Unlike his CEO counterparts at JP Morgan and Citigroup, Goldman-Sachs CEO Lloyd Blankfein was NOT absent as President Obama delivered his speech on financial reform on Wall Street this past week. Nor was Michael Bloomberg, Mayor of New York and a critic of (part of) the President's reform package.
Odd, one might think, given the fact that the Securities and Exchange Commission has filed a civil suit charging Goldman with massive fraud. Even odder, considering the whopping billions just reported in profits and bonuses as the rest of country languishes in 10 percent plus unemployment numbers that some are calling "recovery."
Sam Webb sums up the fraud nicely in a recent Peoples World column. Essentially the largest and most prestigious investment bank in the world purchased hedges (Credit Default Swaps) against the likelihood that their own customers were going to lose money on mortgage backed securities that Goldman itself had recommended (and collected fees for such recommendations). Some economists call this "going broke for profit." Imagine a car dealer selling you a "lemon," collecting fees and commissions on the sale, and then going to Vegas to bet those same fees and commissions, perhaps even more money than the original car value, that you would probably return the car as worthless.
Or, even better, imagine an insurance company sells you a life insurance policy, but the uses the premiums to bet that you will die soon! (Perhaps this explains some of the "no medical exam required" life insurance ads on TV!) Now you have a sense of the scam Goldman and others have been running throughout the financial crisis.
Some apologists say: "Whats wrong with buying hedges? Farmers do it against bad weather?" Fine for farmers. Perhaps in energy as well. But what is the purpose of a financial system whose business model is betting against its clients – with its clients money!!???
Answer: there is NO purpose that serves the American people in such frauds. But that is not to say that there is no room for a private financial system that serves its IDEAL purpose, which is to efficiently allocate capital to useful AND profitable products and services. Especially in innovation fields, such financing can perform a valuable contribution to healthy economic growth. Our point, however, and I think the President's as well, is that these investments must be useful. And in order for them to be useful, strong regulation, in fact a progressive industrial policy, is required.
The de-regulation culture that has dominated financial policy ever since Reagan has driven capitalist prerogatives in the direction they always go if left to their own devices – short-term profits and speculation at the expense of longer term investments that are in more or less harmony with sustainable economic growth. In the first decade of the 21st century the US built a lot of second and third homes, and financed a lot of third and fourth autos in the driveway. During that time Germany, India and Japan invested heavily in solar, wind, green technologies, while we got vacation homes and two wars. Real median incomes rose in those countries (median is a good measure that captures where working people are in the "growth" statistics), but in the US they fell, or were flat. Oh yeah – we all got, instead, the limit on our credit cards extended beyond our ability to pay.
In my view, Blankfein attended Obama's speech, because 1) he wants, in the end, to cut a deal on the fraud case; and 2) Goldman would like to position itself as a "winner" in the new regulatory regime. and 3) he, as well as Bloomberg, would like to cut the "make them smaller" provisions advocated by Paul Volker, and the ban on "proprietary" sales (that means customized derivatives) from the current legislation under consideration in Congress. And, of course, Goldman is desperately hoping, itself, NOT to be broken up into small pieces, regardless what happens to JP Morgan or Citigroup or Bank of America, or Wells Fargo, etc, etc.
Further, Obama has little chance of a strong reform bill getting through Congress unless he can divide finance capital. Judging by the cynical right wing Republican and Tea Party backers – who are bankers!!! – funding phony "anti-bailout" propaganda and agitation, peeling off Goldman with carrots and sticks – I vote mostly STICKS – to back, or at least not oppose, reform is risky but perhaps necessary move. We should not underestimate the danger that a united front of finance capital presents. Clearly, a number of these interests are prepared to drown our democratic institutions in gangster-ism and blood to prevent their power from being rolled back a single inch!!
I vote rolling them back to at least the 40 yard line. That means,in brief:
1. Break up the mega banks that failed (that would technically not include Goldman, but it remains to be seen if the firm would have been solvent without the fraud). If the banks do not become smaller, they will capture the regulators and we will be right back in the same boat again.
2. Separate investment banking from commercial banking. Ban making investments with depositors money.
3. Force investment banks, this would include Goldman, to go back to being private partnerships – that way they can't use public stock or other means of capturing other peoples money for bets they don't believe in themselves.
4. It may not be possible to ban all derivatives, or even all custom derivatives. But they CAN be forced to be traded on exchanges; and they can be subject to a transaction tax, which will greatly increase their transparency.
5. More personnel on the regulatory bodies must come from outside the banking system, and reflect broader public interests than the financial sector.
A more profound question is: what are the longer range implications of a smaller financial sector? Of a "progressive industrial policy"? No doubt, the subject of a different article. On the one hand some argue that financial services will head offshore to Hong Kong or the Caribbean. That is possible, and such an event could raise US government debt service costs. However, who would bail these firms out next time their binges explode? Further, I think it unlikely that a new era of growth and wealth will arise primarily from commodities – physical things we buy. If, instead of investment in ever more automobiles, for example, we build high-speed, comfortable mass transit systems we are still "wealthier" as a society. But the wealth is captured in a public good as opposed to a private commodity. More public goods and services – fewer commodities – that's the short answer!
Photo: http://www.flickr.com/photos/financialreform/ / CC BY 2.0
