Simon Johnson: Goldman Faces Special Audit and Possible Ban in Europe

Simon Johnson: Goldman Faces Special Audit and Possible Ban in Europe

Those of you who are familiar with my long trend forecasts will be aware of the thesis that the American Wall Street banks have become dominated by a culture of compulsive sociopaths who are incapable of reforming or restraining their greed. Like all addicts, they will push the envelope, emboldened by each successful scam, the weakness of regulators, and the craven support of politicians, going further and further until at long last they go one transgression too far.

Goldman Sachs may have reached that point. And as also suggested here, the rebuke may be coming from foreign nations who become weary of the extra-legal antics of the rogue American banks.

In the interests of harmony, the Europeans may once again bow to US pressure to permit the Money center privateers to roam through the interational financial system wreaking havoc, as they have been doing through the domestic US economy, and it will be too bad if they do.

If it ever comes to the light of day, the complicity of several central banks and governments in the actions of the money center banks in manipulating markets may ignite a firestorm of a scandal.

The banks must be restrained, and the financial system reformed, and the economy brought back into balance, before their can be any sustainable recovery.

Baseline Scenario
Goldman Goes Rogue – Special European Audit to Follow

By Simon Johnson

“…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

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?

To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible. (There is a case to be made that the money center banks, in particular Goldman and JPM, are sometimes acting as instruments of US foreign policy – Jesse)

The credibility of the Federal Reserve, already at an all-time low, has just suffered another crippling blow; the ECB is also now in the line of fire. Goldman Sachs has a lot to answer for.”