8/9/2019 NB-AR-0610 Anger at Goldman
1/2
Page 1 of 2
I N T H E N E W S
Member FDIC | Equal Housing Lender
Public anger at Goldman Sachs is the vehicle being usedto force
through sweeping financial reform legislation.
In the publics mind, Goldman has come to symbolizethe
self-interested corruption at the heart of modernfinance. The legal
discussion about Goldman seems tocenter on whether Goldman had a
conflict of interest.Goldman doesnt have a conflict of interest;
Goldman is aconflict of interest.
The company is not unique among major financialinstitutions. It
is in the spotlight because it is widelyrespected as the most
intelligent and influential financialmarket player. Goldman creates
markets, moves markets,shorts markets and participates heavily in
the regulationof these markets through an influential network of
past,future and wannabe employees.
The basic facts of Hank Paulsons transition fromchairman and CEO
of Goldman Sachs to U.S. secretary ofthe Treasury are
mind-boggling.
He ran Goldman during the build-up of the bubble,earning $38.5
million in 2005. In 2006, he went toTreasury as the bubble was
peaking. He was forcedto redeem his ownership in Goldman before
becomingTreasury secretary. He therefore sold his stock for
$485million on a tax-free basis saving more than $100 millionin
taxes because he was entering public service.
We will be assessing Paulsons actions for many years,but it is
very clear that he was presiding over theresolution of the
financial crisis his firm played a pivotalrole in creating. There
is nothing illegal about any of this,but there is a lot wrong with
it.
The regulatory reform bill passed by Congress is almost2,000
pages. I have not read it. Neither have most if notall of the
congressman who voted for it. I dont have toread it to know the
foundational premise is fatally flawed.I also havent read the bill
because legislation that longisnt written to illuminate, simplify
and solve problems.
In this environment, what passes for a public debate isa bunch
of talking points spouted by people who dontknow finance and havent
read the bill. The public furyover Goldman was the vehicle used to
ram through thisfinancial reform bill of flawed intent.
The premise of the bill was that systemic risk must bemanaged by
more and tougher regulators. The systemicrisk of the Too Big to
Fail institutions is not a naturally-occurring market phenomenon.
It is the unintended
consequence of the conflicting goals of federal
financialpolicy.
Fannie Mae, Freddie Mac, the Federal Reserve andGoldman Sachs
all played a role in this, but the problemis both simpler and more
challenging than an angrypublic would like to believe.
We already have a large and complex regulatoryapparatus. This is
designed to:
Protect depositors (the FDIC).
Implement federal monetary and fiscal policy (theTreasury).
Maintain the safety and soundness of the system(the Fed, the
FDIC, the Officer of Comptroller of theCurrency and the state
regulators).
Stimulate low-income housing and communityinvestment (Fannie and
Freddie and all theregulatory agencies).
Provide funding mechanisms (the Fed and FederalHome Loan
Banks).
Protect investors (the Securities and Exchange
Commission). Provide consumer protection (multiple
agencies).
Understanding and navigating this regulatory complexityhas
displaced credit underwriting as the most importantcore competency
in finance. This regulatory dynamic is
Anger At Goldman Mustnt Drive Reform | Investors.com June 3,
2010
Anger At Goldman Mustnt Drive ReformBob Atwell Text
Investors.com June 3, 2010
8/9/2019 NB-AR-0610 Anger at Goldman
2/2
Page 2 of 2
I N T H E N E W S
what drives centralization and causes systemic risk.
Thiscentralizing dynamic tilts the competitive landscape
away from community-based players using localfinancial resources
to responsibly serve people in thedecentralized manner personalism
requires.
Regulatory complexity favors the large players in anyindustry.
The big firms have the volume over which tospread the fixed costs
of compliance, and they inevitablyprovide heavy input into the
formation of regulatorypolicy and practice. They also have the
resources to hirethe necessary lobbyists.
We are all sickened by the current state of affairs. But noone
is going to stop the seamless flow of people betweenthe public and
private sectors. So the notion that anyoneoutside of Wall Street
and Capitol Hill will be helpedand protected by more powerful
financial wizards in
Washington has no reasonable basis in practice.
Their current proposition is if we just further
centralizefinancial markets under Washingtons control, they willfix
things for us. The problem is the new law does noteliminate any of
the ineffective agencies currently inexistence and likely will
create new ones.
Centralized finance is too profitable for politicians to
want the nonsense stopped. In the end, we are likely tohave a
modified version of the same game with somedifferent names.
Financial Disneyland will reopen
with more and tougher security, but the fundamentaldynamic of
centralized and politicized finance will beeven stronger. Security
will talk tough and penalize a fewplayers, but the games will
resume. The primary impactof enhanced security will be to keep
small players off thefield of play.
The financial machinations on display in thecongressional
hearings caused severe economic pain.Politicians have successfully
harnessed the public anger
at New York to support a more muscular Washington.
There is, however, a better way, and we can have a muchhealthier
and more stable outcome. We just need to growup and process our
anger like adults. We are currentlyallowing our anger to be used
against us.
We dont want systemic risk managed; systemic risk mustbe
eliminated. The best way to eliminate systemic risk is
to stop using the policy approaches that create it. It canbe
eliminated very simply by imposing higher capitalstandards on those
institutions that pose systemic risk.Taxation of systemic risk
would also reverse the impliedpublic subsidy that creates it. We
will solve only theproblems we sincerely intend to fix.
Atwell is chairman of Nicolet National Bank in Green Bay,
Wis.
Member FDIC | Equal Housing Lender
Anger At Goldman Mustnt Drive Reform | Investors.com June 3,
2010
