New Proposals and More on Goldman Sachs

Includes: GS, JPM
by: Kid Dynamite
Yesterday I wrote about misplaced blame. I think the general public is mad at Wall Street, when in reality they should be mad at the government for the way it's treating (coddling) Wall Street. When we funnel tens of billions of taxpayer dollars to these firms, they are going to try to make money with it - that's what they do. Instead of being mad at Goldman Sachs (NYSE:GS) and JP Morgan (NYSE:JPM) for ringing up huge second quarter profits by "gambling with the taxpayer's dime" as the populist line goes, be mad at the government for giving them the taxpayer dime in the first place.

Yesterday, I read this story (Wednesday, actually):

July 15 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair, with support from Federal Reserve officials, is pushing for tougher measures to curb the size and risk-taking of the nation’s largest financial firms.

The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending. The idea goes beyond the Obama administration’s regulation-overhaul plan, which would have the Fed adjust capital and liquidity standards for the biggest firms, without any pre-set fees.

I hate this idea, as it basically sounds like it's sanctioning the behavior - as long as you pay the price, you can do it. Many of the problems we've had in our financial system come as a result of the breakdown in the distinction between commercial banking (that's lending and borrowing) and investment banking (that's underwriting and trading). These two were separated for a long time by the Glass Steagall act, which eroded over the last decade. As I've written before, it's ok for a firm to lose its own money - it's NOT ok for a firm to lose everyone else's money - which is what happens 1) when commercial banks ring up massive proprietary trading losses and 2) excessive leverage is extended.

My point is, if the administration passes the new regulations mentioned in the Bloomberg article above, I won't be mad at Wall Street - I'll be mad at the lawmakers for passing ridiculous legislation that sanctions risks under the name of "pay to play" when the proper solution is to limit leverage and consider re-instituting the distinction between investment and commercial banking.

Finally, here are three more interpretations of Goldman Sachs and their behavior:

1) Andy Swan "Stop Blaming Goldman"

Goldman is out to take your money, and they are REALLY good at it.

You have three options:

1) Quit. If you really think it’s an unfair conspiracy that’s producing your losses, then this is the only rational thing to do.

2) Keep losing and whining. This is the most annoying one, for everyone around you. I do not recommend this.

3) Win. Play to win. Think like Goldman, and see the world of retail traders as they are. Research. Learn. Practice. And most importantly, do the opposite of what best-selling books have told a million other shmoes to do.

2) Falkenblog "Is Goldman Evil?"

Goldman is self-interested, which means they don't share all their ideas, and they don't hire everyone capable who wants a job there, but that's inevitable and you can't let that color your views. The latest hatchet job in Rolling Stone is by Matt Taibbi, who has a profoundly adolescent and paranoid world-view that seems clever and witty only at a distance. Those who think Goldman was the prime mover in our financial mess are simply wrong, as Goldman was as guilty as everyone who did not second-guess the assumption that aggregate housing prices do not fall in nominal terms (academics, legislators, regulators, investors, home buyers, investment bankers, rating agencies—did I forget anyone?)...

I think GS as an example of what happens when you have a bunch of smart, highly connected people working together to get rich. There is a lot of inside ownership, and so their large bonus structure clearly implies they understand the Lafffer curve, in that giving people stronger incentives helps everyone—capital and labor.

3) Curious Capitalist: "Vampire squid"

"At Goldman the focus has been on hiring the smartest group of people employed by any American institution, and putting them to work—in the most collegial atmosphere of any major Wall Street firm—in the relentless pursuit of arbitrage opportunities (a.k.a. money). It is Goldman's edge at talent acquisition and development, together with a slightly more public-spirited ethos than is prevalent on Wall Street, that best explains its colonization of the federal government. The end result of it all is deeply disturbing and problematic for our democracy—no argument from me there. But it has come about because Goldman is really good at what it does."