naked capitalism

The Financial Times tonight reports that Goldman CEO Lloyd Blankfein made “startling” remarks in Germany, for instance, that a lot of banking activity is rather thin on redeeming social value. Oh, and he admitted bankers might be paid too much, too.

Gee, with revelations like that, what might he to ‘fess up to next? That some employees have substance abuse problems? That bankers take clients to strip clubs? The mind simply boggles.

Admitting to something that everyone knows is hardly a confession. particularly when it is as watered down as this one:

Mr Blankfein said: “The industry let the growth and complexity in new instruments outstrip their economic and social utility as well as the operational capacity to manage them.”

One senior European banker said Mr Blankfein’s speech was clearly geared to his audience.

Many German banks filled their balance sheets with asset-backed securities bought with cheap short-term funding in a strategy that unravelled spectacularly when funding dried up last year. “Germany has an open wound,” said the banker.

“Blankfein was clearly trying to placate the locals and show some kind of contrition. But I agree with what he said – these were silly bets and they were absolutely useless.”

Acknowledging that some products had become too complex, Mr Blankfein said: “We have a responsibility to the financial system which demands that we should not favour non-standard products when a client’s objective and the market’s interests can be met through a standardised product traded on an exchange”….

The Goldman boss, who himself received total compensation of more than $70m in 2007, said multi-year bonuses should be outlawed and senior staff should receive large proportions of pay in stock, rather than cash.

These are all non-concession concessions. The idea of moving credit default swaps to exchanges (which is the candidate under consideration) is likely to prove to be a non-starter. I was initially a big fan of the idea of either shutting them down or moving CDS to exchanges, but the more I have had to look into them, neither looks like a good option so I am now leaning towards strangling them slowly by regulating them aggressively. It is disheartening that there is no good, simple, surgical solution.

There are very few CDS that trade actively, I am told only about 50 names, and even those are probably not traded enough on a daily basis for moving them to an exchange to be viable (the very fact that CDS aren’t even actively traded enough for them to be included in Bloomberg and Reuters feeds). Skeptics should read Donald MacKenzie’s An Engine, Not a Camera, on how much uneconomic activity by Chicago exchange members was required to get a some financial futures contracts going. And this was a business the community wanted to succeed. Conversely, the dealers have good reason not to make heroic efforts.

Second, even if an exchange were to get going, or ISDA did succeed in creating more standardized contracts, the fact that the reform proposals on the table allow dealers to trade OTC is an exception you can drive a truck through. The profit model is intact, and everyone understands that.

Recall also that Goldman, unlike JP Morgan, did not try renegotiating the repayment terms of its TARP warrants. So Goldman is now trying to play statesmanlike, and will let everyone else engage in more public piggy behavior. All Goldman has to do is look better than its peers, which isn’t hard (well, save the government capture bit, that is kind of hard to disguise).

Churchill once said, “In war, resolution; in defeat, defiance; in victory, magnanimity”. If there was any possibility of real reform, Blankfein would not even go as far as making gracious-sounding but empty concessions. By contrast, it’s cheap, easy, and prudent to make nice noises when you have nothing to lose. So all we have is clever posturing to diffuse some ire, and the FT is treating it with more dignity than it deserves.