COLUMNISTS 
Should Tim Geithner let Lloyd Blankfein escape?
Mr Blankfein, the chairman and chief executive of Goldman Sachs, is eager for his institution to become the first big bank to shake off the stifling embrace of the US government. Mr Geithner, the US Treasury secretary, must decide whether to let him.
Mr Blankfein’s argument is seductive: it is Goldman’s “duty” to pay back the $10bn in taxpayer money it took last autumn when its future – and that of the global financial system – looked dicey. Goldman seems to be doing fine now: this week, it reported unexpectedly robust first-quarter earnings of $1.8bn.
It has spent recent weeks attempting to turn its repayment into a fait accompli. First, Mr Blankfein made a contrite speech assuring investors – to the irritation of its rivals – that Goldman was sadder and wiser and would buckle down to pay reform. Then he raised $5bn in capital from those investors to wave in front of the Treasury secretary.
But Mr Geithner should take his time. Not only is the future of Goldman and other taxpayer-backed banks unclear, given the unstable US economy, but Goldman wants to escape the burdens of political control while retaining the benefits of public backing. That does not seem like a good deal for the taxpayer.
There are obvious political risks in letting Goldman roam free while other banks remain bound by the troubled asset relief programme (Tarp). It would exacerbate suspicions that Goldman, with its long history of producing Treasury secretaries, gets special treatment. These were not soothed by the decision to pay off all Goldman’s credit default swaps with American International Group, now controlled by the state.
The bigger danger is the long-term precedent it would set. Goldman wants to bolt before Congress or Mr Geithner, who still operates as a one-man band while the nomination process for his senior staff meanders along, has the chance to change fundamentally how it operates.
So far, it has faced mildly irritating limits on how much it can pay staff but nothing on the scale of the 1933 Glass-Steagall Act, which imposed structural reforms on Wall Street after the excesses of the Jazz Age. It would never acknowledge it, but its political campaign is going just fine.
This week’s results illustrated this. Goldman has reduced its leverage ratio sharply – its assets are now only 14 times capital, compared with 26 times at the end of 2007. Yet its fixed income and currencies trading desks have exploited the wide spreads caused by market disarray to make more money than ever.
Goldman has plenty of capital and a cash pile of $164bn, which it keeps stuck in short-term Treasury bonds in case of future turmoil. Not only does it show no sign of being in danger any more, but it has abundant resources to exploit the weakness of others by buying distressed debt and discounted private equity stakes.
Mr Blankfein criticised Wall Street’s past pay practices as “self-serving and greedy” but Goldman is still putting aside 50 per cent of revenues – $4.7bn in the first quarter – for the bonus pool. Inside, it may feel “humbled”, as Mr Blankfein said, but it looks like the same old bank.
The same, that is, except for one thing – Goldman is now backed by the US government. That is why Mr Blankfein wants to repay the Tarp money. Once it has repaid the $10bn, Goldman hopes to go back to paying employees what it wants, buying and selling more or less what it fancies and operating as before.
He is peddling an illusion. Even if Goldman repays the equity, the world has changed irrevocably because it is a government-backed enterprise.
That will formally be true for a year at least. As well as the preferred shares it took from the Tarp, it has raised another $28bn in bonds backed by the Federal Deposit Insurance Corporation and intends to carry on using the FDIC’s balance sheet.
More fundamentally, we now know unambiguously that Goldman is a “systemically important financial firm”. In other words, Goldman is too big to fail and would be bailed out by the US government if its balance sheet failed. That privilege should come with weighty conditions.
Note that Goldman’s status is a choice, not a tag it has unwillingly been given. It could avoid this by shrinking itself into an institution like a private equity group or a merchant bank, which can take all the risks it desires because its partners lose everything if it fails.
Goldman does not want to do that because it likes having the engine of its capital markets division and equities operations alongside its advisory and fund management arms. It calculates, probably correctly, that the pay-obsessed Congress is not sufficiently serious to put a new Glass-Steagall Act in its way.
But there is no clarity yet that Goldman or other Wall Street banks will be forced to pay an appropriate levy for government backing. Unless it is high, they have no incentive to be truly independent.
There is no need to look back far to observe how pernicious a combination of private ownership, implicit public backing and inadequate regulation can be. This produced the Fannie Mae and Freddie Mac fiascos.
If Mr Geithner cannot think of a sound structural reform to limit the size of Wall Street banks, he must at least make regulatory restrictions bite. He has talked of capping their leverage and their latitude to indulge in proprietary trading but not defined what this means in practice.
He ought to keep Goldman on the leash until he has set out the price it must pay for its newfound privileges. If he lets Mr Blankfein dash straight back to business as usual, Goldman will have won again.
More columns at www.ft.com/gapper
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