Rogue Trader

Simon Johnson takes a look at what's next on the news that Goldman Sachs helped start the Greek Fire and the upcoming audit that will be out of the Fed and Obama's hands.

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November.  These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets.  When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings.  But a single rogue bank can bring down the world’s financial system.

Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House.  It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues.  Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients.

Johnson doesn't expect much in the way of punishment, however.  I think he's completely wrong even about that.

Instead, Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether.  If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action?  What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

Sadly, Obama's economic team has already answered that question.  And they will be twisting EU arms to make sure nothing happens to Goldman Sachs.  I'm even more cynical than Johnson here: I believe it's a coin toss to see if Goldman Sachs will even get a slap on the wrist by the EU. The most likely outcome will be an audit that clears Goldman Sachs of any wrongdoing and allows them to continue to operate.  Perhaps they will be fined a pittance.

But blacklisted from Europe?  Goldman Sachs?  Not going to happen.  I admire Simon's analysis on economics, but on politics he's off by a mile here.  A year from now Goldman Sachs will be operating like none of this ever happened with more record quarterly numbers.  The EU and US economies?  That will be a different story...