Dodge Says Goldman Case May Spur New Rules From Wrong Lesson

Former Bank of Canada Governor David Dodge said that fraud allegations against Goldman Sachs Group Inc. may encourage regulators to create new rules that fail to address the causes of the global credit crisis.

“This is going to give a further push for tighter rules, I am not sure we are going to take the right lesson,” Dodge said in an interview in Ottawa. “The real lesson is to drive stuff through transparent markets, whether it’s clearinghouses, whether it’s exchanges, to standardize products.”

The International Monetary Fund’s recommendation that the Group of 20 nations consider a tax financial institutions to help pay for future bailouts of the industry is an example of rule that could create a problem, Dodge said. France and the U.K. have already backed the idea of a tax on banks.

The recommendations yesterday from the IMF on bank taxes are “ very unhelpful,” said Dodge, who is also a co-chair of the Global Market Monitoring Group of the Institute of International Finance and who was nominated to the board of Bank of Nova Scotia in March.

“I don’t think what’s going to happen down in Washington over the next couple of days is necessarily going to focus on the right thing either,” Dodge said.

Finance ministers and central bankers from the G-20 meet in Washington this week.

Canadian Finance Minister Jim Flaherty said yesterday that new taxes on banks may end up weakening financial institutions and fueling risky behavior.

The U.S. Securities and Exchange Commission said last week it is suing Goldman Sachs for fraud linked to derivatives. President Barack Obama is speaking in New York today about financial markets, and his spokesman said last night Obama will say new regulations are needed so the country’s economic system isn’t at the mercy of “risky decisions” on Wall Street.

“When something like this happens, it certainly strengthens the hand of Mr. Geithner and the U.S. administration, and it strengthens the hand of the French administration to have tougher rules,” Dodge said, referring to Treasury Secretary Timothy F. Geithner.