The player to watch as a timid Congress closes in on a modest financial reform bill is America’s biggest banking and investment firm. Goldman Sachs so far has ridden out the trouble successfully and made a profit of $12 billion in 2009.
Its lobbyists are busy trying to carve out an exemption for asset-management and insurance companies that would limit the effect of the so-called Volcker Rule, a measure being considered to forbid banks from risking their own money in the market. The exemption would let Goldman hold onto its several large hedge funds.
Aside from the pending legislation, Goldman faces a civil suit by the Securities and Exchange Commission alleging fraud in its offer of securities that it had built to fail and against which it was betting. The firm also has been subpoenaed by the Financial Crisis Inquiry Commission in its investigation of the causes of the meltdown.
Whether the SEC and the commission really insist on getting answers from Goldman, the company has persuaded some of its clients that it favors reform. It said in a statement: “One lesson we have learned from the crisis is the need for more effective regulation. We are working with regulators on improved safeguards for the global financial system.” It called for an end to “too big to fail,” declaring that the biggest firms “should be required to structure themselves so that they can be recapitalized without taxpayer money, and before our local problems can spiral into a systemic crisis.”
One recent book about the financial crisis credits Goldman Sachs with recognizing the bubble that was about to burst earlier than its rivals. In “House of Cards,” William D. Cohan writes that “Goldman has been able to make so much money in part by taking risks and trading — both with clients and for its own account — when other firms have been reluctant to do so.”
But some among the small group of economists who saw the collapse coming are more critical of Goldman. Stephen Roubini, a professor of economics at New York University, told a skeptical audience at the International Monetary Fund that a deep recession was coming starting with a housing bust and spreading to a paralysis of the global financial system.
Writing in “Crisis Economics: A Crash Course in the History of Finance,” he and Stephen Mihm, a University of Georgia economic historian, reported that Goldman Sachs had been too highly leveraged and that its analysts had led the way in the false hope that the rest of the developed world would escape the financial collapse.
Their proposed solution, breaking up the biggest banks, along with stronger but fewer regulators, armed with stricter laws, give lawmakers a good direction to move in.