Tuesday, November 24, 2009
The White House shows off place settings and silverware for the big fete.
The White House shows off place settings and silverware for the big fete.
'Success Story': Rep. Weiner says Medicare is holding down costs better than private plan
'Success Story': Rep. Weiner says Medicare is holding down costs better than private plan
Rep. Weiner says Medicare is holding down costs better than private plans
Tax havens & currency speculation Pt.4
November 24, 2009
Tax havens & currency speculation Pt.4
Sony Kapoor on the rise of Goldman Sachs and the need to democratize the economy
Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay. And we're talking to Sony Kapoor. Sony is the managing director of Re-Define, Rethinking Development, Finance & Environment, international think tank. Used to work for Lehman Brothers and some of the other institutions on Wall Street. Thanks for joining us again, Sony.
SONY KAPOOR, MANAGING DIRECTOR, RE-DEFINE: Thank you for having me.
JAY: Our conversation has brought us to the big G, Goldman Sachs, which is becoming such a massive entity unto itself. It's really, especially out of this most recent crisis, emerged no longer one of many financial institutions but clearly more than the gorilla on the block. Goldman not only controls—or its people are allies, the Treasury Department, the Federal Reserve. But it's a ridiculous thing even to talk about insider trading when you talk to Goldman. They have people connected to them, probably, on every important board of most of the major companies in the world. They have board-level information when they decide what to trade and not to trade. Talk about the rise of Goldman and what that means in terms of the democratization of the economy.
KAPOOR: Well, there are two aspects to this. One, there was this perception, even before the crisis actually happened, that Goldman was somehow first amongst equals. One reason behind that was, unlike most of its other competitors, such as Lehman, etc., Goldman stayed having a partnership structure for much longer. It was only recently—I think it's in the past decade or so—that the partnership was dissolved and it became a public holding company. What that meant was that it was much more closely knit than other financial institutions. What it also probably did was it helped Goldman weather the crisis better than the other financial institutions, because if you're a partnership, your capital and money's tied up with everybody else's, and you stand to lose personally, which employees of Lehman and some of the other banks didn't. The worst that would happen to them would be that they wouldn't get their salary or bonus—they didn't actually actively lose any money. And what that meant was that the risk-management practices within Goldman, where everybody was peeking over everybody else's shoulder, still had some residual footprint from those partnership days, even though the structure had changed. And I think it helped Goldman be more vigilant going into the crisis. The second aspect is—.
JAY: Let me just interrupt for a sec. But that vigilance also meant they were betting against their own advice to their own clients. As we know, they were insuring with AIG on investment properties on the downside that they were selling to their clients without disclosing this, so that risk management had very little to do with any kind of responsibility other than their own quick profit.
KAPOOR: That is true. And I think there's shades of gray between what is legally permissible and what is ethical or not. And to my judgment, this was all above board and legal, but not necessarily ethical. The important thing is that in many of these big banks—there were parts of Lehman Brothers which seriously recognized the gravity of the situation and which were asking the management of the firm to get out of this real estate business and to try and reduce their exposure and to try and buy insurance the way Goldman did. But there were other parts of Lehman Brothers which were making so much money out of this that they wanted the party to continue. And we know which side won. And I think that this aspect of thinking of these big financial institutions as one cohesive-whole entity is a little bit mistaken. So it is quite possible, actually, that different parts of Goldman were pulling in different directions. And it's not to say that the people dealing with the customers and selling them those products were not aware of what the other side was doing.
JAY: Sony, you worked with these people on Wall Street. This idea of "too big to fail", that if this whole house of cards comes falling down, that the state is going to have to come in and bail us out, were they betting on that all along?
KAPOOR: Not explicitly, especially if you look at the institutions that failed. The two institutions, Bear Stearns and Lehman Brothers, they were actually out of the big Wall Street banks, the institutions which had the highest amount of employee ownership. So if you look at it from the incentive perspective, that these are the people who are running the bank who actually own 50 percent or 40 percent of the bank, they knew that in the event of any failure it's the bondholders who mostly get bailed out, but the shareholders mostly were going to lose a lot of money, and they were aware of that.
JAY: But Lehman must have been in shock that they didn't get bailed out. I mean, Paulson and others were trying to get the Brits to bail out Lehman. They must have been a little surprised, in fact. But it's an ex-Goldman guy that kind of decides whether they live or die. I mean, Goldman must have been betting they weren't going to go down.
KAPOOR: At one level, perhaps. But, again, if you look at the individual employees, the calculations they make are very simple. So if you're an employee of Lehman Brothers and you own maybe, you know, 0.5 percent of Lehman Brothers or something, if you're a senior employee, but the amount of bonuses that you can get by betting the bank every year, year after year, are probably significantly higher than the amount you would lose if the whole bank failed. So, from an individual perspective, it is still rational to bet the bank without counting on government bailouts. But collectively it's disastrous, and what you had is a failure of this decision-making. So, yes, the awareness that these banks would be bailed out was really important. And the way it works is that these banks would not have been able to raise the financing through bonds that they did at fairly cheap rates if the bondholders who were investing in these banks, who were lending these banks money, did not think that these banks would be bailed out. So it's not within the institution that this decision-making happens, but it's the awareness of the possibility or the likelihood of bailout means that these institutions can take much more risks than they would otherwise be able to do, 'cause otherwise bondholders would penalize them.
JAY: Right. Now, there's two kind of proposals that have been talked about as possible reforms. One is, if it's too big to fail, break it up into something smaller. Is breaking up of Goldman—I know it's not being seriously talked about, but is it something that should be being talked about?
KAPOOR: I think absolutely, yes. If you look back in the United States to when, for example, Standard Oil was broken up, there was a lot of controversy at that point of time about whether this was the right thing to do, and this was a successful business, etc. But in retrospect it proved to be a good decision, and the sum of parts was greater than the whole. And I think that if Goldman and some of the other big, large, too-big-to-fail banks were broken down, either by geography or, more likely, by function, what you would have is a sounder financial system, a financial system where the society will not be forced to bear the risks of profits being privatized by these institutions, where they would be politically less powerful. And even investors in these institutions would benefit, because the sum of parts would be bigger than the whole.
JAY: Now, the other option, or maybe an option that goes with this, is—the logic goes like this: if the public option is necessary and useful for keeping the health-insurance business in line, then why not the public option for the finance sector?
KAPOOR: There is a possible role for the public sector. And in the United States, what you have is already a significant public-sector presence, for example Freddie Mac and Fannie Mae. And in many developing countries, you have development banks. And there was a tradition for that here: you had banks dedicated to agriculture lending, dedicated to small and medium sector. The most important thing we need to think about is to build up a diverse financial system and a competitive financial system. What we had was increasing uniformity in the financial system, where every bank was chasing the exact same kind of investments, lending to the exact same people, and not lending to the exact same group. A good bank is one which lends to someone that nobody else lends to, but does not lend to someone that everybody else is lending to. And what we've had over the years is exact reversal of this doctrine, where those who have a good credit score, for example, get twenty envelopes through their door offering them credit, and those who actually need the credit are not able to access it. What you need to do is integrate this social goal of providing credit, enabling financial services which allow people to participate in society and grow, and combine that with the idea of having diverse financial institutions fulfilling real sector needs. And this combination is more stable.
JAY: And what we're seeing is probably the opposite. We're seeing increased concentration of ownership on Wall Street, the rise of the monolith, Goldman, and in the public sector we're seeing the strengthening of the role of the Federal Reserve, which also strengthens the hand of the big banks. So we're not seeing more diversity; we're seeing more concentration of control.
KAPOOR: Absolutely. And this is why when we're discussing the changes we need to do. We need to not just reverse what has happened in the past one or two years of this increasing concentration, but go much further than that, in actively fostering diversity, in actively imposing a more competitive landscape. And that is why breaking up these too-big-to-fail institutions is extremely crucial to this idea of building up a stable financial system and a prosperous society.
JAY: So maybe one thing people watching might do when they choose who they're going to vote for is vote for people who aren't getting any money from the finance sector. They might be a little more likely to have a little backbone on these issues, 'cause most people in Congress are getting some kind of money from the finance sector, and certainly President Obama was one of the more bigger recipients of that.
KAPOOR: I'm not familiar enough with the landscape, but I think that the whole concept of lobbying and of campaign contributions from the sector that you are being elected to regulate and oversee is a flawed concept, and there might need to be a broader governance reform around public funding of election campaigns on much smaller budgets.
JAY: And you also might want to have some rules about people stepping out of Goldman right into public office. There could at least be, like, a five-year moratorium or something between going back and forth between so-called private sector and public sector.
KAPOOR: Absolutely. This whole revolving-door concept is—you know, it begs questions around possible conflicts of interest. That's a very serious problem.
JAY: So I guess what we're really saying, to all of us, we'd better understand this stuff—it isn't that complicated—because we're being taken to the cleaners in the name—this looks so complicated you can't really take a stand on it. But once you dig into it, it isn't rocket science. It's fairly Ponzi scheme-ish.
KAPOOR: Absolutely. The whole concept where, throughout the years, the banks, the bankers, and the regulators, everybody said this is too complicated and this is rocket science, you won't understand it, don't tinker with it or the whole system, the whole financial system, will go bust. And the fact of the matter is we actually haven't touched it, and it's gone bust anyways. And it's really, really, really not complicated. And this complexity was used as an example to reduce accountability. What we need to do as individual citizens, as unions, as consumer associations, as civil society, is to understand that this is not rocket science, make an effort to participate in the reforms and try and get our voice heard. The only voices you're hearing in the financial regulation discussion are the big investment banks, the big commercial banks, some hedge funds, and some private equity voices. It's not just that the individuals, the consumers, are missing from the debate and the taxpayers are missing from the debate, but also the big pension funds, the big reinsurance firms, the savings banks, the community banks, all these parts of the financial sector.
JAY: Well, that's a whole 'nother story, because why the union pension funds, which are enormous and big, big players in the economy, why the unions don't use the clout of their pension funds is beyond me, but they don't.
KAPOOR: This is one of those problems we've revisited this interview series of collective action. Now, if you're an individual pension fund, CalPERS [California Public Employees' Retirement System] or one of the others, you need to make a decision: okay, how much realistic return can I expect on my investment? Most US pension funds have been factoring in returns of 9 or 10 percent. Now, if you're a small investor in a big economy growing at 2 percent, you can generate 9 or 10 percent year after year. But if you're the whole financial system, if you're a big pension fund, if you are the financial system, you cannot generate returns of 10 percent or 9 percent. And we need to recognize that that is not a sustainable thing to do. And the way these pension funds have been thinking is that, well, we think we're smarter than the others and we will be able to choose the right hedge fund investments, the right private equity investments, the right derivatives or commodity investments which will earn us a higher return. Individually everybody is thinking this, but collectively it's impossible. That is why there is a very important need for the unions and the pension funds and the bigger investment community and the government to start this honest discussion of what is possible and what isn't. We actually have a massive pension black hole, and it's time to recognize that and take that into account in the discussions on reforming the financial system.
JAY: Thank you again, Sony, for joining us. Sony Kapoor from Re-Define. And thank you for joining us on The Real News Network. And don't forget our financial reform, which is the donate button. It's here. I'm pointing here. Or there. Somewhere on this page is a donate button. And if you want us to keep doing economic news—and, I think, uncompromisingly—then you got to hit "donate". Thanks for joining us on The Real News Network.
Tax havens & currency speculation Pt.4
Sony Kapoor on the rise of Goldman Sachs and the need to democratize the economy
Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay. And we're talking to Sony Kapoor. Sony is the managing director of Re-Define, Rethinking Development, Finance & Environment, international think tank. Used to work for Lehman Brothers and some of the other institutions on Wall Street. Thanks for joining us again, Sony.
SONY KAPOOR, MANAGING DIRECTOR, RE-DEFINE: Thank you for having me.
JAY: Our conversation has brought us to the big G, Goldman Sachs, which is becoming such a massive entity unto itself. It's really, especially out of this most recent crisis, emerged no longer one of many financial institutions but clearly more than the gorilla on the block. Goldman not only controls—or its people are allies, the Treasury Department, the Federal Reserve. But it's a ridiculous thing even to talk about insider trading when you talk to Goldman. They have people connected to them, probably, on every important board of most of the major companies in the world. They have board-level information when they decide what to trade and not to trade. Talk about the rise of Goldman and what that means in terms of the democratization of the economy.
KAPOOR: Well, there are two aspects to this. One, there was this perception, even before the crisis actually happened, that Goldman was somehow first amongst equals. One reason behind that was, unlike most of its other competitors, such as Lehman, etc., Goldman stayed having a partnership structure for much longer. It was only recently—I think it's in the past decade or so—that the partnership was dissolved and it became a public holding company. What that meant was that it was much more closely knit than other financial institutions. What it also probably did was it helped Goldman weather the crisis better than the other financial institutions, because if you're a partnership, your capital and money's tied up with everybody else's, and you stand to lose personally, which employees of Lehman and some of the other banks didn't. The worst that would happen to them would be that they wouldn't get their salary or bonus—they didn't actually actively lose any money. And what that meant was that the risk-management practices within Goldman, where everybody was peeking over everybody else's shoulder, still had some residual footprint from those partnership days, even though the structure had changed. And I think it helped Goldman be more vigilant going into the crisis. The second aspect is—.
JAY: Let me just interrupt for a sec. But that vigilance also meant they were betting against their own advice to their own clients. As we know, they were insuring with AIG on investment properties on the downside that they were selling to their clients without disclosing this, so that risk management had very little to do with any kind of responsibility other than their own quick profit.
KAPOOR: That is true. And I think there's shades of gray between what is legally permissible and what is ethical or not. And to my judgment, this was all above board and legal, but not necessarily ethical. The important thing is that in many of these big banks—there were parts of Lehman Brothers which seriously recognized the gravity of the situation and which were asking the management of the firm to get out of this real estate business and to try and reduce their exposure and to try and buy insurance the way Goldman did. But there were other parts of Lehman Brothers which were making so much money out of this that they wanted the party to continue. And we know which side won. And I think that this aspect of thinking of these big financial institutions as one cohesive-whole entity is a little bit mistaken. So it is quite possible, actually, that different parts of Goldman were pulling in different directions. And it's not to say that the people dealing with the customers and selling them those products were not aware of what the other side was doing.
JAY: Sony, you worked with these people on Wall Street. This idea of "too big to fail", that if this whole house of cards comes falling down, that the state is going to have to come in and bail us out, were they betting on that all along?
KAPOOR: Not explicitly, especially if you look at the institutions that failed. The two institutions, Bear Stearns and Lehman Brothers, they were actually out of the big Wall Street banks, the institutions which had the highest amount of employee ownership. So if you look at it from the incentive perspective, that these are the people who are running the bank who actually own 50 percent or 40 percent of the bank, they knew that in the event of any failure it's the bondholders who mostly get bailed out, but the shareholders mostly were going to lose a lot of money, and they were aware of that.
JAY: But Lehman must have been in shock that they didn't get bailed out. I mean, Paulson and others were trying to get the Brits to bail out Lehman. They must have been a little surprised, in fact. But it's an ex-Goldman guy that kind of decides whether they live or die. I mean, Goldman must have been betting they weren't going to go down.
KAPOOR: At one level, perhaps. But, again, if you look at the individual employees, the calculations they make are very simple. So if you're an employee of Lehman Brothers and you own maybe, you know, 0.5 percent of Lehman Brothers or something, if you're a senior employee, but the amount of bonuses that you can get by betting the bank every year, year after year, are probably significantly higher than the amount you would lose if the whole bank failed. So, from an individual perspective, it is still rational to bet the bank without counting on government bailouts. But collectively it's disastrous, and what you had is a failure of this decision-making. So, yes, the awareness that these banks would be bailed out was really important. And the way it works is that these banks would not have been able to raise the financing through bonds that they did at fairly cheap rates if the bondholders who were investing in these banks, who were lending these banks money, did not think that these banks would be bailed out. So it's not within the institution that this decision-making happens, but it's the awareness of the possibility or the likelihood of bailout means that these institutions can take much more risks than they would otherwise be able to do, 'cause otherwise bondholders would penalize them.
JAY: Right. Now, there's two kind of proposals that have been talked about as possible reforms. One is, if it's too big to fail, break it up into something smaller. Is breaking up of Goldman—I know it's not being seriously talked about, but is it something that should be being talked about?
KAPOOR: I think absolutely, yes. If you look back in the United States to when, for example, Standard Oil was broken up, there was a lot of controversy at that point of time about whether this was the right thing to do, and this was a successful business, etc. But in retrospect it proved to be a good decision, and the sum of parts was greater than the whole. And I think that if Goldman and some of the other big, large, too-big-to-fail banks were broken down, either by geography or, more likely, by function, what you would have is a sounder financial system, a financial system where the society will not be forced to bear the risks of profits being privatized by these institutions, where they would be politically less powerful. And even investors in these institutions would benefit, because the sum of parts would be bigger than the whole.
JAY: Now, the other option, or maybe an option that goes with this, is—the logic goes like this: if the public option is necessary and useful for keeping the health-insurance business in line, then why not the public option for the finance sector?
KAPOOR: There is a possible role for the public sector. And in the United States, what you have is already a significant public-sector presence, for example Freddie Mac and Fannie Mae. And in many developing countries, you have development banks. And there was a tradition for that here: you had banks dedicated to agriculture lending, dedicated to small and medium sector. The most important thing we need to think about is to build up a diverse financial system and a competitive financial system. What we had was increasing uniformity in the financial system, where every bank was chasing the exact same kind of investments, lending to the exact same people, and not lending to the exact same group. A good bank is one which lends to someone that nobody else lends to, but does not lend to someone that everybody else is lending to. And what we've had over the years is exact reversal of this doctrine, where those who have a good credit score, for example, get twenty envelopes through their door offering them credit, and those who actually need the credit are not able to access it. What you need to do is integrate this social goal of providing credit, enabling financial services which allow people to participate in society and grow, and combine that with the idea of having diverse financial institutions fulfilling real sector needs. And this combination is more stable.
JAY: And what we're seeing is probably the opposite. We're seeing increased concentration of ownership on Wall Street, the rise of the monolith, Goldman, and in the public sector we're seeing the strengthening of the role of the Federal Reserve, which also strengthens the hand of the big banks. So we're not seeing more diversity; we're seeing more concentration of control.
KAPOOR: Absolutely. And this is why when we're discussing the changes we need to do. We need to not just reverse what has happened in the past one or two years of this increasing concentration, but go much further than that, in actively fostering diversity, in actively imposing a more competitive landscape. And that is why breaking up these too-big-to-fail institutions is extremely crucial to this idea of building up a stable financial system and a prosperous society.
JAY: So maybe one thing people watching might do when they choose who they're going to vote for is vote for people who aren't getting any money from the finance sector. They might be a little more likely to have a little backbone on these issues, 'cause most people in Congress are getting some kind of money from the finance sector, and certainly President Obama was one of the more bigger recipients of that.
KAPOOR: I'm not familiar enough with the landscape, but I think that the whole concept of lobbying and of campaign contributions from the sector that you are being elected to regulate and oversee is a flawed concept, and there might need to be a broader governance reform around public funding of election campaigns on much smaller budgets.
JAY: And you also might want to have some rules about people stepping out of Goldman right into public office. There could at least be, like, a five-year moratorium or something between going back and forth between so-called private sector and public sector.
KAPOOR: Absolutely. This whole revolving-door concept is—you know, it begs questions around possible conflicts of interest. That's a very serious problem.
JAY: So I guess what we're really saying, to all of us, we'd better understand this stuff—it isn't that complicated—because we're being taken to the cleaners in the name—this looks so complicated you can't really take a stand on it. But once you dig into it, it isn't rocket science. It's fairly Ponzi scheme-ish.
KAPOOR: Absolutely. The whole concept where, throughout the years, the banks, the bankers, and the regulators, everybody said this is too complicated and this is rocket science, you won't understand it, don't tinker with it or the whole system, the whole financial system, will go bust. And the fact of the matter is we actually haven't touched it, and it's gone bust anyways. And it's really, really, really not complicated. And this complexity was used as an example to reduce accountability. What we need to do as individual citizens, as unions, as consumer associations, as civil society, is to understand that this is not rocket science, make an effort to participate in the reforms and try and get our voice heard. The only voices you're hearing in the financial regulation discussion are the big investment banks, the big commercial banks, some hedge funds, and some private equity voices. It's not just that the individuals, the consumers, are missing from the debate and the taxpayers are missing from the debate, but also the big pension funds, the big reinsurance firms, the savings banks, the community banks, all these parts of the financial sector.
JAY: Well, that's a whole 'nother story, because why the union pension funds, which are enormous and big, big players in the economy, why the unions don't use the clout of their pension funds is beyond me, but they don't.
KAPOOR: This is one of those problems we've revisited this interview series of collective action. Now, if you're an individual pension fund, CalPERS [California Public Employees' Retirement System] or one of the others, you need to make a decision: okay, how much realistic return can I expect on my investment? Most US pension funds have been factoring in returns of 9 or 10 percent. Now, if you're a small investor in a big economy growing at 2 percent, you can generate 9 or 10 percent year after year. But if you're the whole financial system, if you're a big pension fund, if you are the financial system, you cannot generate returns of 10 percent or 9 percent. And we need to recognize that that is not a sustainable thing to do. And the way these pension funds have been thinking is that, well, we think we're smarter than the others and we will be able to choose the right hedge fund investments, the right private equity investments, the right derivatives or commodity investments which will earn us a higher return. Individually everybody is thinking this, but collectively it's impossible. That is why there is a very important need for the unions and the pension funds and the bigger investment community and the government to start this honest discussion of what is possible and what isn't. We actually have a massive pension black hole, and it's time to recognize that and take that into account in the discussions on reforming the financial system.
JAY: Thank you again, Sony, for joining us. Sony Kapoor from Re-Define. And thank you for joining us on The Real News Network. And don't forget our financial reform, which is the donate button. It's here. I'm pointing here. Or there. Somewhere on this page is a donate button. And if you want us to keep doing economic news—and, I think, uncompromisingly—then you got to hit "donate". Thanks for joining us on The Real News Network.
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