar to what was done with Big Oil a century ago.


    And the oil companies seem to be doing ok...
    25 May 2012, 08:35 PM Reply Like
  • ofthesilentgeneration
    , contributor
    Comments (8) | Send Message
    I agree with Goldman's Jim O'Neill provided that the investment banks invest their own money and pay for their own losses.


    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
    25 May 2012, 09:23 PM Reply Like
  • American in Paris
    , contributor
    Comments (5504) | Send Message
    Glass Steagal would not necessarily prevented 2008/2009.


    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.
    26 May 2012, 06:24 AM Reply Like
  • Angel Martin
    , contributor
    Comments (1341) | Send Message
    As someone who is increasingly a tail-risk player, more reckless and overleveraged financial entities like JPM, GS, the eurozone and the US gov't has to give me more changes to win


    as a citizen, however, ...
    25 May 2012, 10:46 PM Reply Like
  • rick flair
    , contributor
    Comments (369) | Send Message
    how can they change, when the entire idiotic society is predicated on the flase premise that no one ios to blame for anything? i'm laughing when someone sade Maddoff's wondering why he's the only guy in there?
    25 May 2012, 11:20 PM Reply Like
    , contributor
    Comments (10685) | Send Message
    GS is BS. The suggestion is that without the "risk" there would be opportunities that would be foregone. That's just dumb. The answer to the issue is that there is always someone (not necessarily a systemically important financial institutions - yet to be defined) who will be willing to accept the risk if the price is right. Thus you have folks who are happy to invest in "junk" bonds, and people who are happy to make car loans to defaulters. There will always be someone there to do the deal if the price is right.

  the "expense of everything else" means what? Perhaps I should read the article. I would if I could find it.
    26 May 2012, 12:02 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5719) | Send Message
    "At the expense of everything else" means "at the expense of obscene profits from financial fraud, abuse and manipulation."


    You just have to know what "everything" is, from Goldman's perspective.
    26 May 2012, 06:36 AM Reply Like
  • mike mohr
    , contributor
    Comments (452) | Send Message
    When Goldman speaks means they are ready to steal and cheat the small investors.
    26 May 2012, 12:22 AM Reply Like
    , contributor
    Comments (10685) | Send Message
    This they have demonstrated abundantly....even to the extent of taking the opposite position of a client they advise.
    26 May 2012, 11:42 PM Reply Like
  • winningtrader
    , contributor
    Comments (2476) | Send Message
    He is right that they should be able to take risk. BUT only if they risk their own money and not the customer deposits. Of course, they always use the customer deposits even when it is illegal (check MF Global) + whenever they get in trouble they run to Washington and claim that they are TBTF and to save the world the government needs to bail them out. If they want to take risk, they should set up funds that are separate from the firm and trade there risking their own equity. You can bet that is not very interesting for them for the most part.
    26 May 2012, 02:40 AM Reply Like
  • dividend_growth
    , contributor
    Comments (2897) | Send Message
    You guys clearly can't control the urge to gamble with tax payer guaranteed deposit money.


    That's why you guys must either be put on a tight leash, or speculate with your own money.
    26 May 2012, 02:47 AM Reply Like
  • mweaver
    , contributor
    Comments (201) | Send Message
    savings and loan debacle of mid 1980's
    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.
    26 May 2012, 05:37 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5719) | Send Message
    Goldman Sachs was an investment bank that morphed into a commercial bank at the height of the financial crisis. The reason is, it was about to implode, as Lehman Brothers had already done, taking the economy and financial system with it. They were bailed out.


    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.
    26 May 2012, 06:32 AM Reply Like
  • SA Editor Stephen Alpher
    , contributor
    Comments (550) | Send Message
    Agree with O'Neill, stability is a silly goal.


    Just end the de facto government backstop.
    26 May 2012, 07:03 AM Reply Like
  • mdmrjsds
    , contributor
    Comments (502) | Send Message
    I haven't read the article, but if his comment is representative, it is obvious he doesn't understand what stability is. Stability doesn't mean that systems don't get perturbed from the set point, and thus it doesn't mean that people in the system no longer take risks; it means that when systems are perturbed, they return to normal operation instead of haring off into the wild blue yonder. I think he is thinking of stability as stasis. They are not the same thing. In other words, he doesn't have a clue. That doesn't mean he doesn't have a (self-interest) reason. :-)


    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!
    26 May 2012, 11:03 AM Reply Like
  • rick flair
    , contributor
    Comments (369) | Send Message
    Under any rational system, which we ARE NOT, there would be extreme CRIMINAL consequences, for any gov't official or elected official caught or attempting to 'revitalize' any US corporation. PERIOD. There would be capital punishment for any of the above attempted for FOREIGN corps.The way its playing out is the worst case crony mecantilist outcome. notice i did not use the word capitalism. wrong word, for all this nonsense.
    27 May 2012, 11:32 AM Reply Like
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