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Goldman scandal gatecrashes UK election

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Paul Mason | 11:23 UK time, Tuesday, 20 April 2010

In the pre-meltdown days banks like Goldman Sachs were happy to stay above politics, quietly using their soft power through that Venn Diagram of influence that overlaps the Wall Street banks with the Council on Foreign Relations, the US Treasury and, well, almost everything else on Earth.

But the SEC's decision to charge Goldman with civil fraud has forced the issue of investment banking's business model into the electoral limelight in the UK.

[UPDATE: My colleague Robert Peston has got hold of the IMF's proposal on a global banking tax. We'll be grilling Alistair Darling about it on Newsnight, and getting reaction from Vince Cable and Philip Hammond]

The trader at the centre of the Goldman operation under scrutiny was based in London; now, with Gordon Brown accusing Goldman of moral bankruptcy (while as he told me yesterday, "reserving judgement on the individual case"), the Lib Dems have trumped this and called for the UK government to boycott Goldman as a client.

Goldman's defence is that it was doing nothing wrong: that it obeyed its own rules and the law. This defence goes to the heart of a bigger problem: many commentators believe it's not Goldman that's at fault but the entire investment bank business model which allows the same, giant, heavily influential bank to represent the buyer and seller in the same transaction.

A risky state of affairs in the abstract, when you turn it into gleaming-toothed bankers confronting you with "buy this product or you go off our Christmas card list" type sales techniques it has obvious pitfalls.

What it led to was a boom and bust that has left the state picking up the pieces. What the political debate is all about now is how society and the state can levy a legitimate charge on the banks for the implicit guarantee that - should any inadvertent mistakes by these high-rolling individuals ever threaten an economic nuclear winter again - there will be a pot of money there to bail them out.

Hence we come to the global bank tax. The G20 at Pittsburgh asked the IMF to design a global bank tax. The tax has two purposes - (and I can hear the engineers among you begin to groan mentally here, because things with two purposes are hard to design): to limit risk taking and to raise money to compensate the state for the implicit bailout.

However, nobody can agree how to do the former, and where the money should go to. So at the weekend the Dutch wanted the tax to go straight into the Dutch treasury; the Spanish into a Spanish contingency fund, and the Brits into an international contingency fund. Meanwhile the debate on how to design the tax is fraught: do you tax profits straight; do you tax bonuses; do you tax risky activities differentially; do you tax types of bank differentially?

If you are aiming to deter risk, you become more differential - the smart money is on a tax raised on banks access to the wholesale markets. If you are aiming to raise money you use the Huey P Long principle: "soak the fat boys and spread it out thin".

Now here's the problem. Two words: Copenhagen; Doha. Global deals are proving virtually impossible to do. Since it's the G20 running this show, and the G20 does not take votes but operate through consensus I would place a large bet on the eventual IMF proposal being watered down to its lowest possible impact.

In the UK election a clear difference has emerged between the parties. The Lib Dems have embraced the Glass-Steagall principle: attack the investment banking business model that allows Goldman Sachs and its peers to consider trades such as the one in question as being lawful. Basically - as with FD Roosevelt - you ban speculation using other people's money.

The Tories have not been so specific but they have promised to put Mervyn King in charge of bank regulation, and Mervyn King favours breaking up the biggest banks if the systemic risk they pose is too great.

(Incidentally the banking tax proposal coming out of the IMF does not seem to contain much in the way of addressing the systemic risk - or too big to fail problem; though the IMF was at one point said to be trying to do this.)

Labour remains the only party committed - implicitly, Gordon Brown evaded my question yesterday - to a global or nothing approach. I also reject breaking up the banks on any lines.

In this its position reflects most closely that of the banking industry.


  • Comment number 1.

    even now it it is not illegal to trash the uk again. who benefits?

    look at the time stalling excuses given for not reforming the house of lords over the last 100 years [linking it to other things that need to be done 'first', its too complex, etc]. the bankers and their 'assets' are time stalling.

    banking is still in essence a medieval guild where even the head of state still has to 'ask permission' to enter the city of london. basically banking and the legal profession are the two unions not brought into the modern world.

    members of these guilds know each, they inter marry, socialise etc. if one was to examine the top 100 what links might one find?

    the big claim bankers make is they take risk. they do not. like the professional gamblers never 'gamble'. the credit crunch was not because of risk but of engineering something bad to look like something good then selling against it. that is not risk management.

    even now in the last great state nationalisation their industry would collapse if the public money was not there to support it. there is no risk for them in taking uk money at 0.5% and putting it an account in australia for 5% then saying 'how clever we are which is why we need a big bonus'.

    we need people who take risks. we don't need a medieval guild of oligarchs.

  • Comment number 2.

    Surely the Goldman scandal that has oozed out of the poorly functioning back passage of banking's stinking, gout-ridden carcass this week has only bolstered the Lib Dems? I would love to understand better, Paul, why you think breaking up the banks, as Clegg and co. are advocating, would be a bad idea (this is genuine curiosity, rather than a snide way of disagreeing). As somebody who has read a huge amount on the financial crisis, but who understands its intricacies quite poorly, the Lib Dem position appeals hugely. What began in autumn 2008 and unfolded through 2009 was the greatest injustice I've come across in my 31 years on this planet. The notion that a group of people are able to accrue extraordinary wealth while shoulder-barging an entire economy to the edge of a massive cliff, and then walk away unpunished when the economy (with the hopes and dreams of literally billions of honest people) goes over the edge, undermines the social fabric of our society. There must be blood. This issue was only touched upon in the first leaders' debate last week. Clegg will surely do well to make more of it this time around.

  • Comment number 3.

    "in the pre-meltdown days banks like Goldman Sachs were happy to stay above politics, quietly using their soft power through that Venn Diagram of influence that overlaps the Wall Street banks with the Council on Foreign Relations, the US Treasury and, well, almost everything else on Earth."

    If people are aware of this 'sphere of influence' that the CFR have, why can't something be done to stop their level of influence. The only party to reconise the fact that there is a more 'global adgenda' on the horizon, and thats the BNP.

    Surely BNP need to take a look and think is it just an immigration issue they have a problem with, or is it the looming global power infrastructure shift that is making their original immigration issues worse. Take a step away from your more disliked policies and picked at policies, and explain what we all know is coming, in a rational and understandable way.

    If BBC analysts can see the influence of the shadow elite, why can't this be portrayed in more main stream news, after all you are meant to be broadcasting in our best interests, and with no element of bias.

  • Comment number 4.

    Sorry, but Gordon Brown has no legitimacy in saying that regulation is an International responsibility whilst bailout responsibility is a National one!!

    The UK tax payer has responsibility for underwriting underlying banking assets in excess of 5 times our GDP (i.e. more than 15 times our annual tax take!).

    If we have unilateral responsibility for dealing with any fall out, then we have to act unilaterally to mitigate it. End of discussion.

  • Comment number 5.

    Policies, dear boy, policies

    The key test is whether any of our election candidates are willing to implement the following clear policies to reign in the shadow banking sector:

    1) Tobin style tax on all financial transactions (starting low e.g. 0.001%, then ramping up) to slow down unneccessary activity
    2) Simple ban on "naked" short selling, default swaps etc. as this stuff is pure nitro-glycerine!
    3) No new "originate-to-distribute" loan creation, with phased restoration of existing arrangements (stop the source of spurious securitisation activities)

    All simple, neccessary and most likely sufficient policies to get us out of the stranglehold!

    I'd be interested to know what Mervyn's stance is on each of these policies. They have all arisen from the topsy turvy de-regulation that has occurred on his (and his predecessor's) watch, namely:

    The shift from regulating banks and financial systems by clearly stating what limited activities they CAN do, to the highly bamboozling situation of banks pretty much able to whatever they want to do, unless a regulator expressly says they CANNOT do it.

    They have completely contorted the concept of banking regulation, and well and truly let the "venal but legal" genie out of the bottle!!

  • Comment number 6.

    "and Mervyn King favours breaking up the biggest banks if the systemic risk they pose is too great."

    How could British Mervyn King break up international Banks (like HSBC, Standard Chartered and Barklays)?

    All the writing and talking which was disconnected from reality was what got us all into this mess was it not? In the sciences, such behaviour is routinely punished with poor marks and poor degrees (if a degree at all) as it demonstably is false i.e it does not accurately describe reality. The fact is, one can't understand a lot of what these financial people say because it just doesn't stand up to reasoning (to use the engineering image).

    There are far too many artists (MBAs etc) out there in my view.

  • Comment number 7.

    Hawkeye_Pierce [#4] "Sorry, but Gordon Brown has no legitimacy in saying that regulation is an International responsibility whilst bailout responsibility is a National one!!...
    If we have unilateral responsibility for dealing with any fall out, then we have to act unilaterally to mitigate it. End of discussion."

    Perhaps you don't understand politics? The electorate gave him a mandate so he can pretty much say and do as he pleases within the law. Where is the law which says that he can't say what he said? if you keep saying things like the above people will justificably ask you to substantiate it, thinking you are asserting that he is in violation of some law. he is an internationalist. He is not a nationalist. People here must pay to feed the world in New Labour's view. We owe it to them.

    By the way, are you Mr, Mrs, or Ms Hawkeye_Pierce? I take it that must be your real name given that you think others are not entitled to anonymity?

  • Comment number 8.

    the thing is regarding the global bank tax is that, IN TIME, the tax can pay off various government treasuries first,be put to a national contingecy fund second, and when that is sufficient, put into an international fund later on...if everybody agrees.

    mind you, i think the %(0.015) advocated by the US looks a bit small giving the number and size of banking/financial problems of the last 100 years.

  • Comment number 9.

    My bet is that nothing will come of banking regulations, the same banks operate all over the world and have the ears of all the governments. They can tell Mervyn to favor one kind of system while telling the Americans to go for something else safe in the knowledge that unless everyone signs up to the same thing, nothing will come of it. Anywhere.

  • Comment number 10.

    Another excellent piece, Paul. Without an economist's, a politician's or an investment banker's axe to grind you're able to present a refreshingly clear perspective.

    I would comment that the fundamental problem here is that many of the key players are too clever by half. The are a lot of "bright young things" in the financial Capitals who are able to come up with incredibly complex investment vehicles with the potential to earn them - and their employers - vast sums of money. Trouble is, they do not appreciate the risks (of the "Black Swan" variety) and I'll bet sometimes they don't know themselves if they're being ethical or even fraudulent in the excitement to make even more money (to give the benefit of doubt).

    Pity the politicans, their regulatory appointees and central bankers, who are also very clever, but have less understanding of those complex products. What are they to do? Apply sanctions (heavy regulation or heavy taxation) - and lose their markets, or adopt a laissez-faire approach and hope that everything turns out well (as it did for so long)?

    The answer is actually quite simple: ban fraud and limit complexity through transparency and "experienced investor" restrictions. That much is in place, even in the "light-touch regulation" days of yore.

    It's the identification and the implementation that's the issue. Regulators must be able to judge whether financial products are suitably ethical and transparent and have full backing of Governments to act decisively.

    As I see it, the present Government has been indecisive and slow to act, hoping for a global consensus to "bail it out" of its responsibility to address past problems and set the right framework for going forward. Yet neither of the two opposition parties has declared policies which are significantly better than a basic "sledgehammer" approach.

  • Comment number 11.

    Most people have been extremely well conditioned to fear regulation and rule following. That's been extremely good for business.

  • Comment number 12.

    As a consequence, those who do not condition well (i.e. have high fear thresholds) have become very good business people and very rich.

    It's depressing isn't it? Unless you are a good businessperson that is.

    Good businesspersons are made, not trained.

  • Comment number 13.

    The way you have commented that global deals are proving virtually impossible with reference to 'Doha', says it all.

    While eyes are on a non-progressing 'Doha' deal, trade deals which no one is following but which will have enormous effect - notably at this point the EU/India Free Trade Agreement - are progressing, unseen, with the contents of the agreement texts kept secret.

    Isn't it similar with banking regulation? The red herring debate between national and global regulation is out front, while behind the scenes DEregulation is the name of the game

    Do look under the covers!
    Don't you have any spies in International Financial Services London?

  • Comment number 14.

    Goldman et al : an inherent vice.

    The status quo will always privatise profits and socialise catastrophic loss. If this is unacceptable to the populus who tacitly underwrite multinational banking activities, then some restrictive legislation is the only answer.

    Tobin taxes, insurance and the like won't solve the problem, they only add another layer to the contractural hierarchy to be exausted before inevitable meltdown. If an activity is undesirable/immoral/corrupting then that's all there is too it. Make it taboo.Or live with it.

    Like a volcano lots- of free fertile soil and geothermal energy - until it explodes and ruins somebody(elses hopefully) holiday.

    The dirty little secret is that we may be prepared to let the system continue for individual selfish reasons.

    Make me good lord, but not quite yet, and let me get out the exit before the other fools. Amen

  • Comment number 15.


    I think that was just a typo on Paul's part, (I should read 'he' maybe) Paul is a journalist he would not (could not) offer up such a forhright opinion on the policy of breaking up the banks or he would be a columnist!

    I liked your goldman sachs scandal analogy ''slithering out of the back passage of the gout ridden carcuss of the banking industry''

    The only trouble with your analogy is that the banking industry is not a carcuss, we are the carcuss, the banking industry is the vulture still feeding off us all I am afraid.

    We need to remember what money was invented for, simply as a convenient mechanism to exchange goods and services of value freely for the benefit of society as a whole. Money is not meant to represent value in itself, the fact that it does in the modern world has led to the creation of huge money (not value) generating institutions called ' banks'.

    Breaking up the largest and most influencial of those is a very sensible first step for sure. I think if paul was allowed to have an opinion, he would probably agree with that from what I know of reading his posts over some time.

    Keep contributing.

  • Comment number 16.

    Only when these overpaid parasites have to face the risk of jail will the government have real influence. The companies and the senior executives need to be properly licensed, the operations need to be under supervision, whistle blowers should be generously rewarded, the state must define the rules on governance and ensure they are enforced, no auditor should have any other lucrative relationship with the companies, etc. Oh yes Nick Clegg should tell Brown on 7th May to go as he is obviously always keen to offer cleansing services to the derrière of finance capitalism.

  • Comment number 17.

    We need to break up our banks, limit their capacity to speculate and bring them back to earth. Britain should also launch an official investigation into what went wrong – and hand the findings to the Serious Fraud Office. This needs to become this election campaign's number one issue – not one which either a compromised Labour party or a temporising Conservative party will relish. The Lib Dems, the fiercest critics of the banks, have begun to get very lucky.

  • Comment number 18.

    Breaking news.

    The ash cloud is not so dangerous after all!!

    The 'risks have been re-assessed'


    EUROCONTROL (love the name by the way) got it wrong.

    All those who knew someone who died on the roads in the last few days or had their bank accounts wiped out getting home take note.

    There was no need for this.

    Just like there was no need for a Euro ban on oddly shaped fruit in our supermarkets.

    Simple exclusion zones operate in other parts of the world with far more volcanoes than here, and hey, guess what. The total number of deaths due to plane crashes from flying in volcanic ash = ZERO in the whole history of aviation and nobody needed rooms full of experts and fancy computer models which only exist in cyberspace to achieve that wonderful fact.

    Here is another fact, tired and stressed out drivers on long journeys often make mistakes while at the wheel and kill themselves or others. I wonder how much of that has happened in the last few days, not to mention the low level stress and general finacial disaster for many.

    Feel free to make your compensation claims to 'EUROCONTROL', care of Brussels, I am sure they and their army of lawyers will be pleased to hear from you as it will keep them busy for another few years generating many jobs that do not need to be done and give no one any life satisfaction so the beast that is the model of ' eternal economic growth' can continue to feed, when, actually, it is not needed anymore.

    I hate to say it, but I told you so...


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