Today, there was a rather brilliant hearing conducted by the Senate Banking Committee about the Volcker rule. Unfortunately, I missed the beginning. But what I did manage to catch was wonderfully amusing. The Senators questioned a panel including representatives from banking behemoths Goldman Sachs, Citigroup and JP Morgan, as well as finance professors from MIT and Harvard. The discussion got quite heated several times. My favorite part was Goldman's representative denying that it ever needed, or even really got, a bailout.
That representative was managing director Gerald Corrigan. If he was really the best representative that Goldman could send to represent the bank from both political and philosophical standpoints, then that's pretty scary. Corrigan was the exact caricature of a Goldman banker that the general public envisions. He was arrogant, presumptuous and skirted responsibility at every opportunity.
At one point, there was a contentious exchange between Corrigan and fellow panelist, economist Simon Johnson regarding whether banks' exposures to certain kinds of derivatives should be limited. It went something like this:
Corrigan explained that some big banks, like Goldman, regularly ran stress tests to ensure their derivatives exposure were well hedged and capital levels were adequate to cushion the blow of even several of their major counterparties going bust. Another panelist said that it might be a good idea for regulators to require banks to perform such internal stress tests.
Johnson balked. He questioned whether it was wise to put much value in such tests conducted by the banks. After all, he mentioned, if Goldman Sachs is the gold standard of stress testing, why did it fail to do so properly before the crisis and have to run to the Fed for a bailout?
Well, that was an easy one for Corrigan to answer: they never needed a bailout.
Huh? Johnson rebutted, asking why it was converted to a bank holding company practically overnight so that it could receive emergency assistance from the Federal Reserve if it didn't need a bailout. And what, wondered Johnson, would have happened if it didn't get that assistance? Wouldn't Goldman have failed? He pointed to Former Treasury Secretary and once Goldman CEO Hank Paulson's new book as providing proof of the deep trouble Goldman was in at the time.
But Corrigan wouldn't budge. Instead, he said:
There is no question whatsoever that when you look at totality of the steps that were taken by central banks and government, particularly in 2008, that Goldman Sachs was a beneficiary of this. There's no doubt whatsoever about that -- as was everybody else. I mean, that's what those extraordinary measures were all about. But again, I'm not suggesting for one minute that Goldman Sachs was not a beneficiary of these initiatives. It was clearly.
And yet, it would have been fine without those measures? So why, then, did it request emergency funding from the Fed? Did it just want to borrow money on the cheap (without really needing it for any kind of emergency) so it could reap more profit? While extraordinarily doubtful, isn't that, in a sense, even worse? The prevailing logic to why banks like Goldman got emergency Fed assistance is because without that help they would have failed. If that logic is wrong, then the bailouts disturb me even more.
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