We have warning signals coming from observers such as Charles Krakoff at Benzinga, RC Whalen at ZeroHedge, Charles Gasparinto at The Huffington Post, and Simon Johnson from The Baseline Scenario.
An excerpt from Simon Johnson is below:
Goldman Sachs: “We Consider Our Size An Asset That We Try Hard To Preserve”
To great fanfare, this week Goldman Sachs unveiled the report of its Business Standards Committee, which makes recommendations regarding changes for the internal structure of what is currently the 5th largest bank holding company in the United States. Some of the recommended changes are long overdue – particularly as they address perceived conflicts of interest between Goldman and its clients.
What is most notable about the report, however, is what it does not say. There is, in fact, no mention of any issues that are of first order importance regarding how Goldman (and other banks of its size and with its leverage) can have big negative effects on the overall economy. The entire 67 page report reads like an exercise in misdirection.
Goldman Sachs is ignoring the main point of the debate made by – among others – Mervyn King, governor of the Bank of England, regarding why big banks need to be much more financed by equity (and therefore have much less leverage, meaning lower debt relative to equity). On p.10 of his Bagehot Lecture in October 2010, for example, King was quite blunt:
“Modern financiers are now invoking other dubious claims to resist reforms that might limit the public subsidies they have enjoyed in the past. No one should blame them for that – indeed, we should not expect anything else. They are responding to incentives. Some claim that reducing leverage and holding more equity capital would be expensive. But, as economists, such as my colleague David Miles (2010) and Anat Admati and her colleagues (Admati et. al., 2010), have argued, the cost of capital overall is much less sensitive to changes in the amount of debt in a bank’s balance sheet than many bankers claim.”
This King/Miles/Admati critique appears to be gaining a great deal of mainstream traction (see this link for more on the Miles’ view). At the American Finance Association (AFA) meeting last weekend in Denver, there was much agreement around the main points made by Professor Admati and the leading group of finance thinkers that recently wrote with her to the Financial Times on this issue. Professor Admati’s slides from Saturday are on the Stanford website (she presented in a Society of Economic Dynamics session, running parallel to the AFA). The Admati, DeMarzo, Hellwig, and Pfleiderer paper examines in-depth, critically, and in the context of current public policy, the mantra that “equity is expensive” for banks; this is available online – on the same page you’ll also find related pieces of varying length. Reviewing any of these materials is an easy way to get up to speed on why Goldman Sachs’ internal reorganization is little more than irrelevant.
Or perhaps it is a thin smokescreen. The Goldman report does have one revealing statement (on page 1, under their “Business Principles”): “We consider our size an asset that we try hard to preserve.”
As John Cochrane, a University of Chicago professor and frequent contributor to the Wall Street Journal puts it, “The incentive for the banks is to be as big, as systemically dangerous as possible.”
This is how big banks ensure they will be bailed out.