Goldman Sachs results resonate around the world as the great comeback of Wall Street's greed. By putting $20 billion aside in one semester for bonuses, the eminent firm has provoked nothing less than a refocusing of the agenda of the September G20 meeting. Heads of Government have no intention of letting Wall Street's greed and its consequences be forgotten.
What is the fuss about?
When the U.S. Government declared that it would put an end to some of Wall Street's abusive practices, foreign financial leaders actually took them seriously. Governments around the world expected some form of moderation from the management of those firms who had put the entire financial system on its knees, and forced them to intervene massively to avoid a financial meltdown. They also expected tough regulatory or legal measures to avert another frenzy.
Goldman Sachs, after benefiting from Government money and even transforming itself into a bank to gain access to Federal Reserve funding, is now fresh out of bailout money. Even before that happened, provision for substantial bonuses were booked at the end of the first quarter. So the first question that comes to the mind of foreign observers: was the U.S. Government bailout of banks merely a way to bridge the gap to ensure the stability of Wall Street's bloated bonus system?
This is not about Goldman Sachs. It is about a growing perception that the United States, having thrown the entire global market system into turmoil, is not attacking the root of the crisis: greed. Why should the world pay to maintain a compensation system that is perceived to be outrageous and dangerous for the systemic stability of capital markets?
President Obama's reaction was well-received as a sign of awareness on the part of the White House that there is something wrong with the system itself. The U.S. Treasury is taking initiatives to increase transparency in the compensation system, and is trying to find ways to apply rules that would moderate some of the excesses that put the world on the brink of bankruptcy. But the US response was also perceived as a sign of weakness. Even with its unprecedented bailout expenditures, is there nothing the U.S. government can do to force moderation in compensation on the beneficiaries of this largesse?
That debate is not going away any time soon. It is a fundamental ethical question that the United States cannot avoid any longer if they want their reputation as regulators and systemic custodians of the world's markets to be credible.
The most depressing part of the situation is the fact that there is no evidence from Wall Street that the firms intend to self-moderate. Things look like "business as usual". Also depressing is the great absence in this debate of the players who could most easily impose moderation: the institutional investors. With their share of the votes, they have a collective capability to determine how their money is used and how much of it goes to compensation. They have remained silent in this debate, probably uneasy about raising an issue that applies to them as well. After all the largest bonuses of the last years came from these same hedge funds and private equity tycoons.
I know we are back to the moral hazard we seem so keen to evacuate. This is one of the many unresolved ethical questions we must continue to address for our own good and reputation. If the United States and Wall Street intend to lead, they must show that they have learned something from their recent failures.
Your rhetorically ask, "is there nothing the U.S. government can do to force moderation in compensation on the beneficiaries of this largesse?"
I submit that such action would be counter to the Obama Administration real goals.
It is clear from their actions, not their speeches, that Obama is intent on creating a government that extends the personal wealth and political power of government officials and the ruling class at the expense of the population without even the pretense of honest service.
The Obama administration, including Bernanke, Summers, and Geithner, continues to provide financial support for the biggest banks and insurance companies but provides virtually no support for taxpayers or small business (including letting CIT go bankrupt).