Friday, December 18, 2009

The case for breaking up Goldman Sachs

Bloomberg News opines that a simple reinstatement of Glass-Steagall (as proposed by McCain and Co) would not be enough. If there needs to be sincere reform of the vampire squids on Wall Street, then it better be a proper, clean divide of banking responsibilities...

Simply saying that Goldman Sachs and Morgan Stanley are no longer bank-holding companies (a coveted status they received last fall that allows them to borrow at the Federal Reserve’s discount window), as would likely happen under a Glass-Steagall-like split, won’t go far enough. A newly reconstituted Wall Street would need to be further divided. As things now stand, Wall Street and big banks are bundles of conflicts that too often pit firms against their customers. That led to some of the riskier practices that helped fuel the financial crisis. Investment houses underwrote and sold investors complex bundles of mortgages, for example, even as they bet the housing market would crater. This needs to change. Either a firm is an adviser, a broker, an asset manager or a hedge fund. It can’t be all things to all customers. Nor can a firm be all those things and not create the kind of linkages that threaten the stability of the financial system. So firms should have to choose between being, say, brokers and investment bankers versus proprietary trading shops or asset managers. In that case, if Goldman Sachs wants to be a giant hedge fund, that’s all it should be. After all, some smaller, focused players such as hedge funds failed during the crisis but didn’t require taxpayer bailouts. Splitting up Wall Street would also make finance easier to regulate. In their current agglomerated state, too many firms are impenetrable black boxes. Regulators don’t really know what’s going on inside. Neither do investors. And it often seems management is clueless as well. To be sure, changes along these lines would be painful and bitterly opposed by banks and Wall Street.

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