I N T H E N E W
Anger At Goldman Mustn’t Drive Reform
Investors.com June 3, 2010
Bob Atwell Text
Public anger at Goldman Sachs is the vehicle being used
to force through sweeping financial reform legislation.
In the public’s mind, Goldman has come to symbolize
the self-interested corruption at the heart of modern
finance. The legal discussion about Goldman seems to
center on whether Goldman had a conflict of interest.
Goldman doesn’t have a conflict of interest; Goldman is a
conflict of interest.
The company is not unique among major financial
institutions. It is in the spotlight because it is widely
respected as the most intelligent and influential financial
market player. Goldman creates markets, moves markets,
shorts markets and participates heavily in the regulation
of these markets through an influential network of past,
future and wannabe employees.
The basic facts of Hank Paulson’s transition from
chairman and CEO of Goldman Sachs to U.S. secretary of
the Treasury are mind-boggling.
He ran Goldman during the build-up of the bubble,
earning $38.5 million in 2005. In 2006, he went to
Treasury as the bubble was peaking. He was “forced”
to redeem his ownership in Goldman before becoming
Treasury secretary. He therefore sold his stock for $485
million on a tax-free basis saving more than $100 million
in taxes because he was entering “public service.”
We will be assessing Paulson’s actions for many years,
but it is very clear that he was presiding over the
resolution of the financial crisis his firm played a pivotal
role in creating. There is nothing illegal about any of this,
but there is a lot wrong with it.
The regulatory reform bill passed by Congress is almost
2,000 pages. I have not read it. Neither have most — if not
all — of the congressman who voted for it. I don’t have to
read it to know the foundational premise is fatally flawed.
I also haven’t read the bill because legislation that long
isn’t written to illuminate, simplify and solve problems.
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In this environment, what passes for a public debate is
a bunch of talking points spouted by people who don’t
know finance and haven’t read the bill. The public fury
over Goldman was the vehicle used to ram through this
financial reform bill of flawed intent.
The premise of the bill was that systemic risk must be
managed by more and tougher regulators. The systemic
risk of the “Too Big to Fail” institutions is not a naturally-
occurring market phenomenon. It is the unintended
consequence of the conflicting goals of federal financial
policy.
Fannie Mae, Freddie Mac, the Federal Reserve and
Goldman Sachs all played a role in this, but the problem
is both simpler and more challenging than an angry
public would like to believe.
We already have a large and complex regulatory
apparatus. This is designed to:
• Protect depositors (the FDIC).
• Implement federal monetary and fiscal policy (the
Treasury).
• Maintain the safety and soundness of the system
(the Fed, the FDIC, the Officer of Comptroller of the
Currency and the state regulators).
• Stimulate low-income housing and community
investment (Fannie and Freddie and all the
regulatory agencies).
• Provide funding mechanisms (the Fed and Federal
Home Loan Banks).
• Protect investors (the Securities and Exchange
Commission).
• Provide consumer protection (multiple agencies).
Understanding and navigating this regulatory complexity
has displaced credit underwriting as the most important
core competency in finance. This regulatory dynamic is
Anger At Goldman Mustn’t Drive Reform | Investors.com June 3, 2010
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what drives centralization and causes systemic risk. This
centralizing dynamic tilts the competitive landscape
away from community-based players using local
financial resources to responsibly serve people in the
decentralized manner personalism requires.
Regulatory complexity favors the large players in any
industry. The big firms have the volume over which to
spread the fixed costs of compliance, and they inevitably
provide heavy input into the formation of regulatory
policy and practice. They also have the resources to hire
the necessary lobbyists.
We don’t want systemic risk managed; systemic risk must
be eliminated. The best way to eliminate systemic risk is
to stop using the policy approaches that create it. It can
be eliminated very simply by imposing higher capital
standards on those institutions that pose systemic risk.
Taxation of systemic risk would also reverse the implied
public subsidy that creates it. We will solve only the
problems we sincerely intend to fix.
Atwell is chairman of Nicolet National Bank in Green Bay, Wis.

We are all sickened by the current state of affairs. But no

one is going to stop the seamless flow of people between
the public and private sectors. So the notion that anyone
outside of Wall Street and Capitol Hill will be helped
and protected by more powerful “financial wizards” in
Washington has no reasonable basis in practice.

Their current proposition is if we just further centralize

financial markets under Washington’s control, they will
fix things for us. The problem is the new law does not
eliminate any of the ineffective agencies currently in
existence and likely will create new ones.

Centralized finance is too profitable for politicians to

want the nonsense stopped. In the end, we are likely to
have a modified version of the same game with some
different names. Financial Disneyland will reopen
with more and tougher security, but the fundamental
dynamic of centralized and politicized finance will be
even stronger. Security will talk tough and penalize a few
players, but the games will resume. The primary impact
of enhanced security will be to keep small players off the
field of play.

The financial machinations on display in the

congressional hearings caused severe economic pain.
Politicians have successfully harnessed the public anger
at New York to support a more muscular Washington.

There is, however, a better way, and we can have a much

healthier and more stable outcome. We just need to grow
up and process our anger like adults. We are currently
allowing our anger to be used against us.

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