No proposed regulation is so weak that it cannot be weakened further. And Goldman Sachs knows the strongest argument by heart: what if other countries chose something even less ambitious? During the debate in the US on new financial regulation, Goldman Sachs warned that the European Union might go for the lesser version and attract more capital. Now, the bank is warning the EU against light handed regulation in the US.
Last week hundreds of senior figures from the financial sector attended a major conference on financial regulation in Brussels. Everyone in the Commission and the European Parliament who has a say on the new rules under way at the EU level was also there. According to one observer however, there was no open discussion. As Green MEP Sven Giegold discovered when he suggested that the banks could actually lend more if they didn’t spend quite so much on payouts for their bosses and shareholders.
The reaction in the room was markedly hostile. Giegold was responding to a banker who claimed that draft proposals would seriously dampen banks willingness to loan money to the real economy. When Giegold flagged the idea that rules could actually be made that would force banks to divert profits to loans, he was immediately attacked by a representative of the French bank Société Générale.
A classic speech on the need for regulation from Single Market Commissioner Michel Barnier also received a cool reception. The conference was obviously not meant as a platform for open debate. The purpose was very practical: to increase pressure on politicians to make them refrain from passing strong regulation of financial markets.
Rules more than supervision
The conference was hosted by banking lobby group Eurofi, chaired by a key figure in EU policy making, Jacques de Larosière. He led the group that authored a report which led to the recent adoption of four new supervisory bodies at the EU level. Though there are still important details missing in this area, the participants and speakers from financial corporations were not interested in supervision, Sven Giegold noted. Rules were the issue at the heart of the conference and on everybody’s mind.
And for a reason.
First, it's hardly surprising that supervision in its own right is not seen as a major infringement on financial markets. As long as the rules supervisors are to uphold are weak, then there's no incentive for the finance lobby to make a fuss over them.
Second, after an extremely long wait since the reforms were announced in the autumn of 2008, proposals for new rules – the real issue - are starting to surface. Banks and derivative markets were at the root of the crisis, and new rules have been drafted. The big battle has started.
Preparations have dragged on for a long time, many civil servants, politicians, regulators and lobbyists know each other intimately from the long process leading to these drafts. In fact, all the proposals already bear clear marks of the influence of financial lobbyists. But that does not mean that vested interests cannot take it even further, and indeed there are many voices among them who want to sound the alarm bells and weaken draft regulations even further. As anyone at the Eurofi conference could see.
The classic counterattack
Let's pick an obvious example: Goldman Sachs. The big Wall Street investment bank used the Eurofi conference to stage a counterattack along very classical lines. A move that was chosen by the conference’s official media partner, the Financial Times, as the main story from the whole event. Only two articles made it to their website, and both were on the big US investment bank.
In the main article, Lloyd Blankfein, chief executive of Goldman Sachs, launched a discretely worded but unequivocal threat. In what the Financial Times saw as a warning, he cautioned against “mismatched” regulation: “Operations can be moved globally and capital can be accessed globally.”1
The message was clear: if you pressure us too much, we'll take our operations – our money – elsewhere. Money for sound investments will be harder to come by, and existing investments in companies might be withdrawn, leaving the economy in even deeper trouble. So don't squeeze the financial sector.
The fact that Goldman Sachs is a major corporation on both sides of the Atlantic, makes it a good choice for a mouthpiece for the industry both in the US and on European soil. And to think that Goldman Sachs only lobbies in its home country would be a mistake. Blankfein was not an outsider in Brussels. His bank is deeply involved in the European economy.
And it’s well placed in all kinds of lobbying in Brussels on financial regulation. Its high ranking employees are often picked by the Commission to work as advisors in a large number of its expert groups (advisory bodies used by the Commission) - an excellent position to influence proposals before they are even released to politicians and the public. And Goldman Sachs is very well represented in the financial lobby groups, all of which are well known in the corridors of the EU institutions.
In the major derivatives lobby group, the International Swaps and Derivatives Association (ISDA), Goldman Sachs (GS) has a director. In the futures lobby group, The Futures and Options Association (FOA), they have a board member. In the European Services Forum, which works mostly on trade-related services issues, the policy committee chairman is from the US investment bank. In the Association for Financial Markets Europe (AFME), a transatlantic banking coalition, the bank holds a director position. In the securities field, GS is a member of the board at the Securities Industry and Financial Markets Association (SIFMA). Goldman Sachs is also a member of the investment fund lobby organisation the European Venture Capital Association (EVCA) and of Eurofi – the organiser of the conference. Finally, the bank is a member of the European Parliamentary Financial Services Forum (EPFSF),2 a lobbying vehicle for the financial services industry within the European Parliament.
So, not a bad choice for a voice of the financial sector. In the US, Goldman Sachs was part of a major campaign to water down reform proposals just as they now are in Europe. And in both places, ironically, the message is the same: if you go too far, we'll take our business elsewhere.
Like when Gerry Corrigan from Goldman Sachs told the US Senate in February this year, that: “there is a critical international component to the outcome of the debate on alternative financial
market structure in the US. That is, if the United States adopted a materially different and more restrictive statutory framework for banking and finance than, for example, Europe, the outcome could easily work to the competitive disadvantage of US institutions.”3
Now Lloyd Blankfein is using the same argument to warn against strong regulation in Europe.
Though easily identified, this lobbying tactic may prove successful. And it does not seem to be a disadvantage that the message comes from Goldman Sachs. Even though Goldman Sachs was formally accused by the US financial authorities (SEC) last April, for having defrauded two European banks, IKB and ABN Amro, to the tune of approximately one billion dollars, by offering them investments they knew another customer would bet against. In July the bank agreed to pay compensation.4
Apparently the story has not harmed the reputation of the bank significantly, at least not among political elites. In fact, the whole conference and the amazing number of civil servants, regulators and high level Commission staff it attracted, confirms that the cosy relationship between the decision makers in the Commission and the financial sector has been left by and large unchanged by the crisis and all the dirty dealings it revealed.
It adds insult to injury that the final day of the conference coincided with the demo of 100,000 citizens that know the consequences of financial crisis as well as Goldman Sachs knows the way of the markets.