Goldman Sachs on Regulation

Goldman Sachs COO Gary Cohn can rant and rave all he wants to at politicians who merely make a suggestion about financial reform, but it remains true that the financial system needs to be regulated, transparent and beneficial to society as a whole. The banks do not exist just to make a profit for themselves.

An article from FT.com by Brooke Masters and Jeremy Grant called Finance: Shadow boxes quotes Cohn:

“Risk is risk,” said Gary Cohn, president of Goldman Sachs. “My concern is that ... risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector.”

The article goes on to explain the shadow banking system and to list those companies that might be part of the unregulated entities that could bring about the next financial crisis.

And that is why, as The Daily Targum states:

Wall Street needs stricter regulations - The Daily Targum
Editorial

Wall Street is known for big bonuses — the kind of bonuses that let investment bankers make more in a day than many people make in a year. But the Federal Deposit Insurance Corporation (FDIC) is looking to combat that a little. Regulators have proposed a rule that, if approved, will force financial firms like Bank of America and Goldman Sachs to defer at least half of bonuses for top executives for three years. The FDIC hopes that, by making these institutions defer payment over longer periods of time, it will force them to more closely analyze their executives' long-term performances, thereby deterring them from making impulsive, high-risk trades or investments. While the FDIC's intentions are noble, there are some flaws in this plan that need to be patched up if they want it to work successfully.

While the rule would tell these financial institutions to defer bonuses, there does not seem to be a plan for enforcing this instruction — at least, if there is a plan, it is not public. Such a plan is crucial to the success of the FDIC's rule. After all the U.S. economy has gone through because of Wall Street's practices, can the country really trust them to do the right thing, even when told to by the FDIC? It seems, then, the rule as it is proposed is not strict enough. There needs to be more regulations put into place — along with a system of enforcement — to ensure the bonuses will, in fact, be deferred.

Also, Wall Street culture as it is encourages quick, high-risk, almost impulsive trades. There is little to no emphasis on long-term success in these financial institutions. Instead, all of their transactions are rooted in the immediate. What the FDIC is trying to do, then, is drastically change Wall Street culture. This is an incredibly difficult step to take. Certainly, if the FDIC is successful in this endeavor, the U.S. economy could greatly benefit from an attitude change in these institutions. But, as stated above, for such a drastic change to take place, the FDIC is going to need to do more.

We applaud the FDIC's attempts, but this has to be only the first step. If the FDIC wants to reform Wall Street, a lot needs to be done. Merely putting this rule into practice is not going to make much of a dent. What Wall Street needs are more rules, more regulations and far more scrutiny.

Read the article here