Goldman Sachs: Too big to rein in?

Has Goldman Sachs retained its financial power and political clout?

Goldman Sachs is not solely or even primarily responsible for the 2008 financial crash, writes Weissman [Reuters]

On June 11, Goldman Sachs agreed to pay $67m to settle a suit charging the firm and others with colluding to drive down the price of takeovers.

For another firm, paying out tens of millions of dollars to resolve allegations of collusion might provoke an existential crisis. Not for Goldman. The firm did not admit to any wrongdoing and said in a statement: “We’re pleased to put the matter behind us.”

That seems to sum up how Goldman would like to handle everything related to its role in politics and markets over the last two decades. The rest of us shouldn’t be too ready to do so.

To be sure, Goldman Sachs is not solely or even primarily responsible for the 2008 financial crash and the ensuing, worldwide Great Recession. There’s plenty of blame to go around.

Goldman Sachs – The bank that rules the world

But as the leading firm on Wall Street before the crash, as the company most entangled in high-level policymaking, as an innovator of overly complicated and socially destructive trading products and schemes, as an orchestrator of financial deregulation, as an enterprise with tentacles extending so far that it has been accused of manipulating aluminum markets, Goldman Sachs surely deserves plenty of blame.

Not for nothing did columnist Matt Taibbi famously call the firm “a great vampire squid wrapped around the face of humanity”.

Wall Street has a long list of malefactions for which it must answer. As both the leading firm on Wall Street and a perpetrator of so many abuses, Goldman Sachs can fairly be treated as a stand-in for Wall Street overall. Consider:

  • The revolving door: The US government’s failure to control Wall Street was due in large part to the fact that Wall Street executives had their hands on the levers of government power. Political contributions and lobbying made a huge difference (totaling more than $5bn in the decade preceding the crash), but the most important factor was that former Wall Street executives filled top government positions – advancing deregulation, going light on enforcement and shaping policy to accelerate the over-financialisation of the economy. Former Goldman employees were pervasive in the Clinton, Bush and Obama administrations – and most notably, filled the key position of US treasury secretary during the Clinton (Robert Rubin) and Bush (Hank Paulson) administrations.
  • The drive for deregulation: As treasury secretary, Robert Rubin played a crucial role in stomping on efforts by Commodity Futures Trading Commission Chairman Brooksley Born to regulate financial derivatives. As Goldman CEO, Hank Paulson led the successful investment bank push to overturn a Securities and Exchange rule that limited how much investment banks could rely on borrowed money – a key move that enabled much more reckless activity.
  • Market complexity: Goldman has been a key innovator and exploiter of the most complicated and complex financial products – the kinds of financial products about which boosters often claim miraculous returns or social benefits, but which typically are revealed over time to be dangerous for both investors and the stability of the financial system. 
  • Market concentration: Financial firms have extended their reach far into the real economy, often swamping legitimate trading in, say, commodities, with financially-driven schemes that distort the workings of important markets. One notable example includes aluminum, where the New York Times has reported on an “industrial dance [that] has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange”. Goldman purchased one of the largest storehouses of aluminum in the US, holding a quarter of the aluminum on the market. To comply with rules that forbid aluminum from sitting unmoved in a warehouse, Goldman simply moved it between warehouses. Holding the metal drives up prices – by about a tenth of a cent for every aluminum can, according to the New York Times – and made a mint for Goldman.
  • Too-big-to-fail subsidy: Like other giant banks, Goldman benefits from the implicit guarantee of a bailout in the event its viability is threatened.The Dodd-Frank Act included many important reforms, but Goldman remains too big to fail. In the wake of the financial crisis, Goldman was aided by a $10bn infusion from the US government, along with access to super-cheap loans from the Federal Reserve’s discount window. Gaining coverage under the government’s protective umbrella required Goldman to convert itself, in legal terms, from an independent investment bank into a bank holding company, a manoeuvre remarkably performed in just a matter of days.
  • Duplicity and betrayal of clients: There’s little question that Goldman and its executives looked out for themselves during the high-flying days of the 1990s and 2000s. Less clear is how well Goldman serviced its clients. Most famously, the firm paid the Securities and Exchange Commission $550m to settle charges that it duped investors in selling them the wrong side of a housing bet with the firm and investor, John Paulson. Goldman sold bets on a package of mortgage loans that Paulson thought would fail, without disclosing Paulson’s role.
  • Criminal immunity: For all of its shenanigans, no criminal charges have been brought against Goldman or its executives. Nor have any criminal charges been brought against any other leading Wall Street bank or executives for illegalities in the run up to the financial crash. Perhaps this is because no crimes were committed. But perhaps it’s because prosecutors have been frightened about bringing criminal charges against firms they have deemed “too big to jail”.

Over the last few decades Goldman has become emblematic of the problem. Wall Street firms have grown too big, and Wall Street has taken over too much of our economy and gained too much influence in and over our government. The financial services sector is supposed to serve the rest of the economy, not the other way around. And the government must control Big Finance, not the other way around.

Four years after the passage of the Dodd-Frank reform legislation, many of its key features have yet to be implemented -the delay itself is due to the ongoing political power of Wall Street. But neither the Street nor Goldman have the same political juice they did before the crash, and there is some evidence that Goldman and the financial sector are slowly retreating to a more manageable size. The trend lines are not yet clear, however.

What should be clear is that we cannot “put the matter behind us”. Banks wrecked the economy once – forcing millions out of their homes, throwing tens of millions out of their jobs, throwing entire nations into crisis – and they will do it again, unless we take steps to prevent it.

Robert Weissman is the president of Public Citizen, a non-profit, consumer rights advocacy group and think tank.