When almost every media mention of your institution is accompanied by the nickname “vampire squid,” you might think it prudent to learn a little humility. Not, it seems, if your name is Lloyd Blankfein.
The Goldman Sachs Group Inc. chief executive officer missed another opportunity to express contrition when he appeared before the U.S. Financial Crisis Inquiry Commission earlier this month. While his answers weren’t quite belligerent, he offered little in the way of an apology.
He may regret not saying sorry if President Barack Obama makes good on his threat to geld the banking industry by imposing new regulations on proprietary trading, private-equity investments and future balance-sheet growth. More importantly, the furious White House reaction to the seeming indifference of finance chiefs to the economic chaos they created threatens to inspire a patchwork of unilateral rule changes around the world.
Without coordination, financial reform won’t work. If countries go their own way, the result will be what Barclays Plc Chairman Marcus Agius last week called “regulatory arbitrage,” with financial firms shopping between different jurisdictions to find the least onerous regimes.
A piecemeal approach to new rules may result in the regulatory equivalent of an arms race. Bashing bonus-hunting bankers has never been more popular, and no politician will want to miss this opportunity to play to the gallery.
Finance chiefs still don’t seem to comprehend just how much anger they have aroused among ordinary folk, or how appalled most of the world is at the lack of either an apology or an acknowledgment that even the strongest players only survived the credit crunch because of the transfusion of billions of dollars of taxpayers’ money.
If different administrations around the world reckon they can win more popular support by retaliating more fiercely than the country next door, those desired improvements in banking oversight could become too tough.
The U.K., for example, has been championing the introduction of a so-called Tobin tax, designed to pinch a sliver of revenue every time a security is traded anywhere in the world. The proceeds would be set aside to build a rainy-day fund to protect us from future financial crises.
‘Arbitrage and Speculation’
The tax was initially proposed in 1971 by Nobel Prize- winning economist James Tobin. Back then, central banks were struggling to manage monetary policy after the collapse of the Bretton Woods system of pegging currencies. So Tobin, a professor emeritus of economics at Yale University before he died in March 2002, proposed a tax on currency trading, say 0.05 percent, to deter what he himself termed “speculators.”
Tobin argued in an article published in the Financial Times in September 2001 that a tax would help underpin monetary policy. “Market arbitrage and speculation tend to keep money- market interest rates (risk-adjusted) the same in every currency throughout the world, preventing a central bank from adjusting its monetary policy to its local economy,” Tobin wrote. “If such arbitrage and speculation require repeated taxed transactions, one nation’s interest rates can differ from those in New York or Tokyo.” A tax, Tobin said, would “preserve some measure of national monetary autonomy.”
On the surface, the idea is seductive. The authorities could sell it to the public as killing two birds with one stone, raising some much-needed revenue at the same time as deterring those pesky speculators.
Problems arise when you try to distinguish between, say, a legitimate hedging transaction in the futures market by a farmer seeking to guarantee the price of next season’s crop, and a trader punting on the price of wheat to boost this year’s bonus. A further complication springs up when a particular country decides that not implementing the tax will win it market share in financial trading.
That’s a particular issue for London. U.K. Prime Minister Gordon Brown has to face an election in the first half of this year, and is behind in the opinion polls. There’s a non- negligible risk that he might seek salvation for his government by putting Britain at the forefront of financial regime change with the solo introduction of a transaction tax -- a surefire vote-winner, albeit spelling commercial suicide for the City of London as a financial center.
Public wrath will filter into government policies designed to lash safety air bags around the banking community. The next time a senior banker finds himself on public trial for the misdemeanors of his profession, it might be wise to show some remorse for the $1.7 trillion of financial-asset writedowns and the 25 percent drop in global stock-market values from the December 2007 peak -- otherwise those bindings are more likely to smother than merely chafe.
(Mark Gilbert, author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.)
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