Tuesday, July 28, 2009

Goldman Sachs and Financial Reform

New York magazine has published Tenacious G about Goldman Sachs, which contains a great deal in it, including the following section dealing with the aftermath of the bailout of AIG's counterparties following the collapse of Lehman last fall:

Somehow not recognizing (or perhaps not caring about) the brewing backlash, (Treasury Secretary) Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system.

The appearance of a government of Goldman enablers didn’t improve when Stephen Friedman, serving as both a board member at Goldman Sachs and chairman of the Federal Reserve Bank of New York, bought 52,600 shares of Goldman stock while he was supposed to be responsible for the firm’s oversight. Friedman had a temporary waiver saying he could still act as a Goldman board member, but it was hard to shake the impression that Friedman had sidestepped the rules, particularly since the subsequent rise in Goldman’s share price made him $3 million richer. (In May, he resigned from the Fed over the alleged conflict of interest.)

The company was earning its nickname: “Government Sachs.” Dating back to Sidney Weinberg, the firm’s legendary chairman who served on the War Production Board in the forties, the natural course of power for a Goldmanite has been to make money at the firm and then make a name for himself in government.

None of the above means that anything improper was done. That said, appearances are important, and if the theoretical Martian were to look at all this, he would wonder about the influence of so many people from the same company in this mess. Furthermore, the entire situation over the past decade, starting with the ridiculous euphoria over things like the fourth online pet supplies store and culminating in the worst lending practices ever engaged in by a country owning the world's reserve currency, indicts Big Finance. These guys were great in their time, but they fed on meat that like Caesar made them great.

Big Finance needs to get smaller. Ultimately even the financiers would benefit from that change. Until that time, how can anyone believe that any price of any security or commodity represents reality? And thus the public's (and my personal) preference for cash or cash-like securities. If traders run the show and need volatility to goose up their profits, then volatility we will get. That helps them but hurts the rest of us. President Obama ran promising change. So far we have a "Bushbama Continuity" re a "Big Finance Uber Alles" policy. The public would love a true reform agenda out of the new President. So far, he has disappointed many of my most prominent fellow bloggers who had high hopes for his Administration in that regard.

It's time for a change of course, Mr. President. Please don't be fooled by the typical cyclical upturn in the economy. We can't risk another 2008. There's no time to waste.

Coyright (C) Long Lake LLC 2009

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