Further Confirmation That Real Bank Reform is Dead on Arrival

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.

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  1. Swedish Lex


    Interesting to see how the Goldman spin machine is adapting its message to A) please Europeans who may be a bit more sensitive to the institutionalised über-greed that is Goldman and B)that the Goldman spin masters have discovered that a new PR-speak that includes politically correct public “confessions light” (do not want to open the door for law suits by going too far, do we) needs to be rolled out.

    I yesterday referred to an FT article that spells out the amount of $$ the large investment banks stand to loose with the new regulation, including in the EU. They are clearly in damage control mode.

  2. DH

    Churchill also said: “Never in the history of human conflict has so much been owed by so many to so few”.

    How true, but I bet he wasn’t thinking of zombie bankers at the time!

  3. Richard Kline

    Yeah, well Tommy Atkins also said (in the time of young Churchill), “When you kill a man, kill him dead.” That lesson is yet unlearned by Paulson, Bernanke, Geithner, and Summers, who like a college of Doctors Moreau keep their monstrosities animated—and hungry.

  4. Siggy

    Mr. Blankfein is making nice. You expected something else?

    Should he receive accolades, no he’s merely an overpaid factotum of a behemoth financial trading machine. He’s doing what he thinks is best for his firm and its public face.

  5. Lavrenti Beria

    And descriptive of the attitude of Blankfein, Josef Stalin once said, “Gratitude is a sickness suffered by dogs.”

  6. DoctoRx

    Love the quotes this AM . . .

    Yves- what have you learned about CDS that would prevent new ones from being banned unless they were treated as proper insurance contracts with appropriate reserves? (Or, if there are no reserves, are any anti-gambling laws applicable?)

  7. Yves Smith Post author


    Regulating them as insurance is not the same as banning them, and that is where I am coming out on this. Regulate them intrusively enough (both serious capital requirements and related regulatory audits) and that would hopefully shrink the total a great deal. Then when you have a smaller amount and a better overview of who does what to whom, you can decide whether of not to kill, strangle further, or let be.

    Of course, that assumes the will to go after this product, which I doubt will be sustained unless we have another train wreck.

  8. Bill

    I’m still not convinced by the anti-CDS crowd. Some say buyers of protection (i.e. shorting the credit) caused Lehman to fail. But on the other hand, writing too much protection (AIG, MBIA, etc) caused those firms to fail (or nearly so). Which is it? How can both sides be wrong? I think the main lesson is that taking too large of a position relative to available capital is dangerous… but we already learned this from past crashes. That’s why most investors can’t buy stocks on more than 50% margin.

    If all CDS contracts were moved to a clearinghouse, regulators would have access to information about position sizes and risk levels of individual participants and could set appropriate margin requirements. It would not require the standardization of contracts (which would be very difficult for CDS). What’s the argument against this type of solution?

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