Helpful advice for Goldman Sachs: Beware the ides of March.
March 15, 2012, 6:44 a.m. EDT
Beware the Treasury-banking complex
By Kurt Brouwer
The New York Times just published an opinion piece by Greg Smith, formerly of Goldman Sachs (GS +0.33%). In it, he stated that Goldman Sachs used to be a firm that cared about its clients, but not anymore.
He wrote:
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money… The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
While I sympathize with Smith’s heartfelt piece, I think the problem goes much further than just how Goldman Sachs treats its clients. I believe the problem is the relationship Goldman Sachs and other Wall Street firms have with the U.S. Treasury and other government agencies.
…
The U.S. Treasury-banking complex
When he left office, the late President Dwight Eisenhower gave an extraordinary speech that included a warning about the military-industrial complex, which represented a combination (military contractors and the Defense Department) that had attained too much influence over policy.
Here is an excerpt from his 1961 speech that I have altered by exchanging his term military industrial complex for my term Treasury-banking complex:
…In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the [Treasury-banking complex]. The potential for the disastrous rise of misplaced power exists and will persist.
We must never let the weight of this combination endanger our liberties or democratic processes…
Unfortunately, I think we have already let the Treasury-banking complex get embedded in our system. The big banking institutions are so well-connected in Washington that they can manipulate the rules and regulations to fit their needs. By the way, I’m not talking about local and regional banks, but rather the very big banks such as Citi (C +0.65%), Goldman Sachs and Bank of America (BAC +1.36%).
These banks and their executives donate millions of dollars to politicians in Congress and elsewhere. In addition, there is a revolving door between executives of top banks such as Goldman Sachs, Citi or Bank of America and the U.S. Treasury, along with other government agencies. Think Hank Paulson or Robert Rubin, both of whom headed the U.S. Treasury after careers on Wall Street. Some pundits have even speculated that being the Secretary of the Treasury is a demotion from being chief executive of Goldman Sachs.
Fair weather capitalists
Essentially, the big banks are ‘fair weather’ capitalists. Banks get the profits when things are going well. But that all changes when they get in trouble. At those times, we hear the plaintive cry that they are ‘too big to fail’ and that taxpayers should absorb the ill effects of the leverage and risk banks took.
Instead of relying on an overworked regulatory system, I believe we need to mandate transparency. If a firm employs high amounts of leverage (borrowed money), then it should be required to spell that out. If it cannot do so, then maybe it has become too complex to manage. Assuming banks release transparent financial reports, from that point on, let the buyer beware.
No government guarantees for high risk banks
Further, if a banking institution wants the benefit of FDIC guarantees for bank deposits or ‘too big to fail’ designation, then it should have to operate in a very low leverage, low risk manner.
Instead, if a Citi or Goldman or a Bank of America wants to be a high flying, free wheeling firm, then it can do that too. But, its investors need to know that their capital is at risk, not ours. Greg Smith closed out his opinion piece by writing this:
…Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.
Suggesting we need to weed out morally bankrupt people sounds good, but that would be difficult, whether we are talking about Wall Street or Washington.
At a minimum, we need to reduce the influence of Wall Street on Washington. Maybe Greg Smith will spearhead a movement to do so. That would be great, but I won’t be holding my breath.
No comments:
Post a Comment