Münchau - Das Ende von Goldman Sachs


  [Het Parool, The Netherlands]




Financial Times Deutschland, Germany

Like Al Capone, Goldman Sachs Must Be Taken Out


"Just as Al Capone was indirectly convicted and taken out of circulation because of tax evasion, the remaining investment banks will likely be attacked in a roundabout way rather than a frontal assault. The indictment of Goldman Sachs is therefore one of the most important moments of the entire financial crisis."


By Wolfgang Münchau



Translated By Stephanie Martin


April 20, 2010


Germany - Financial Times Deutschland - Original Article (German)

Al Capone: the murderous Chicago bootlegger was brought down by charges of tax evasion. Is this indirect approach the way to go at the remaining investment banks?


FINANCIAL TIMES VIDEO: Goldman's conspicuously large profits will please shareholders, but will not sit well with politicians in light of the SEC's fraud charges against the bank, Apr. 20, 00:01:21RealVideo

The death of a president [of Poland] and the spread of a volcanic cloud are the events that have overshadowed everything else in recent days and weeks. But the indictment of Goldman Sachs is by far the most important economic news of the year - perhaps along with the looming bankruptcy of Greece.


This is an important message, because for first time since the crisis broke, two things have appeared on the immediate radar screens of authorities: the dubious role of the shadow banking system and the construction of perverse financial products. Goldman, the prosecution alleges, created a product with the goal of achieving losses, so that a major client would be able to benefit from these losses.


I have no information and certainly no opinion on the legal specifics of the case. Whether Goldman Sachs is guilty is a matter for the American civil courts. But regardless of how the actual legal situation is assessed, this affair has important implications for the future regulation of the financial markets - an issue on which only minimal progress has been made so far. Up to now, the responsible parties have for the most part been beating around the bush and discussing the regulation of capital and bonus payments.


The two central questions that arise from the Goldman case are: should we eliminate the shadow banking system? And should we prohibit toxic financial products?




My answers to these two questions are: yes and yes. The problem with the shadow banking system is the lack of regulation. Since in the case of a larger contamination risk, the government will always be called in - in the end it has a right to be in control. It must therefore have the right to subject private banks to supervision. Shadow banks operate outside of these control structures.



Goldman Sachs is for now, still very large and powerful. Wherever large sums of money are being moved from one place to another, the American investment bank is involved. When Greece cut its deficit with opaque currency swap contracts, Goldman Sachs played the roll of emcee. The bank is omnipresent. It has access to so much insider legal knowledge that it has a natural advantage as an investor - without having to break any laws.


But Goldman isn't only “too big,” it's also “too big to fail” - even more so than Lehman Brothers. A hypothetical collapse of Goldman would be a cataclysmic event for the global economy. That's more than just an argument for regulation. After all, atomic bombs aren’t “regulated” either. Basically, it’s impossible to justify the fact that a financial weapon of mass destruction like the shadow banking system is in the hands of private individuals at all.


Lehman Brothers is now gone and Bear Stearns and Merrill Lynch are divisions of other banks. Only two classic investment banks remain: Goldman Sachs and Morgan Stanley. I don’t think it'll be possible to regulate these banks out of existence, but the air is getting thinner. Just as Al Capone was indirectly convicted and taken out of circulation because of tax evasion, the remaining investment banks will likely be attacked in a roundabout manner rather than a frontal assault. The indictment of Goldman Sachs is the symbolic beginning of this process and is therefore one of the most important moments of the entire financial crisis.  


But I believe that in addition to this, it is necessary to tackle the products themselves. A few months ago I argued that credit default swaps (CDS) should be completely prohibited. The mischief they can wreak is enormous. Technically, there are similarities between purchasing a CDS and shorting a bond. That's true on a superficial level, but a CDS is more heavily leveraged and has a far greater potential to deceive investors. I heard recently that an American hedge fund has created a product with a complex structure intentionally based on bad loans. The hedge fund then used credit default insurance to speculate against its own product. This was profitable because the product received the highest overall rating of “AAA,” making the cost of the premiums for credit default insurance unrealistically cheap. The buyers of the product were the dumb ones - and these were often naive European banks.  




According to the charges, Goldman Sachs followed a similar principle. The bank deliberately created a bad product and took advantage of its insider knowledge and a structural ratings distortion to reap guaranteed profits. There is no question that this sort of thing is unethical, and there's also no question that this sort of thing should be banned. But the fact is that shenanigans like this were probably legal.     





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Of course it’s possible to create complex regulations that ultimately all end up being circumvented. I would make it really simple. “Naked” credit default swaps - the purchase of credit default insurance without ownership of the securities to be insured - should be altogether prohibited. The burden of proof should lie with the purchaser, not with the regulator. This means that the buyer must deposit his bonds when purchasing a CDS. This type of regulation would likely destroy most of the CDS market. While that’s not my goal, it wouldn’t cause me to lose any sleep.



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[Posted by WORLDMEETS.US April 25, 5:58pm]


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