With alumni in the White House, Goldman sees an opening

Investment bank now targeting Volcker rule in DC lobbying after Obama-era battering

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When Lloyd Blankfein, Goldman Sachs’ chairman and chief executive, arrived at the Rayburn building on Capitol Hill in late 2010, he was battered and bruised. At the time his bank was viewed as a vivid example of Wall Street misbehaviour. In the previous months it had been sued by regulators, flayed by lawmakers then damaged by the passage of Dodd-Frank, a law that would curtail its freedom in the name of preventing another financial crisis.

Mr Blankfein was going to meet its co-author Barney Frank, the Massachusetts Democrat and chairman of the House’s financial services committee. Goldman Sachs had concerns over the new oversight regime, but it could not afford to look intransigent. “I’m for smart regulation,” Mr Blankfein said in the private encounter, trying to sound co-operative. “And I’m for fucking dumb regulation,” Mr Frank replied sarcastically.

If the Obama years were a harsh time for Goldman in Washington, the election of Donald Trump has provided a new opening. Not only does the president regularly rail against “job-killing regulations”, he has made two Goldman alumni his point men on financial regulation. Gary Cohn, Mr Blankfein’s former deputy, heads the national economic council, while Steven Mnuchin, once its chief information officer, is Treasury secretary.

The new team in Washington could not have come at a more important time for Goldman. The bank that received a $10bn bailout from US taxpayers in 2008 is looking to the Trump administration for another helping hand, this time from what Goldman sees as overbearing regulation exacerbating its current trading funk.

For years the main engine of the Goldman money machine has been trading securities, the division where Mr Blankfein and Mr Cohn won their spurs. It remains one of its biggest revenue streams, but is misfiring. Part of the blame lies with traders who made bad calls this year. But its predicament goes deeper. Post-crisis regulation has curtailed the operation. In 2007 the bank’s net trading revenue from bonds, currencies and commodities peaked at $16.2bn. Last year, notwithstanding some reorganisation,the rough equivalent was $7.6bn. Goldman’s trading business is a shadow of its former self, albeit still highly profitable.

The main culprit in Goldman’s eyes is the Volcker rule, a ban on banks placing market bets with their own money. The idea of banning so-called proprietary trading — conceived by former Federal Reserve chairman Paul Volcker — was a centrepiece of former president Barack Obama’s efforts to build a bulwark against future crises requiring public bailouts. But the prohibition’s final form, which stretched to 964 pages of regulation, has been criticised by banks as muddled and overly complex. They blame it for inhibiting market making activity that was meant to be permitted.

Mr Blankfein described the Volcker rule this month as “very cumbersome”, complaining “you have people sitting on trading desks very nervous”. Other Goldman insiders are more blunt in private, attacking Volcker as a noose tailored for the bank’s throat.

Goldman declined to discuss its lobbying, but says: “As many of the regulators who implemented the [Volcker] rule have conceded, now is an appropriate time to review the rule.” The Financial Times has assembled a picture of its efforts from interviews with more than four dozen policymakers, bankers, lobbyists and lawyers. They describe an aggressive institution pushing to regain its trading edge by having Volcker watered down, if not abolished.

The Dodd-Frank Act is signed in 2010 by Barack Obama, who made the banning of proprietary trading a centrepiece of his presidency © AFP

The bank is “all over it”, says a Treasury official. “Their single focus this year, more than any other bank, is the Volcker rule,” says the Washington chief of a rival institution. Dennis Kelleher of Better Markets, which advocates tougher regulation, says: “Goldman has always been the big swashbuckling trader that wants to take huge risks and huge leverage for the big score.”

Mr Blankfein says he is “barely” in touch with his former colleagues Mr Cohn and Mr Mnuchin, claiming in June to be “apprehensive” about how it might look. But Goldman has cause to hope Washington will come to its rescue.

When Mr Trump fired the gun on Wall Street deregulation this year Mr Cohn said “we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year”. In June, Mr Mnuchin’s Treasury department unveiled a regulatory review whose bank-friendly recommendations included “substantial amendment” to the Volcker rule. Randal Quarles, Mr Trump’s nominee to be the Fed’s regulatory chief, said last month that “the complexity of the rule makes it very difficult to apply and [we] should work to try to simplify [it]”.

But there are reasons to be cautious, too. So far not a single significant regulation has been changed. White House turmoil has slowed the confirmation of Trump appointees at the main US watchdogs. Goldman is straining relations with its rivals and its critics are ultra-vigilant for any sign of a “Government Sachs” plot.


Goldman Sachs and the Trump campaign were never natural bedfellows. Mr Trump’s final campaign video scorned the robber barons of the global elite as it displayed an image of Mr Blankfein. A tweet from the Goldman boss on Monday, interpreted by many as a comparison between the shadow cast by the solar eclipse and the Trump administration, hinted at the tensions. The head of its Washington office is a Democrat named Michael Paese, who leads a team of eight in-house lobbyists and oversaw lobbying spending of $1.4m in the first half of this year, compared with $3.2m for 2016, according to the Center for Responsive Politics. His boss is John Rogers, Goldman’s chief of staff, an earnest man from the Republican party establishment, which Mr Trump derides.

Randal Quarles, President Donald Trump's nominee for the Fed’s regulatory chief, said 'the complexity of the [Volcker] rule makes it very difficult to apply” © Bloomberg

Where Goldman and the Trump team have found common cause is deregulation. The job of the Rogers-Paese axis is to turn Mr Trump’s anti-red tape rhetoric into blows against the Volcker rule. It is a clunky regulation disliked by almost all US banks. But its reform is crucial for Goldman because of the bank’s outsized dependence on trading. Citigroup has surpassed Goldman by spending $2.5m on lobbying in the first six months of 2017, while JPMorgan Chase is in line with it at $1.5m, but both are universal banks working on multiple fronts. Morgan Stanley, which doled out $1.2m, was the investment bank most similar to Goldman before the crisis, but it has shifted its focus to wealth management.

Goldman, however, does not want to look like it is on a lone crusade. As one person who works with the bank says, it would be the kiss of death for any proposal to be branded the “Goldman Sachs amendment”. So it has tried to forge a united front with the industry.

But there are cracks in the façade. “[Goldman] don’t play well with others. Unless there’s something they want and feel collectively they can do,” says the chief lobbyist of another bank. On Volcker, “whatever the industry view is, it has to be their view”, he adds. The corralling of its peers has happened via the Securities Industry and Financial Markets Association, or Sifma, a trade group. Sifma laid down a marker with comments it submitted in June to the Treasury’s regulatory review calling for Congress to erase the entire rule.

On conference calls where Sifma’s members thrashed out what they would say on Volcker, Goldman was “relentless” with Mr Paese at the helm, according to one person involved.

Another bank lobbyist says institutions that wanted refinements rather than the abolition of the Volcker rule pushed back against Goldman, worried that asking for too much would jeopardise the chance of any victories. But the lobbyist says that in the end: “What Sifma came out with on Volcker is what Goldman wanted. That’s where they did their fighting.” Ken Bentsen, Sifma president, however, denies that Goldman drove the process and says the trade group’s views have been consistent since 2010.

Putting himself in Goldman’s shoes, Peter J Solomon, founder and chairman of a boutique investment bank, says he would “absolutely” want to cast off Volcker and make big bets again. “I would want to do more. Where else are you going to make your money?” he says.


The received wisdom in Washington is that deregulation will come from Trump-appointees at the Fed and other agencies, which fleshed out Dodd-Frank with their rules and can loosen them within the existing law. In an internal podcast in March, Mr Paese said: “When those individuals are in place . . . I think you’ll see a deregulatory agenda come forward.” But the Senate is yet to confirm Mr Quarles or a second Trump nominee for the Fed, which is Goldman’s primary regulator.

Only Congress could repeal the Volcker rule, and that is politically improbable. But there is a backdoor route for lawmakers to help Goldman. It would entail slipping Dodd-Frank changes into an end-of-year spending bill. Two people close to Goldman say it is evaluating its options. “We have our Christmas wishlist, but what can you actually get for the kids under the tree?” says one.

Mr Mnuchin and Mr Cohn have hinted at changes that would exempt investment banks from some Dodd-Frank restrictions. In January, Mr Mnuchin told senators: “I think the concept of proprietary trading does not belong in banks with [federal] insurance.” The Volcker rule applies to all banks. Narrowing it to only the parts with government-insured deposits would liberate Goldman, because unlike its rivals it keeps its trading separate from its small consumer bank.

“That could be done by striking part of one sentence in the law,” says Tyler Gellasch, who helped draft the Volcker rule as a Senate aide. The Treasury denies its proposals would give an advantage to any large banks with a low reliance on deposit funding.

The final version of Paul Volcker's rule stretched to 964 pages of regulation © EPA

Then in April Mr Cohn said he favoured a 21st-century version of the Glass-Steagall law, a Depression-era statute that forced a structural separation of retail and investment banking. Mr Cohn’s version, however, was not about breaking up banks. Instead he alluded to multi-track regulation.

“Right now we’ve got this massive set of regulations built to regulate all banks as [if] they’re equal,” Mr Cohn said. “We may be able to tailor regulations for different aspects of the financial markets and different aspects of the financial institutions.” Rival lobbyists took that to mean fewer rules for Goldman traders but little respite for universal banks with more diversified businesses.

Michael Barr of the University of Michigan, who helped craft Dodd-Frank at the Treasury department, says: “What the administration seems to mean is let’s return to prudential regulation focusing on banks — not the investment banks, holding companies, insurance companies or shadow banking activities. What they [officials] mean is let’s go back to the world we mostly had before the financial crisis.”

As Goldman’s president, Mr Cohn told the Obama administration that Dodd-Frank caused bond market liquidity to dry up. Democrats view the bank’s claims with scepticism, but they are no longer in charge.

In Mr Blankfein the emboldening effect of the Trump administration is unmistakable. In June he criticised policymakers’ response to the financial crisis as an “over-reaction”, a striking shift from his words in 2010. The bank’s lobbying reflects the change. A weakening of the Volcker rule is not guaranteed, but it is now within Goldman’s grasp.

Additional reporting by Ben McLannahan in New York

The tensions that make a warm embrace unlikely

Shortly before he left the White House, Steve Bannon, Mr Trump’s former chief strategist, said there was a “fight every day” over economic policy, with “Gary Cohn and Goldman Sachs lobbying”. Although Mr Bannon used to work for Goldman and shared its dislike for intrusive regulation, his anti-corporate economic nationalism was a threat to the bank, so his departure is seen as positive news.

Goldman was anything but a hotbed of Trumpism last year. Its employees and the bank’s political action committee made their biggest campaign contributions to Democratic candidate Hillary Clinton, followed by Republicans Marco Rubio and Jeb Bush, according to the Center for Responsive Politics. The pair who shape Goldman’s Washington strategy — Michael Paese and John Rogers — have more in common with each other than Mr Trump. Mr Paese is a Democratic lawyer who worked as a senior aide to the lawmaker Barney Frank before Dodd-Frank. Mr Rogers was a young official in the Reagan administration and a protégé of James Baker, the former Treasury secretary.

Their colleagues have a real stake in their work. Dodd-Frank is a big reason why Goldman’s return on common equity plunged from more than 32 per cent in 2006 and 2007 to 9 per cent in 2016, which is still above average for big US banks. Return on common equity is the metric to which much senior executive pay is tied.

Before Mr Cohn joined the White House to lead the national economic council, Mr Frank recalls clashing with the former Goldman executive over Dodd-Frank at a lunch in Davos. “I thought he was excessively critical of the whole legislation and basically suggesting it was a terrible imposition on him,” Mr Frank says.

Lloyd Blankfein has taken issue with presidential moves that bore Mr Bannon’s fingerprints, such as Mr Trump’s equivocation over the violence in Charlottesville. But Trumpian populism is the president’s creation. Although he has pushed for deregulation, he is never likely to offer Goldman a warm embrace.

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