The Public Purpose of Banking

by Dollars and Sense

Maybe Goldman Sachs should have used some of its bonus money to hire better P.R. folks—the company has really been taking a beating, and not just because it is "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," as Matt Taibbi put it in Rolling Stone. Really, the company's making it even worse than it has to be.

First (back in October) there was the Goldman Sachs international adviser Brian Griffiths telling people that inequality was good for society as a whole

"We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all," Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion at St. Paul's Cathedral in London. The panel's discussion topic was, "What is the place of morality in the marketplace?"

This is true, apparently, because higher compensation encourages more charitable giving. "To whom much is given much is expected," Griffiths said, according to Bloomberg. "There is a sense that if you make money you are expected to give."

Later that month, Goldman Sachs abandoned adorable kittens. No kidding. As reported on the website of New Deal 2.0 (where we notice that a number of D&S authors, and at least one ex-boyfriend of a current D&S co-editor, are among the "braintrusters"), The Villager newspaper in lower Manhattan reported that Goldman Sachs "neglected to pay the vet bills for homeless kittens found in its nearly-completed Battery Park City headquarters." The newspaper offered this apology on Goldman's behalf:

Since Goldman Sachs has been a big part of the Lower Manhattan fabric for almost a century and a half, we'd like to take this opportunity to apologize to the rest of the country on behalf of our neighbor, a financial giant personifying much of what is wrong on Wall St.

Before we get to the multibillion-dollar stuff, we'd first like to apologize that the firm has not yet paid a few thousand dollars of vet bills for the five kittens born in its headquarters building nearing completion in Battery Park City. In August, after our sister publication Downtown Express reported the kittens' discovery, Goldman offered to pay the bills and encourage its employees to adopt the 'BlackBerries.'

It may be just a matter of Goldman waiting to get the vet invoices—we can't imagine they'd stiff kittens while writing out bonus checks worth $23 billion—but the cats still need adoptive homes. (Incidentally, anyone interested in one of these adorable kittens should e-mail their rescuer, the Brotmans, at rbrotpaw--at--aol.com.)

(This was a while back—I doubt any of the kittens are still homeless.)

Now Goldman's CEO, Lloyd Blankfein, is mouthing off to the London Times about how bankers do "God's work." The whole article is terrific, but here's the quotable quote:

Is it possible to make too much money?

"Is it possible to have too much ambition? Is it possible to be too successful?" Blankfein shoots back. "I don't want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I'd like them to continue to do what they are doing. I don't want to put a cap on their ambition. It's hard for me to argue for a cap on their compensation."

So, it's business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein's face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker "doing God's work"

See what I mean? They need to hire better P.R. folks or at least forbid travel to London.

This is all a lead-up to the following piece, by Marshall Auerback (also of New Deal 2.0), from Naked Capitalism. Auerback takes Blankfein as his jumping-off point for a discussion of Christopher Dodd's new banking regulation bill.

Attention Lloyd Blankfein: The Public Purpose of Banking

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

It seems odd that days after we were told by Goldman Sachs's CEO, Lloyd Blankfein, that bankers are doing "God's work", we are still having active debates about how to regulate these selfless apostles of capitalism.

The latest foray into financial reform comes from the Senate. Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank-supervision authority, according to a report from Bloomberg. Dodd, according to the Bloomberg report, has faulted the U.S. bank regulation system, saying "it encourages charter shopping and a 'race to the bottom' by agencies to win oversight roles." Bloomberg notes that "his proposal goes further than proposals by President Barack Obama and House Financial Services Committee Chairman Barney Frank to merge the OTS and OCC."

Certainly, almost anything is an improvement over the abomination that came out of Barney Frank's committee. But we feel that the 'race to the regulatory bottom' could easily be solved via a simple mechanism: If you don't fall in line with our regulatory requirements, you're simply denied a banking license to operate in this country. Problem solved. The United States is the biggest banking market in the world. Do you think any major bank would willingly vacate this market?

And even if the "too big to fail" behemoths decided to transplant a bunch of their operations elsewhere, the country would still be left with thousands of community banks which could fill the void and better fulfill the public purpose described by Mr Blankfein: namely, to "help companies to grow by helping them to raise capital", rather than extracting their pound of flesh via grotesquely high financial intermediary fees, as is the case today.

We have argued before on New Deal 2.0 that the FDIC is best suited to carry on the role of chief systemic regulator, given its role as deposit insurer. That regulator has the best institutional incentives to be concerned with systemic risk and to be a vigorous regulator. It should be the least subject to regulatory capture (a pervasive problem at the Fed, which is full of quant economists who have virtually no interaction with other Fed examiners).

But WHO controls the banks is ultimately less important than HOW we control the banks' activities. Oversight is all very nice, but at times it pays to get back to first principles. What on earth is the public purpose of these things?

Banks are set up and supported by government for the further benefit of the macro economy via providing a payments system and lending in a way that is specifically defined by regulators. Newsflash: the public purpose of banking is NOT to provide profits per se to shareholders. Rather, the provision of the ability to earn profits is only a tool used to support the attendant public purpose. Banks should only be allowed to lend directly to borrowers, and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government in regulating and supervising those activities. There are severe consequences for failure to adequately regulate and supervise those secondary market activities as well.

Banks should be prohibited from engaging in any secondary market activity because it serves no public purpose and may result in severe social costs in the case of regulatory and supervisory lapses. Some argue that these areas might be profitable for the banks, but this is not a reason to extend government sponsored enterprises into those areas. Therefore, banks should not be allowed to buy (or sell) credit default insurance. The public purpose of banking as a public/private partnership is to allow the private sector to price risk, rather than have the public sector pricing risk through publicly owned banks.

If a bank instead relies on credit default insurance, then it is transferring that pricing of risk to a third party, which is counter to the public purpose of the current public/private banking system. Banks should not be allowed to engage in proprietary trading or any profit-making ventures beyond basic lending. If the public sector wants to venture out of banking for some presumed public purpose it can be done through other outlets.

If the activities of the banks are not facilitating the production and movement of real goods and services what public purpose do they serve? It is clear they have made a small number of people fabulously wealthy. It is also clear that they have damaged the prospects for disadvantaged workers in many parts of the world.

It's more obvious to all of us now that when the system comes unstuck through the complexity of these transactions and the impossibility of correctly pricing risk, the real economies across the globe suffer. The consequences have been devastating in terms of lost employment and income and lost wealth.

All governments should sign an agreement which would make all financial transactions that cannot be shown to facilitate funding for real goods and services illegal. Simple as that. When we keep these principles at the front of the argument, we can see that what Senator Dodd and Congressman Frank are arguing about is akin to how to rearrange the deck chairs on the Titanic.

Read the original post.

Labels: banking regulation, Brian Griffiths, Goldman Sachs, kittens, Lloyd Blankfein, Matt Taibbi, New Deal 2.0

 

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11/11/2009 03:13:00 PM