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To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

Given the strength of the financial sector’s lobby in Washington, this case involving Goldman suggests that we, the American electorate, were unwittingly putting our financial system and our republics in danger by enabling the lobby to have such effect in watering down the regulatory reform in the wake of the financial crisis of 2008.

In the election cycle in which the US Senate’s agricultural committee took up legislation that would regulate all derivatives (2010), people and organizations affiliated with financial, insurance and real estate companies gave members of the committee $22.8 million. Wall Street firms raised $60,000 at two fund-raisers for the committee’s chair’s re-election campaign in the cycle before the committee took up the legislation. Many of the chairs constituents want a crackdown on the speculation. This put Blanche Lincoln in a difficult situation, ethically speaking. At the very least, accepting money from the firms that would be subject to the legislation involves the appearance of a conflict of interest. I contend that given human nature, even such an appearance ought to be avoided or even outlawed. At the very least, it is unseemly in a republic, and I would argue dangerous to its viability.

Furthermore, as if the banks’ culpibility in the crisis was not sufficient to cancel their reservations at the regulatory table, the Goldman case strongly suggests that the banks ought not to be trusted as contributors to regulatory reform. And yet they push ahead to reduce the regulatation, in spite of it all. A child who drops his milkshake doesn’t turn around and tell his mother that she better not clean it up and that she had better not get involved if it happens again. Rather, such a child stands back. As if there is not enough of a natural feeling of shame at having made a mess, there is, or ought naturally to be, an even greater sense of shame in presuming to be in a position to direct the clean-up according to one’s self-interest over objections that the person who caused the problem is not the one best suited to fix it. Even if corporations can enjoy the legal fiction of personhood, there are actual human beings running them, and it is telling when those people dismiss their innate shame in their presumption–even pretending that it is not presumption! We are to blame in not calling them on it, and relegating them. We must relegate them if they won’t do it for themselves, as would be natural for them to do. In other words, we ought to call the artiface for what it is and relegate it as a parent would naturally tell a spoiled and misbehaving yet dogmatic child to go to his room. We, the American people, are enablers; bad parents. We ought to look toward solving the bigger problem, which the case of the Goldman children intimates.

The theory of regulatory capture points to the government’s need for information that the industry being regulated can provide. This theory ignores the broader power-base that an industry is apt to have in lobbying the government (and supporting candidates). In other words, information is just small change from the standpoint of an industry’s ability to influence a government. A better theory would have its primary focus on the macro level, asking the question, in effect, whether (and how) a republic is compromised by its moneyed corporations and banks. Besides looking at campaign finance law and uncovering actual lobbying practices, we ought to look at how much the society in question values money, commerical gain, wealth and economic freedom. We ought not be limited to the managerial or technocrat perspective in ascertaining whether our financial system and indeed our very republics are in danger from being used by unscrupulous firms or industies according to that which fits their peoples’ desires. Once we have uncovered the real problem, we really won’t have any excuse for not fixing it, and we would be bad parents indeed if we let the children fix it.

Sources:
http://washingtonindependent.com/82571/sec-charges-goldman-sachs-over-subprime-tied-product  http://opinionator.blogs.nytimes.com/2010/04/16/goldmans-stacked-bet/?ref=opinion
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?postversion=2010041616 ; http://money.cnn.com/2010/04/16/news/companies/goldman_sachs_questions.fortune/index.htm?postversion=2010041615 ; http://www.nytimes.com/2010/04/20/business/20derivatives.html?hp
http://www.nytimes.com/2010/04/25/business/25goldman.html?ref=us

A year after the financial crisis of 2008, Lloyd Blankfein, the CEO of Goldman Sachs,  found himself vilified for his firm’s quick return to risky trading in spite of its new bank holding company status. Populist resentment at the time was especially pitted against the hefty bonuses from the trades. Also, people were upset about the benefits that the bank had obtained from the decisions of its alums in the U.S. Government—specifically, in the U.S. Department of the Treatury. For instance, Goldman Sachs and other AIG counterparties got a the dollar-for-dollar payout from AIG thanks to an infusion of funds for that specific purpose by Treasury. Regardless, in an interview with the London Times, the highest-paid CEO (at least in the financial sector) dismissed such talk and defended his money-making machine and its compensation.  In addition to being the engine of economic recovery, according to Blankfein, Goldman Sachs provides a social function in making capital available to companies so they can expand. Stunningly, he adds, “I’m doing God’s work.”[i]  Such a claim is a far cry indeed from Thomas Jefferson’s warning that banking institutions are more dangerous to our liberties than standing armies.[ii]  Perhaps God intends to undo our liberties by bailing out the banks.

Besides these rather obvious problems with Blankfein's religious claim is his presumption to know what God's work is, and, furthermore, that he is doing it.   Even though a feckless system of corporate governance can enable a CEO to essentially function as his or her own boss, including doing the board's job of evaluating his or her own performance, it is a tall order for a human being to be able to evaluate his performance as God's work.   To be sure, it is possible that God is an intelligent being that bestows favor on his golden stewards for doing His work.

Lloyd Blankfein may have been involved in two conflicts of interest: 1) that of having excessive power over the board whose principal task it is to oversee him, 2) having communicated with GS alums in high posts in the U.S. Government (e.g., Hank Paulson) and perhaps having them enact policies on GS's behalf.   It may be that institutional and personal conflicts of interests can become so ubiquitous that they are simply not seen by the culprits. Furthermore, it could be that the denial enabled by a tacit presumptuousness is like a white movie screen on which even doing God's work can be projected. How ironic it is, that sordid proprietary interest could operate not merely under the subterfuge of being a neutral "market-maker," but also as God's work. Such work is two degrees of freedom away from squalid greed. So it is remarkable that the two could become conflated in a mind.

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[i] John Arlidge, I’m doing ‘God’s work. Meet Mr. Goldman Sachs, The Sunday Times, 11/9/09.
[ii] Thomas Jefferson to John Taylor, Monticello, May 28, 1816, in Paul L. Ford, ed., The Writings of Thomas Jefferson (New York: G.P. Putnam’s Sons, 1892-99),  XI, 533.

In December, 2010, E.U. leaders agreed to propose an amendment wherein the financial emergency rescue fund would be replaced with a permanent crisis-finance program. The amendment would permit the States having the euro as currency to establish a "mechanism" if it is "indispensible" for the health of the euro.  Interestingly, all of the 27 State legislatures would have to ratify the amendment, though no referenda would be required on account of the amendment being of insufficient scope to trigger them.
According to Marcus Walker and Charles Forelle of The Wall Street Journal, longtime "supporters of European integration are pushing for bold political action to demonstrate Europe will do whatever it takes to defend the euro. A failure of the currency could presage the collapse of the EU itself." (p. A8)  This asseveration is a bit too dramatic; the E.U. existed before the euro and thus can exist apart from it.  The symbolism of the failure, however, would doubtless slow further European integration. So E.U. leaders have responded to fortify the currency. Besides the proposed amendment to provide for a permanent program, the ECB bought E72 billion in government bonds issued by Greece, Ireland, and Portugal. The central bank is as of December, 2010, set to double its capital base, to E10.8 billion from E5.8billion by taking in contributions from the euro zone regional banks. Germany has resisted the E.U.'s attempts to issue or guarantee debts collectively, which would prompt markets to view the euro zone as a single entity. One would think that the EU's common market would be sufficient for the E.U.'s economy to be viewed as one entity. In any case, by acting at the E.U. level, the State leaders could "put this crisis to bed," according to Simon Tilford of the Centre for European Reform in London (Walker, p. A8). Tilford adds that this is a political rather than an economic crisis. Economically relative to the 50 U.S. States, the 17 E.U. States that have the euro had a combined deficit of 6.3% of GNP (11.3% in the U.S.), and a public debt of 84% (92% in the U.S.). Furthermore, unlike the U.S., those E.U. States have a negligible trade deficit. It can be said that the political challenge facing the EU dwarfs even the financial problems. This is not on account of the political fallout from the euro; rather, the way in which the E.U. responded to the financial problems in 2010 points to political problems in the E.U. itself.

According to Timothy Garton Ash at Oxford University, if the euro ends, the question would be "what the European Union then is." (Walker & Forelle, p. A8)  The political existential problem surpasses the financial crises even if the latter pack more of a punch at the pocketbook. Responding to the political problem, fiscal union has been said by some to be necessary for the E.U. In December, 2010, when Greece and Ireland were "under virtual stewardship" of the EU and Spain and Portugal were not far behind, German Finance Minister Wolfgang Schaeuble said, "In this crisis Europe will find steps toward further unification."  While Spain's unknown losses in its banking sector amid the deflation of its housing bubble seem to be more baleful, it can be pointed out that the residential mortgages are 60% loan to value (whereas in some States in the U.S. this figure is over 100%). Furthermore, only 2.6% of the residential mortgages in Spain are more than 90 days past due (though this does not count forgiveness periods). The need for further European <i></i>political<i></i> integration may not be as flashy, but it could well be more important to Europe. I am not arguing that the banking crisis is not significant and should not therefore be attended to; rather, I am suggesting that the most immediate fix may be overshadowed in even the medium run by the need to balance fiscal and monetary policy by having at least a share of both at the E.U. level.  Moreover, federalism itself requires balance; too much power at the State level can lead to dissolution just as too much consolidation at the union/empire level could suffocate the inherent diversity within the union. E.U. leaders could engage in a balancing act wherein they simultaneously shift more governmental sovereignty from the State governments to that of the E.U. while fortifying buttresses protecting Europe from the E.U. eventually consolidating power like what happened in the U.S. through the twentieth century.  I submit that fixing the E.U.'s political/existential problem is much more difficult than fixing the banks.  Adding to the problem here is the relative invisibility  and the lack of apparent urgency of the political problem.  What is the E.U.?  This is not as hard to answer as one might suppose.  The E.U. is a modern federal system on the empire-scale. That is, the E.U. has a government, which is dual-sovereign with its State governments--popular sovreignty being the unity transcending the governmental duality.  The political problem given what the E.U. is, is more difficult to define and solve. Creating a new fund will not cut it. 

Sources: Marcus Walker and Charles Forelle, "Bailout Deal Fails to Quell EU Rifts," WSJ, December 17, 2010, pp. A1, A8' Marcus Walker, "Closer Fiscal Union: A Collective Guarantee," WSJ, December 17, 2010, p. A8; Brian Blackstone, "ECB Seeks Funds for Capital Base, WSJ, December 17, 2010, p. A10.