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Goldman Sachs will help tighten financial regulations
Saying that internal communications between Goldman Sachs employees indicate a need to ban financial companies from trading their own funds, the administration and US congressmen are preparing for a showdown over financial regulation legislation.Democratic Sen. Carl Levin published the emails on his website Saturday, saying they show how Goldman Sachs "made a lot of money betting against the mortgage market." “The company increased risks to the financial system by selling toxic mortgage-backed assets. At the same time, the securities had good credit ratings,” says Mr. Levin. Senate Banking Committee Chairman Christopher Dodd and Senator Sherrod Brown said the internal Goldman Sachs emails would demonstrate "why the Volcker Rule is necessary."
"What these emails mean is that there are multiple types of conflicts on Wall Street, that Wall Street is working for and against its clients on the same stock," Mr. Brown said on ABC. “That's why we need the Volcker Rules.” That's why we need really strong reform that separates equity trading from banking."
Adviser to President Barack Obama, former head of the Federal Reserve Paul Volcker, told the Senate Banking Committee at the beginning of the year that there are powerful conflicts of interest that are inevitable when commercial banks participate in trading their own funds or the funds of private individuals: “I’m not so naive; to think that even with the best efforts of management, the so-called Chinese walls can remain impregnable under the onslaught of seekers of personal gain." Chinese walls refer to barriers between investment bankers and traders that prevent information leakage.
In January, Barack Obama announced some proposals to reform the banking system, authored by Mr. Volcker. In particular, the Volcker Rules intended to limit the size of systemically important banks and the trading activities that leading financial institutions actively engage in. Trading in securities using funds placed on deposits, including trading in mortgage-backed securities, is prohibited. In addition, Mr. Volcker believed it was necessary to separate commercial banks and units involved in speculative high-risk trading, in particular hedge funds. President Obama's adviser Austen Golsby yesterday called the proposals "very important in ending conflicts of interest."
At the beginning of the year, the bank's chief financial officer, David Vignar, explained that about 10% of Goldman Sachs' income came from "separate transactions with its own funds that had nothing to do with clients." However, it seems that the bank will not get away with just explanations. Authorities in many countries are bringing charges against one of Wall Street's most successful players in the investment market. Yesterday it became known that Germany could follow the example of Great Britain. The European Commission continues to investigate the bank's violations.
As you know, a few days ago the US Securities and Exchange Commission (SEC) accused the bank of deceiving investors, who suffered a $1 billion loss as a result. According to the commission, Goldman Sachs abused the trust of investors by failing to provide them with important information about mortgage securities. In addition, the bank entered into a conspiracy with the hedge fund Paulson & Co., organizing the issue of bonds on its order. Paulson then shorted the price of the securities, having a special insurance that allowed him to profit when the price of those securities collapsed.
According to experts, President Obama's administration can earn good political capital from accusations against Goldman Sachs, and in addition, this will help the authorities pass a bill to tighten financial regulation.