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Paulson, not Evans … but don’t look here for an explanation of what it means

by Brad Setser
May 31, 2006

The Goldman takeover of W's second term (Bolton, Paulson) continues …

I'll leave it to you all to figure out.

My timing isn't great, but I am taking a few days off — and won't have sustained internet access.  I'll be back full time on Monday.


  • Posted by a

    You know what they say, “Buy low..”

    Or maybe Paulson looked at how much money GS lost in May and figured it was time to bail out now. Given how much GS stock he owns, he probably figures he’s better off righting the ship of state than letting it sink.

    A little less cynically, I do think the GS guys show a little more civic responsibility than most on Wall Street – or indeed elsewhere.

  • Posted by Dave Chiang

    Not even Paulson can save the US dollar from collapse

    The depth of the U.S. current account deficit is such that financial markets increasingly believe this fundamental root of widening global imbalances will adjust only if the dollar weakens.

    “Financial markets do typically like it when a Wall Streeter takes a key role in the administration,” said David Mozina, head of foreign exchange strategy with Lehman Brothers in New York.

    “It could be modest positive for the dollar, but still, with what has been thrown at the dollar, it’s not going to be allowed to have a respite for too long,” he said.

    After the G7 statement on currencies last month, the Treasury’s report on China that avoided the “currency manipulator” tag and the extension of tax cuts, Paulson may not have much leeway for concrete policy changes.

    His nomination “might allow the dollar to come up for air, but it will basically be a gasp,” said Lehman’s Mozina.

    – Reuters News Agency

  • Posted by Guest

    “…What accounts for Goldman Sachs’ dominance?… Goldman remains in some ways unique, and so do its leaders. Goldman is no longer a private partnership; it went public in 1999. But it is still the most partnershiplike among the large Wall Street firms. And so the firm is governed more like a collegial organization than the top-down, CEO-as-benevolent-dictator organism popularized by Jack Welch and his acolytes. Goldman’s chief assets are people—really rich people who can afford to retire or who can easily find lucrative employment elsewhere. This means that a top executive has to rely more on persuasion than on intimidation. To rise to the top at Goldman, you have to be a centrist statesman with demonstrated operating competencies, firm ideas about where to take the company, and an ability to assuage, coddle, accommodate, and lead massive egos.

    There’s another crucial Goldman difference that allows its bosses to slip seamlessly into other realms. The firm has historically either avoided or downplayed consumer-oriented retail businesses like stock brokerage, credit cards, and mutual funds. Instead, Goldman makes its immense profits chiefly from investment banking and proprietary trading. It’s a giant, extraordinarily profitable hedge fund lashed to a highly profitable investment bank…”

  • Posted by dryfly

    From what I’m reading these guys were NOT brought in to change policy, but rather to do a better job of marketing the ‘successes’ of the administration.

    In effect they just changed the shade of lipstick they put on their pig.

  • Posted by Guest

    Dryfly – well said indeed.

  • Posted by Guest

    Dryfly – well said indeed.

  • Posted by Guest

    “… the hedge fund industry has matured and, in many commentators’ eyes, has become (or is well on the way to becoming) institutionalised…”

  • Posted by Joseph Wang

    dryfly: It’s becoming pretty obvious to everyone what the basic problem is (i.e. US fiscal policy driving a weak dollar), the trick is to figure out a politically realistic solution, and I’m sure that is going to be the main thing on Paulson’s plate.

    I doubt Paulson is going to be a PR hack. He is either going to quietly get something done, or after a few months conclude that he isn’t doing anything useful done and then resign (like Paul O’Neill did).

  • Posted by Guest

    Joe – Actually, he might do BOTH of ur options
    He will “quietly” let the dollar wane and political pressure will mount on him and he will resign.

  • Posted by Guest

    Just to differentiate my posts from the other guest, (I’ll think of an internet handles one of these days) the point of the slate and mondaq posts were only to suggest that Paulson will be doing much more than pr and politics.

  • Posted by Guest

    …that Paulson seems to possess quite a bit of the expertise and capacity to bring in additional talent that may be required to get things done. How that turns out is obviously yet to be determined.

  • Posted by Dave Chiang

    Paulson or Snow, China to chart own currency policy course

    U.S. Treasury Secretary-designate Hank Paulson faces a daunting challenge to get Beijing to veer from its ultra-cautious stance on the yuan.

    “The Chinese RMB policy is driven very much by their domestic concerns and only marginally by what’s going on in Washington,” said Arthur Kroeber, managing editor of the China Economic Quarterly in Beijing.

    “Any change in policy will depend on conditions in the real economy and the global economic situation. You cannot expect them to change policy just because America has a new Treasury secretary,” said Zuo Xiaolei, chief economist at China Galaxy Securities in Beijing.

    Neither arm-twisting by the Group of Seven rich nations nor threats by U.S. senators have made any discernible difference. The same goes for cajoling by John Snow, who Paulson would succeed.

    But Kroeber with the China Economic Quarterly said Premier Wen Jiabao was wary of authorizing a sharp yuan rise for fear that increased imports of farm produce could cause hardship among China’s vast rural population.

    – Reuters News Agency

  • Posted by John123

    Paulson like the prior Treasury secretaries and all other Bush cabinet officers except Rummy and Rice take their marching orders from the White House. Good advice and common sense does not flow up hill under W’s management scheme.

    And what could Paulson do anyway in the 2 1/2 years left? Bush’s religious dogma is that tax cuts are blessed, and every defense expenditure to fight terror wonderful, so we’re left with a $350 billion fiscal deficit.

    Bush clearly does not want to antagonize the Chinese dragon. Any sword rattling over the renminbi/dollar rate is off limits.
    And fundamentally, on the exchange rate side, the Federal Reserve calls the shots. In monetary policy, exchange rate policy is interest rate policy.

  • Posted by Charlie

    And what could Paulson do anyway in the 2 1/2 years left?

    He could calm the markets by stating that the US has a strong dollar policy. If he can say this with a straight face, then he is clearly the right person for the job.

  • Posted by Guest

    Paulson sounds like more of a doer than a talker.

  • Posted by OldVet

    Why bring in a hardnosed bargain hunter as a PR flack? I think he’s there to get the dollar down in an orderly manner, since it’s unlikely they’re going to put him in charge of the Federal budget. Why would he just get in there and say “strong dolar” like that puppet Kudlow on CNBC? I’ll bet he visits Japan and China and a couple other places in short order to get the word out – the dollar needs to go down, now if not sooner.

  • Posted by Guest

    “…a quiet revolution is under way in public finance as policymakers see the blurring of dividing lines between public and private, domestic and foreign…”

  • Posted by psh

    Yeah, Ole Vet’s got the institutional memory here. Last time the grownups put their foot down, they put Jim Baker in, and the first thing on his to-do list was torpedo the Louvre Accord and sink the dollar. One of the nice things about Paulson is that the Chinese don’t think he’s a clown, so maybe he’s the man to get the dollar down this time. But then, Where to hide while it happens? Now even capital flight is not enough to save your butt as we purge our imbalances out? Here’s Pictet & Cie saying don’t just diversify, hedge everything too, but careful, not too much… That chart sez even if you’re a beggar-thy-neighbor American, the niggardly exchange gains triple the volatility of your cash. And foreign currency only gives you the foreign risk-free rate (in equilibrium, tell me when that happens). They’re reasoning from ancient history, though — since 72, back when there was peace and love and kumbaya. Aren’t the risks a bit more asymmetric now? Maybe risk/return tradeoffs are a luxury we can’t afford. We have to adapt our behavior to our new style of currency policy.

  • Posted by Stormy

    Getting it safely down is one tall order. And just how is he expected to do this? A bit ironic that he, of all people, has been called in to close the party.

  • Posted by Guest

    Wall Street touts transparency, yearns for secrecy

    “…”If you accept that volatility will increase, there is no other way than to enter hedge funds.”…”We’re in the eighth inning in the US, the fifth inning in Europe and the first or second in Japan and Asia.”…”

  • Posted by psh

    Aha. De chart shows that as an American, you’re still better off getting out of dollars, in terms of geometric return/terminal wealth, even if you don’t hedge. Maybe Pictet is saying hedging could improve your Sharpe ratio. Hmph. That’s nice for civilized, anal-retentive European countries with balanced economies and human rights. Here in the banana republic, the primary prudential principles are getting your share of the graft and exporting it by the suitcaseful.

  • Posted by Guest

    “…Man Group’s results suggest the industry is overcoming the dwindling investment and lagging performance that caused some hedge funds to close in 2005…. Man Group took advantage of the bankruptcy of U.S. futures broker Refco Inc. and agreed to buy some of its assets in 2005. That turned Man into the fourth-largest operator in the $4.5 trillion-a-day global futures market as well as the largest provider of hedge funds. Fink, who took over as CEO in 2000, led the transformation of Man from a commodities trader into a hedge fund manager. The company was founded by James Man more than 200 years ago as a sugar broker and now has about 4,000 staff in 16 countries including the U.S., France, Singapore and Australia, according to its Web site…”

  • Posted by Dave Chiang

    Henry Paulson media spin to fix Bush’s flagging fortunes?
    By Dr. Peter Morici
    University of Maryland

    Failing to convince voters and financial markets that the US economy is sound, Treasury Secretary John Snow is being replaced by Wall Street investment banker Henry M Paulson, Jr. President George W Bush hopes he will bring the kind of clout with financial markets and the general public that Robert Rubin enjoyed during the Bill Clinton years.

    Don’t hold your breath. The Bush administration labors under the false assumption that better media spin will fix its flagging fortunes, even as systemic ills truly bedevil the American economy.

    Under Bush’s stewardship, the federal budget has swung from a US$236 billion surplus to a $423 billion deficit. This is thanks to runaway federal health spending abetted by a faulty prescription drug program, ill-fated nation-building efforts in Iraq and Afghanistan, tax cuts inconsistent with these initiatives, and general fiscal indifference and dysfunctional partisanship from both political parties in Congress.

    Americans owe foreigners about $5 trillion in Treasury bonds and other debt instruments. Each year, after some hard assets are sold, that figure jumps another $700 billion to finance the trade gap. At that rate, debts will exceed the US gross domestic product (GDP) in about another dozen years.

    To be sure, GDP growth has been strong but powered by the steroids of spendthrift consumption and borrowing, whose effects virtually every economic forecaster expects to wind down in the months ahead. The stock market is falling, international investors weary of dollars are turning to gold, and American multinational corporations are moving offshore.

    Icons like General Electric, IBM and General Motors have made clear to stockholders they are betting on China and India instead of California and Indiana. Meanwhile, their smaller suppliers are being forced to relocate to Asia or close down shop altogether.

    New York investment bankers are happy tour guides on this journey. Now Bush has recruited from among them a champion to sell the whole thing to American voters. If Henry Paulson truly wants to make things better, his greatest contribution would be to compel the president, his horsemen and fellow citizens to face the facts.

    For example, if Americans want foreign adventures, such as Iraq, they will have to pay for them.

    – Dr. Peter Morici

  • Posted by Guest

    “…it’s important to have someone at Treasury people respect. They do respect Hank, and they should. He’s a good choice,” Rubin told me Tuesday in a telephone interview. Rubin is now chairman of the executive committee of Citigroup. Lawrence Summers, who succeeded Rubin as treasury secretary in 1999, agrees it’s a good time for the Bush administration to bring in financial expertise from Wall Street…”,0,5685783.story?coll=hc-headlines-oped

  • Posted by Dave Chiang

    To Guest,

    Robert Rubin’s “Snake Oil” Salesman Legacy during the corrupt Clinton Administration.

    Robert Rubin was a co-head of Goldman Sachs when he took the job at Treasury. His replacement at Goldman was now Democrat Senator John Corzine. Goldman is currently being sued in a variety of civil cases which occured on Corzine’s watch in which Goldman and other investment banks, during the dot bomb era, manipulated Internet stocks on the IPO day. The firms are accused of trading the shares back and forth to drive Internet stocks from IPO prices of say $15 to $100 on the first day of trading. The rationale? To sucker small investors into buying essentially worthless Internet stocks. The end result was a big Treasury tax receipts in the short term due to a manipulated financial bubble or mania.

    Rubin at Treasury did not oversee the S.E.C. but was a key member of the Administration supposedly protecting the public from this form of manipulation. The end result of the dot bomb scam is one of the greatest financial manipulations and fleecing of the public in history.

    As the Secretary of the Treasury, Mr. Rubin did have oversight over the IRS. The IRS during the Clinton Administartion was used to investigate it’s political foes while failing to carefully scrutinize the tax returns of companies like Enron, Worldcom, HealthSouth, Global Crossing and other firms or ponzi schemes that costs investors and taxpayers billions.

    Treasury Secretary Robert Rubin with oversight of the IRS failed to deal with Islamic terror groups raising money in the United States. This is direct responsibility of the Treasury Deaprtment. The FBI had solid proof in 1992 that Hamas and other Islamic terrorists groups were raising money in the United States. Janet Reno and the Treasury Department turned a blind eye to their activities.

    Robert Rubin’s semi-secret Plunge Protection Team or market crash protection scheme used to keep the stock market bubble afloat by buying NASDAQ futures in Asia overnight to keep the U.S. market propped up & tax revenues from stock investments soaring. The plan worked well until 2000, the last year of the Clinton Administration, when the NASDAQ started it’s plunge and lost half of it’s value. Rubin was at the helm of one of the largest financial bubbles in global history, which devastated many Americans but it made Clinton look good for a few years.

    Robert Rubin bailed out large U.S. banks, aka his Wall Street friends, investments in Mexico, Russia and Asia.

    Robert Rubin, as the new vice chairman at Citibank making $16.5 million (see Yahoo Finance for Citibank payroll info), called the Bush Administration loking for a bailout for Enron. Citibank had huge loans to the Enron, which was more of a ponzi scheme than a corporation.

    The Clinton Administration regulalrly went to bat for Enron on their huge India power project and on Ron Brown’s “trade” missions. One wonders if Robert Rubin’s IRS gave Enron relatively easy reviews while the IRS was giving Mr. Clinton’s criticis proctological audits.

    In retrospect, Mr. Rubin was probably one of the most corrupt Treasury Secretaries in U.S. history.

    Dave Chiang

  • Posted by Guest

    “…Demand for the stock has been strong among institutional investors, who haven’t been scared away by the bank’s history of corruption and bad debt. Goldman Sachs Group and UBS AG were underwriters of the deal… But the bank has had serious problems with bad lending. It’s ratio of nonperforming loans to total lending was reported at a whopping 33 percent in 2003. After a government bailout, the bank said the number fell to 4.4 percent. However, much of its lending has been to companies, and an economic slowdown could cause the bad loans to balloon again. Corruption has been another big worry. One of the bank’s former chairmen, Wang Xuebing, is serving a 12-year prison term for taking bribes. A former president of the bank’s Hong Kong branch, Liu Jinbao, was given a suspended death sentence last August for embezzlement. Such sentences are usually commuted to life in prison. Two former branch managers and their family members are facing trial in Las Vegas, Nevada, for alleged embezzlement and money laundering. Steven Y.L. Cheung, a professor of finance at City University of Hong Kong, said the past problems aren’t spooking investors because they think the stock gives them a chance to buy into China’s hot economic growth…”

  • Posted by chuck roast

    Tsk, tsk…Dave.
    You recollection is so…inconvenient.

  • Posted by Joseph Wang

    I’m a fan of Robert Rubin. You left out LTCM and the Asian Crisis both of which if handled incorrectly would have been nuclear bombs comparison to the firecracker that was Enron.

    I don’t think that you can or should blame Rubin (or investment banks) for the dot-bomb. Ultimately, the person who buys the stock has to bare some responsibility for avoiding snake oil. (Now if you want to nail the investment banking community on something, it could be the systematic destruction of the Russian and Latin American economies in the 1990’s, but even then its more stupidity than malice.)

    The other thing that you are missing is that both Rubin and Paulson took or will take massive personal pay cuts by going over to Treasury. Yes, Rubin is making $16 million/year at Citibank, but that is a fraction of what he would have made had he not become Treasury secretary (and it’s not a particularly huge amount for an upper manager of an investment bank.)

    If you hire an investment banker, chances are that they are going to like investment banks and be biased toward banking. The trouble is where else are you going to find someone that understands finance. In the case of the Clinton adminstration, Rubin’s obvious bias toward capital was balanced by Robert Reich’s bias toward labor.

  • Posted by Dave Chiang

    Robert Rubin’s Corrupt Legacy at the US Treasury

    One more criticism of the Wall Street-Treasury complex under Robert Rubin that even Brad Setser earlier agreed with. Rubin was the major proponent of the “strong dollar policy” that was continued under Larry Summers. Rubin seems altogether oblivious to the fact that a strong dollar is a recipe for a large trade deficit. If the dollar rises in value by 25 percent against U.S. trading partners (as it did), it has the same effect on trade as if the United States placed a 25 percent tariff on all its exports, and provided a 25 percent subsidy for all imports. As a result of the strong dollar, the United States is now running a current account deficit of $550 billion annually.

    This current account deficit translates into foreign indebtedness. Remarkably, Rubin doesn’t care or seem to understand how the foreign debt affects US living standards. This is remarkable, because he seemed obsessed with the effect that interest payments on the government debt has on living standards. The analogous effect of capital income payments from the United States to foreign wealth holders somehow never enters his framework. Thanks to the disasterous monetary policies under Robert Rubin, future generations of Americans will see a dramatic drop in their standards of living with the US Industrial and technology base seriously eroded.

    As Treasury Secretary, Robert Rubin personally enriched himself and his Clinton cronies at the National Security expense of the American people. Furthermore, Robert Rubin’s deep personal involvement with the Enron and Fannie Mae corporate fiascos should be investigated by the Justice Department.


  • Posted by Guest

    “…Citigroup, the Goldman Sachs Group and 13 other financial service companies have agreed to pay a total of $13 million to settle claims that they favored some customers in the $200 billion market for auction-rate bonds. The companies violated securities laws from January 2003 to June 2004 by permitting customers to change their orders in the supposedly blind auctions and by giving some clients an advantage when deciding how much to bid, the Securities and Exchange Commission said yesterday…”

  • Posted by Guest

    “…In 1994, in Central Bank of Denver v. First Interstate Bank of Denver, a closely divided Supreme Court ruled that secondary participants (such as auditors and investment bankers) could not be held liable by investors for “aiding and abetting” securities fraud… Enron was, after all, originally a provincial gas pipeline company, which had operated in a quiet backwater. How did it learn to manipulate earnings in new state-of-the-art ways? It was taught to—by accountants, investment bankers, law firms, and banks who, having taught one firm in an industry, could then advise its competitors that they had better catch up. Thus, we return again to the role of the gatekeepers. They possessed unique technical expertise, and because they operated on a nationwide scale, ideas could diffuse through them that might have otherwise have stayed locked within a single firm. Their capacity to teach the techniques of evasion, coupled with the competitive need to do so, probably best explains the contagion-like spread of the technology of accounting manipulation during the late 1990s. …”

  • Posted by Guest

    “What is the bigger snake pit: Wall Street or Washington?… For… Hank Paulson, the political warfare of America’s capital is suddenly looking more appealing. One day after accepting President Bush’s plea to lead the Treasury, Goldman has been accused of another conflict of interest… NRG, a former Goldman client, accused the firm of betraying its confidence when it turned up advising rival Mirant in an unsolicited takeover… The bank advised Texas Genco, which NRG bought last year in a deal Goldman helped finance… commodity hedges put on by Texas Genco are artificially depressing earning until they start unwinding next year. Goldman’s commodities arm designed these hedges…”

    And thinking about Goldman’s capacity to move the forex markets:

    “…Deutsche Bank is the pre-eminent forex trading house in Asia with 18.22 percent market share. UBS finished in second place in Asia while Goldman Sachs was in third place. Its overall global forex market share stands at 19.26 percent, 7.4 percent ahead of its nearest rival UBS which Euromoney said has 11.86 percent market share…”

  • Posted by Joseph Wang

    A strong currency produces a trade deficit when you have a large fiscal deficit that requires inflows of foreign money. I think the Rubin (and hopefully Paulson) both understand the consequence of massive debt, but neither of them were responsible for the large deficit that required this borrowing.

    As I pointed out Rubin took a large pay cut (roughly US$30 million/year) to be Treasury Secretary, and he is making a lot less money now than if he had stayed at GS. There is nothing that Rubin did to make him or his friends personally richer than if he had stayed on Wall Street. Most people on Wall Street won’t touch a job in government because the pay is so laughibly low. Accusing Rubin of personal corruption just doesn’t make any sense.

  • Posted by Joseph Wang

    Again, there is missing context here. No investment bank is perfect and everyone has some irregularities and skeletons, but in comparison with other banks, Goldman-Sachs has probably the best reputation.

    I’m not inclined to bash Wall Street much. It works pretty well considering the huge amount of money that exchanges hands, and NYC works a *lot* better than Shanghai.

  • Posted by Anonymous

    Can someone explain why the debt collected in the 80s was seen as responsible for the weak dollar then while today the government deficit is seen as a cause of the weakening dollar? Shouldn’t the fiscal deficit be creating more purchases of US dollars that keeps the dollar from falling farther?

  • Posted by Anonymous

    Sorry, meant strong dollar in the 80s.

  • Posted by MTC

    I hesitate to do this but someone has to:

    Mr. Chiang –

    1) Explain how Robert Rubin–without (it’s now Governor) Jon Corzine, without Larry Summers, and most importantly, without Alan Greenspan–ordered, cajoled or otherwise induced investment banks into create the opening day IPO pop you categorize as legally actionable?

    2) Since you admit that Robert Rubin is not responsible for overseeing the stock market, please explain how you can criticize him for not overseeing the stock market. (Limit response to 25 words or less)

    3) Please cite the study, research paper or government report demonstrating that under the Clinton Administration the IRS “was used to investigate it’s political foes”. And no, an 8 paragraph cut & paste job from the Asia Times website will not count.

    4) Please cite the study, research paper or government report demonstrating that under Rubin “the IRS failed to deal with Islamic terror groups raising money in the United States”. And no, an 8 paragraph cut & paste job from the Heritage Foundation, the American Enterprise Institute, the Project for the New American Century or any congressional committee chaired by Chris Cox will not count. For extra credit, prove the negative–that under anyone else, the IRS’s “dealing with” Islamic terror groups would have been so much better.

    5) Please name the members of the “Plunge Protection Team” and identify the appropriations (year and page numbers, please) made in the national budget for the team’s activities.

    6) Please recall, for those of us with poor memories, how Robert Rubin bailed out foreign investors in Asia–particularly in Thailand, South Korea and Indonesia.

    7) Please name the Clinton critics who underwent proctological IRS audits during Robert Rubin’s tenure at the Treasury. How were these audits “protological”? Cutting & pasting ragegasms from the editorial page of the Wall Street Journal will not count. (Bonus question – If the experience was a personal one, what does a “protological” audit feel like?)

    8) Please estimate the likely reduction, in millions of 1996 U.S. dollars, of campaign contributions made by U.S. businesses to Democratic candidates had the Clinton Administration not gone to bat for Dabhol nor encouraged business participation in U.S. trade missions. Please enrich the analysis with a review of corporate donations to Republican candidates.

    9) Please flesh out your revolutionary theory of tarrifs and money. Present it to a refereed economics journal. Wait for them to call you.

    10) Please present list of “Clinton cronies” and the estimates of the change in their level of enrichment attributable to the efforts of Robert Rubin. And a 15 paragraph cut & paste job from the National Review Online or its affiliates absolutely, positively will not count.

    11) Bonus questions – Explain why you continue to post here. Be serious. Limit yourself to 25 words or less.

  • Posted by MTC

    Oops, that should be “proctological”

    Apologies for the other typos as well.

  • Posted by Guest

    Joseph – A bit of missing global context? – as difficult as it is to find:

    “…David Webb, a retired investment banker and shareholder activist… said rules are needed to protect shareholders’ rights and to require faster reporting. “Hong Kong is the last market in Asia that doesn’t require large companies to report quarterly. It’s because of resistance from the tycoons…” Many Chinese firms have been scared away from U.S. markets by the tough Sarbanes-Oxley anti-fraud law, said Steven Y.L. Cheung, a professor of finance at City University of Hong Kong…”

    MTC – Might add: 12) citations must include the appropriate use of parenthesis? Guide here:

  • Posted by a

    “Since you admit that Robert Rubin is not responsible for overseeing the stock market, please explain how you can criticize him for not overseeing the stock market. (Limit response to 25 words or less).”

    Well I’d certainly criticize Rubin for not coming to Greenspan’s support after the “irrational exuberence” remark. Greenspan got slammed in Congress for that, Greenspan backed off, and that’s a big reason why the US is in the mess that it is. A little support from Rubin at that time would have gone a long way. He didn’t give it. Sure, Rubin wasn’t responsible for the stock market. But he did have certain responsibilities to the US economy, which the stock market was adversely affecting at that time (and, again, the fall-out continues to this day…).

  • Posted by Joseph Wang

    One other thing is that I tend to like Wall Street because they (and agricultural interests in the Midwest) are some of the most fervent supporters of China in the United States. They are doing it because of the money, but that doesn’t bother me. The basic equation is “China gets rich and powerful” -> “people on Wall Street gets filthy rich.” The other thing is that once you have the economic elites in the United States publicly advocate “panda hugging” then it becomes political difficult/impossible to “play the treason card” or “play the patriotism card.”

    Rubin and the Clinton adminstration set US policy in a direction that has been quite favorable to China, and has also been impossible for the “dragon slayers” in the Bush administration to reverse. This causes a good counter reaction in that it strengthens the hands of people in China that want Chinese policy to be pro-US. The Chinese economic elites also tend to be the people in China that are most pro-US for the same reasons “rich and powerful US” -> “people in Shanghai get filthy rich.”

    One other point which I’ve made before about Enron. It’s not illegal in the United States to overreport your income on your taxes, and the IRS is not set up to catch people that pay too much tax. Part of it is that suppose the IRS did catch Enron overreporting its income, the only thing that the IRS can do is to issue Enron a refund check.

    Also. I don’t think greed or self-interest is a inherently a bad thing. The bad thing is “extremism.” Exterme greed, self-interested , and materialism is a bad thing, but so is extreme anti-greed, anti-self-interest, and anti-materialism.

  • Posted by roast

    Joseph Wang…you point out that Paulson “took a large pay cut” to be Treasury Secretary. Are you saying that by doing this Paulson somehow acquires some sort of beneficent halo and that we can expect him to use this most powerful position for the good of all…from the Wal-Mart Greeter to the Wal-Mart financier, and that in the popular image of Alan Greenspan he will act Delphic wisdom and extraordinary evenhandedness?
    This is disingenuousness in the extreme. Would you say the same of Dick Cheney…that he took a pay cut and the innocuous position of Vice President so that he could (pardon the phrase) “serve the people?” Or after a sufficient application of Vizene, would you possibly alter your view and say that Paulson is a member in good standing of the financial power elite and to take the position of Treasury Secretary is not so much a sacrifice as it is a class-duty that will be rewarded 100-fold with increased prestige and manifold honors including assurances that all economic transgressions both past and future (short of screwing the alter boys on the village green at high-noon on Sunday) will be forgiven and ignored as simply the way we do business here in the Land of the Free?

  • Posted by Guest

    MTC – I understand why you wanted to respond to David Chiang’s idiotic postings, but I’m afraid it won’t make any difference. He apparently derives great pleasure from flaming this board with his sophomoric nonsense. Just don’t read his posts anymore – no one else does.

  • Posted by Dave Chiang

    Globalisation Must be Saved from the Radical Global Neo-liberalism Utopians
    By Barry C. Lynn

    Few outside the US doubt that America’s free-trade system, constructed with such care in the decades after the war, is crumbling fast. The proximate cause is America’s looming bankruptcy.

    This is because there is no better time than today to face up to the two fatal flaws of the radical globalisation project that in the early 1990s came to supplant the more careful trade liberalisation of the postwar era: first, America’s utopian belief that an unregulated “market” would somehow do the work of government; and second, the rise of global companies—especially in the retail and electronics sectors—to fill the power vacuum created by the retreat of the American state from its traditional role managing US trading relationships.

    The depth and intensity of America’s trade utopianism becomes more astonishing as time wears on. Look at how the US treats oil politics and you will see the realistic America of old. The nation’s leaders shape an energy policy, they intervene in markets, they invade oil-rich nations. But when it comes to the global trading system, America today operates on an entirely differ

  • Posted by Guest

    And we wish David all the best with his efforts to sell us Mr. Lynn’s book ‘End of the Line: The Rise and Coming Fall of the Global Corporation’

  • Posted by psh

    Wow, this is like high school when the gym teacher had a personal emergency and everybody hung Ronald Tanner up on the hook for the climbing ropes, like in Texas Chainsaw Massacre, because his hips were as wide as his shoulders or something, except the hook didn’t go through his flesh, of course, it went through his tshirt, but he still stayed up there a long time with his feet moving in little circles.

  • Posted by Joseph Wang

    roast: All I’m saying is that accusations that either Rubin or Paulson are personally corrupt make no sense. They might have other motivations (which might be “nice” or “not nice”) for being Treasury Secretary, but a desire for more money is not one of them.

    You can change your argument to bash Rubin or Paulson for having other “not nice” motives, or you can change the argument to talk about “institutional corruption.”

  • Posted by OldVet

    We’re going to have to start a new storyline – Political Risk threats to Economies. Much of the instability of the world system, and especially the US gross imbalances of spending and consumption, derive from politics rather than corporate actions. Or do they?

    Since at least the time of Reagan in 1980, the US multinationals wanted to expand across the world and make investments there, which they did in China and many other countries where cheap labor was located. They wanted a “strong dollar policy” because they had to dress up their balance sheets for the investing public in the US – show strong asset growth. So they paid for countless Washington political campaigns and parties and fundraisers, and told the elected Washington politicians to practice a “strong dollar policy.” Which the politicians did – under Regan, Bush I, Clinton, and now Bush II. Senate and House, bought and paid for, faithful to their masters. Multinationals paid the piper and called the tune.

    Now those investments are producing goods sold in the US and the rest of the world, and US multinationals make about 50% of their profits overseas. The focus these days is more on Income Statements than Balance Sheets. Profits coming in from foreign FX areas need to be bulked-up so the investing public will buy more stock. So I think – IMHO – that the mantra has turned. The multinationals who pay for the politicians’ campaigns are quietly saying, “Hey get with the Weak Dollar program, that’s what we need.” And the politicians are going to do what they’re paid to do. Bring down the US dollar. Mr. Paulson is going to be the agent of change.

    I doubt anybody who’s very high in corporate executive ranks has much of a heart. But if Paulson can ratchet the dollar down, in competition with the sharks running Japan and China and Korea, then good for him. If that’s what his job is. I don’t want nice guys on the payroll, I want results to straighten out these imbalances. Part of that is bringing down the US dollar, and by a lot. The sooner the better. And if in an orderly manner, then better still.

    Returning to the idea offered: are risks as often political as economic? Is it just the normal business cycle shaking the money tree, or is it politicians in the US, China, Iran, and other countries the ones doing the shaking? Is the Fed a political or an economic actor? Whose political interests are aligned with whom in the business world?

  • Posted by Gcs


    “I’m a fan of Robert Rubin”

    joe he has a fan base but they are all either rich
    identifying with the rich
    or working for the rich

    which are you ???

    more jw:

    “Rubin’s obvious bias toward capital
    was balanced by Robert Reich’s bias toward labor”

    ‘balanced by ‘????

    my tally after the clinton regnum

    had it:

    capital 8 labor zero

  • Posted by Gcs


    sometimes if you make your case
    with too much intensity
    it has a counter productive effect

    in the eyes of us old crows
    watching from above on the power lines

  • Posted by Gcs

    ghostly guest :

    “Just don’t read his posts anymore – no one else does”

    well i read emperor chiang …

    of course
    no one reads me either

    we’re both …ignore able ‘idiotic’ ‘flamers’
    i guess

  • Posted by Ho Lee Fook

    The Plunge Protection Team?….Alien Abductions?….Area 17?….Little Green Men?….The Loch Ness Monster?…..Anti-Zionist Conspiracy?…..? DChiang, oh puhhleeease, do spare us all!!

  • Posted by Dave Chiang

    Reply to Ho Lee Fook,

    Just as a reminder to Clinton-Rubin supporters, the American people voted out twice both Clinton cronies Al Gore and John Kerry. Perhaps it had something to do with the immoral and unethical conduct of Bill Clinton in the Whitehouse. At least George Bush won’t ever be caught with his pants down molesting a college intern like Monica Lewinsky. Why was it that the American newsmedia gave Bill Clinton a free pass on the Monica-gate scandal? Should not Bill Clinton have faced criminal charges; Not to mention various corrupt Whitewater land scandals that led to a taxpayer bailout of a failed Savings & Loan. Bill Clinton totally disgraced the office of the Presidency of the United States.


  • Posted by Stormy

    Oldvet hit the nail on the head:

    It is hard, if not impossible, to tell the interests of corporations from the political realities.

    I used to be a fan of Clinton and Rubin until I started to look at the results of NAFTA. Whose interest was really played here?

    As an interesting aside, I suggest that Clinton fans take a look at the documentary “Big Sugar.” Clinton zipped up his pants to take a call from sugar execs who were complaining about taxing them to clean up their mess in Florida. (Gore, by the way, suggested the tax.)

    Mnc’s and tnc’s call the shots. It is quite amazing to see how politicians on both sides know exactly how high to jump. Occasionally, they have to posture a bit for the public—Schumer does that quite well–, but as soon as the public loses focus, they are back to the old games.

    I do disagree with Oldvet that these same corporations are now calling for a weaker dollar. They have a problem. The problem is: Things have become so imbalanced that there is no real solution—at least for the U.S.

    If you think those corporations are coming home after moving even their R&D labs abroad, guess again. Lately, they have been moving state-of-the art factories abroad.

    Short-term gain has its problems. The big boys will play buy and sell at the global level—hoping to catch every dollar squirt. There are few squirts left.

    As for Clinton’s success in the 90’s: He lucked out with the dot-com boom. IT hit big time in the 90’s—and its origin was the U.S. Clinton benefited; but he also set the conditions for the actual IT business constructs to move abroad, leaving the U.S. economy increasingly empty. Check out Dell…or any other U.S. IT construct. Off shore.

    If the fall comes—and I hope it does not, but I suspect it will be big if it occurs–, I for one hope these mnc’s and tnc’s are shrunk to size and start behaving not as if they were themselves countries.

  • Posted by MTC

    Gcs –

    You are right to chide. I overreacted.

    Still, we also have to think about the occasional readers, the ones who might see a citation in the Financial Times or the Economist and come over for a look. While the blog post is the cited material, many such visitors will read the comment thread as well. Such readers would not know the histories behind the handles.

    Dr. Setser has shown great patience with the delete button, even in the face of personal insult from anonymous sources. When one considers how much of his reputation and personal fortune (not to mention his sweat and his passion) are likely tied up in this blog, one cannot help but feel admiration for his forbearance.

    At the risk of being tenditious, a small comment thread group is a commons, not a market. Noxious commentary is not driven out by competition. It lingers. It is indeed archived. Either one shames the perpetrator into cleaning up after himself or herself, or the mess just lies there, degrading everyone’s experience.

  • Posted by Gcs

    mtc very thoughtful response

    let us agree to disagree

  • Posted by Joseph Wang

    I’m upper middle class, but I do have a lot of admiration for people who work like hell in order to get filthy rich. This applies to Wall Street investment bankers, people in the sweatshops and restaurants a few blocks away in Chinatown, or someone who is willing to risk it all crossing the Rio Grande to work in the United States.

    It’s the same basic dream and the same basic sacrifice.

    There is nothing wrong with being rich. There is nothing wrong with wanting to be rich. The question is whether or not the social institutions exist to convert raw greed into something more or less socially productive.

  • Posted by Joshua

    “The question is whether or not the social institutions exist to convert raw greed”

    You assume that it is greed which drives successful people. In the vast majority of cases it is not.

  • Posted by Joshua

    “Either one shames the perpetrator into cleaning up after himself or herself, or the mess just lies there, degrading everyone’s experience.”

    Ain’t that the truth.

  • Posted by Guest

    MTC – thought your comments were a welcome think piece about standards and a reminder of the opportunity Brad/RGE offers. It would be unfortunate if abuses necessitated registration, a cover charge and the enforcement of restrictive rules.

    Joseph – I associate greed with the confiscation and concentration, rather than creation of wealth. Never socially productive. Usually results in extensive, socially unproductive collateral damage. Impossible to harness. Expensive to rein in. If Paulson’s prime motive is greed, that’s a problem.

    So, attempting to ease back to the central topic ‘Paulson, not Evans … an explanation of what it means’, – as Paulson and Goldman Sachs are extremely interesting, along with the circumstances which prompted Mr. Bush’s nomination, perhaps a bit more discussion on this topic is warranted. Without looking too much like a conspiracy theorist, but thinking about OldVet’s questions, might be worth noting that Mr. Thain is also a Goldman Sachs person:

    “…Mr Thain, 50… took a $16m pay cut to join the NYSE. He worked to restore confidence in the Wall Street institution, implementing reforms that had been put in place by the board… He took the NYSE public and bought the Archipelago electronic trading system, signalling a dwindling role for open outcry. Now he is preparing for his biggest move yet: the acquisition of Euronext. Before becoming Goldman’s chief operating officer, Mr Thain had been president and oversaw the European operations of the investment bank…”,,1789532,00.html

  • Posted by OldVet

    Hi Stormy and Guest, don’t get me wrong – I don’t think US multinationals plan to move factory activities back to the US. However I do think there’s been a change in the popular thinking of executives and brokerage touts that earnings are more important than balance sheets, as tools to selling more stock and bonds to the investing public. It’s a herd movement in response to marketing strategies. A “weak dollar” will make those foreign-earned sales and profits look all that much higher, and drive the stock market.

    Ultimately, too, a weaker dollar will help cut the import bills and change the calculation of whether production makes sense in the US again. If the dollar falls far enough, the new answer could be “yes.” The wheel never stops turning, in the long run.

    My questions go more to the identity of interest between US political parties and US multinationals. If US multinationals insist, for whatever reason, on a “strong dollar policy” then we risk serious social disruptions and a fracturing of the society. Which will benefit no one, anywhere. This is expecially true at the moment, with contruction employement falling as the housing market cools, and the sentimental but mindless push for greater immigration.

  • Posted by Gcs

    i like your straight forward
    use of greed and rich
    joe w

    no shilly shally

    its up to society to tame and channel
    its strongest spirits

    for me
    the self oriented agent
    needs a few internal controls
    beyond rational expectations

    many introjected “governors ”
    to me atleast
    necessary features of any viable social system

    my hunch
    given the total externalization
    of all agent constraining elements
    your proposed “number One priority” type system
    is an unintentional Rx for a leviathan state solution

    but at any rate

    you’re a thinking fellah
    lets agree to disagree
    as to this division of duties
    between self and society

  • Posted by Gcs


    sorry if i’ve contributed
    to the fraying
    of the thread here

    i see brads vac as
    free swim time …sort of anyway

  • Posted by Guest

    Gcs – didn’t intend to come across sounding like a cop and not remotely qualified to do so! I’m sure that my contributions aren’t appreciated by all. Obviously can’t speak for Brad, but think it’s a good idea that a bit of self-regulation happens every once in a while.

    Perhaps a translation issue in that Joseph’s definition of ‘greed’ may be more like our definition of ‘ambition’? I would agree that Paulson has to be a very tough, ambitious guy to be where he is right now. But I don’t think that automatically means he’s driven by greed.

  • Posted by Gcs

    old vet
    i agree with your line completely

    multi nationals at least today
    dictate forex policy for both major party cores


    its interesting isn’t it

    strong or weak

    up or down

    strong dollar good for multi nat fdi
    and re entry of foreign built
    multi nat trade products

    weak dollar good for ddi
    especially with repat foreign earnings

    domestic import substitution and export opportunity

    so which “direction ” is better
    stronger or weaker depends…

    can’t be solved analytically


    it helps to cut the two foreign worlds out there
    apart however

    into a north and a south
    or as brad and most prefer a core and a periphery

    a look at the record over the last 100 years
    north/north core/core international flows
    have a definite back and forth pattern

    such that the relative strengths
    of say the euro and the dollar
    show some fairly obvious
    two way dynamics …

    but that is one system

    the north /south core /periphery system

    has a deeper less “chaotic” pattern
    of booms and busts

    the north to south direction of fdi is steadyif quite variable in amount

    where as the portfolio moves
    are both ways very dynamic and lets face it
    often overly disruptive maybe even destructive

    more then just colored
    by considerations
    independent of necessary real developmental adjustments

    and its always
    unlike north/north forex

    a very and perminently tilted table

    north over valued south undervalued

    maybe the tilt gets adjusted some

    but never up to a level
    let alone an opposite tilt


    ps :

    to realize the real value of a south direct investment
    the multi nat
    must await
    till the time like the koprean won when a particular
    economies makes the transistion to a north status
    as i contend necessarily the rmb must …eventually

  • Posted by Gcs


    listen i hope i got the right guest here

    your stuff is great

  • Posted by c roast

    I don’t know what
    drives Rubin & Paulson

    surely they are good dads
    don’t kick the cat
    take out the trash
    recycle the WSJ

    tee-off at 9 every Sunday
    use the golf cart
    f**k the caddies
    share the Weltanschauung

    very agreeable foursome
    tee it up in the rough
    just us chickens
    playing by our rules

    other guidelines for the unwashed
    they paid their dues
    always gave a mulligan to their sponsor
    part of the apprenticeship

    now they get to write the rules
    Hey! Were a nation of laws!
    and a little celebrity doesn’t hurt
    just us chickens

    how dare you call it
    crony capitalism

  • Posted by acr

    re: “We’re going to have to start a new storyline Political Risk threats to Economies…”

    Aren’t politics and economics joined at the hip – and political risks to economies something that’s been happening long before the whole idea of ‘America’ was born? I’m interested in the ways contemporary capital markets and very private HNWIs may be affecting the current natural order (along with feasible and politically correct approaches to translating it all into accounting terms, economic language, FX correlations…).

    “…as Pitt certainly knows, the problem isn’t that corporations were driverless… It was only when the SEC started asking questions that the lawyers came up with the “driverless” claims. What companies need is one clearly-disclosed driver, who will take responsibility for the bad outcomes along with the good…”

    Not to imply it’s all evil. Still thinking about the central topic, if the HNWIs are all philanthropists, along with the man nominated to be the next Secretary of the Treasury, then perhaps many jobs and public goods will be created as they re-administer their riches, whether gained through greed or ambition.

    “HANK PAULSON… plans to sell as much as $800 million (£427 million) of investments and put the proceeds in a blind trust that will be used in part to make large donations to charity…”,,5-2207539,00.html#cid=OTC-RSS&attr=Business

    How effectively that system works, obviously, remains to be seen.

    Gcs – thanks

    I’ll be ‘acr’ going forward, as I am taking up far to much space to be a guest anymore, especially on this topic.

  • Posted by Gcs


    your prime rib
    makes my roast
    look like pot

  • Posted by OldVet

    Gcs and acr, usually politics and corporate interests work together, but there are those times when they don’t, rare as those times may be. As a little guy, I love trying to figure out the interests that cause such strange politics. And more than that, try to see the trends, for fun and profit, in my old age.

    If we’re not there yet, we’re getting close to a tipping point in north/south FX and FDI terms of “trade” that may be bringing Multi’s into conflict with important political forces in China, LatAmerica, Russia. Have you guys been following the complicated and growing web of deals that bypass the US? Business is swirling between Russia and India and China and Brazil in new ways that leave the Good Ole Boys out of the picture. My gut says Multi’s are going to have to find a new model, since business power is shifting “south”. This leaves US pol’s twisting in the wind, having delivered us up on the cross of the strong dollar.

  • Posted by Gcs

    old vet “the complicated and growing web of deals that bypass the US”

    if you mean us multi s
    i agree

    and the flag follows the us multi s

    so what to do ????
    or is it already being done

    countering hugo and positioning around the russian perimeter

    and pitting vietnam and japan and taiwan against the prc
    and hustling india and and and

    a weak dollar vis a vis the south forex isn’t in the cards
    so far its strictly jockeying agin the yen and euro

    maybe instead of a new north south forex ratio
    better a massive south portfolio melt down
    like in 97-98

    hey just guessin’

  • Posted by alan g

    Ahh, the quandry of mnc’s, plutocracy and good citizenship, or perhaps just the “zen” in citizenship. How much social wellbeing or nationalism can be ascribed to the various central banks and mnc’s?Ahh, the quandry of mnc’s, plutocracy and good citizenship, or perhaps just the “zen” in citizenship.

    How much social wellbeing or nationalism can be ascribed to the various central banks and mnc’s? Is it just precise localization, i.e. “anything to keep my job/government position”,or as the über zen master Gcs (much respect sir) commented, the good old boy golf network? A blending perhaps… until the fertilizer hits the ventilator, then it’s every ceo for himself.

    Regardless, forex rebalancing is a “mexican standoff” as they say. Hmmm, anybody see the end of Tarantino’s “Reservoir Dogs”?

  • Posted by Joseph Wang

    “Success” is sort of an illusion.

    Too much greed is a bad thing, but I’ve seen huge amounts of damage both social and personal from people who weren’t greedy enough. This includes everything from the Cultural Revolution to the grad student (or for that matter the minimum wage restaurant worker) who doesn’t feel that it is “right” to demand that they get a decent wage.

    China had a system in which the first few decades were talking about “selflish devotion to the socialist paradise” and then the second few decades was “to get rich is glorious.” The second works a lot better.

    Note that this isn’t necessarily “pro-management.” My “philosophy of greed” says that if labor wants to band together to collectively bargain for more money, that’s a good thing. It’s all a matter of balance.

    One basic corporate principle of Goldman-Sachs (and they aren’t shy about talking about this) is “long term greed.” I think it is a very good principle.

    Part of the reason that I do think that greed is underrated, is that its pretty easy to control/influence a greedy person. Just point out to them that what they are doing is self-destructive. Greedy people also tend to be open minded. If you give then an argument that they are being self-destructive, and what they are doing *doesn’t* maximize their self-interest in the long term, they tend to listen.

    People that are overly motivated by principle tend to be much less amenable to reason.

    Greed (the long term, self-examining type) is good.

  • Posted by acr

    Joseph – and I say this with the greatest respect as my language skills do not extend to fluency in Mandarin, but I was raised speaking ‘English’ and I don’t think that the concept of ‘long term, self-examing greed’ exists in the English language. If you can find direct quotes from the likes of Paulson – specifically praising “long term greed” – it would be most helpful if those could be provided.

    It’s my general impression that systems of “selflish devotion to the socialist paradise” were written and brutally enforced by greedy people.

    Thinking about a link ‘psh’ provided earlier in this post, I associate greed driven systems with this sort of thing:

    “…It resembles a scene from another era, but this is one of the world’s best-performing stock markets… Welcome to the surreal world of Zimbabwean economics… Zimbabwe has the fastest shrinking economy outside a war zone, with unemployment pushing 80% and inflation a rampant 913%… “It’s quite embarrassing because the exchange is supposed to mirror the reality of the economy,” said Emmanuel Munyukwi, the institution’s chief executive. “We have benefited from the distortion of the market.”…Analysts say the stock market boom masks the fact that thousands of businesses have gone bankrupt, slashing exports and halving the size of the economy since 2000… President Mugabe… has blamed the crisis on successive droughts which hit commercial agriculture, and western powers who “punished” Zimbabwe for taking over white-owned farms. Critics say the fault lies with his Zanu-PF government, which gave land to loot-minded cronies… and then printed money to cover budget deficits – triggering inflation which some say is close to 2,000%… The impact on living standards has been catastrophic. About 4.6 million people rely on food aid; children miss school because their parents cannot pay fees and hospitals lack basic equipment and medicine – handing a death sentence to those with Aids and other treatable diseases… Perhaps the biggest winners are senior Zanu-PF officials who have helped themselves to the best farms and assets… The reserve bank governor, Gideon Gono, is said to be building a huge mansion…”,,1760715,00.html

    Only to suggest that “to get rich is glorious” may work in the short term, but if the global polarization of wealth and consolidation of HNWI philanthropists continues at its current rate, we may all see the return of “selflish devotion to the socialist paradise” sooner than we would like to think.

  • Posted by Aenima

    Greed is the nature of the universe. It devours.

    The Oceans are hungry for land.

    Learn to swim.

  • Posted by OldVet

    acr, we may find ourselves engaging in the “selfish devotion to the plutocracy” before anything else. I’m already on my knees, casting about, figuring how to tie the shoelaces of these corporate behemoths, while pretending obeissance.

  • Posted by Guest

    Hmmm “earned an English degree at Dartmouth”

    “…”Volatility is our friend,” Hank Paulson says serenely. “If it wasn’t for volatility, why would you need Goldman Sachs?… But with the volatility comes opportunity… Internet trading of ever more financial instruments is spreading inexorably–stocks now, but soon all kinds of bonds and agricultural and financial commodities and, one day, everything. Driving Paulson’s huge investment in hardware, software and communications links is his belief that technology will fundamentally change the way securities are traded–and drastically increase the variety of what is traded… Genetically driven to grow and defined by an ethos insiders call “long-term greedy,” this firm wants more. It is conceivable that Goldman’s trading systems could siphon off a sizable enough chunk of global traffic to rival, say, the New York Stock Exchange… Hank Paulson sits on the board of the New York Stock Exchange. Some people say his role in abetting Archipelago angers Richard A. Grasso… Today Goldman sports one of the most sophisticated electronic pricing engines in the world. The firm is the only one allowed to set its own reserve requirements–rather than have them imposed by regulators–for highly volatile derivatives trading…”

  • Posted by Dave Chiang

    Goldman Sachs has Gained Too Much Political Power
    By Matthew Lynn

    June 5 (Bloomberg) — Forget “The Da Vinci Code.” If you want to get to grips with a real conspiracy, take a look at all the Goldman Sachs Group Inc. staffers taking over important economic positions around the world.

    U.S. President George W. Bush has just appointed Goldman Sachs Chief Executive Officer Henry Paulson as his new Treasury secretary, one of the most powerful economic jobs in the world.

    “Goldman is plugged into the powers that be in the U.S.,” said Patrick McGurn, executive vice president at the Rockville, Maryland-based Institutional Shareholder Services. “There are going to be areas where the interests of the Treasury Department and the U.S. and Goldman intersect. On balance, it’s got to be a plus for Goldman, especially outside the U.S.”

    The polite word for that is “network.” The impolite word is “cronyism.”

    Next, Goldman Sachs managers are likely to have a world view dominated by trends in financial markets. In the last decade, that might well have been right. The economy was grappling with globalization and market liberalization. Yet the next 10 years may be a period in which asset- and commodity-price inflation are the main focus. That would require policy makers who weren’t groomed on a trading floor — and you won’t find them at Goldman.

    Third, the concentration of power is starting to look unhealthy. A clan of former senior Goldman staffers is now in a position to help steer the dollar, the euro and the pound.

    Lastly, there may be the potential for conflicts of interest. For example, policy makers might need to think whether oil speculation has to be brought under control. And Goldman is a participant in that trade. Would a former Goldman manager hammer one of his old firm’s most profitable lines of business? And would they form an objective view on whether hedge and buyout funds are amassing too much influence? Maybe not.

    – Bloomberg News Agency

  • Posted by acr

    I noticed Lynn’s piece as well, but it was this that caught my attention:

    “…In January, Goldman Sachs Managing Director Mario Draghi became the new governor of the Bank of Italy. In Britain, David Walton, who was chief European economist for Goldman in London, last year joined the Bank of England’s Monetary Policy Committee, which sets U.K. interest rates. In Canada, Mark Carney, formerly managing director in Goldman’s Toronto office, is now a senior official in that country’s Finance Ministry. It’s not just economic jobs, either. Gavyn Davies went from Goldman to become chairman of the British Broadcasting Corp. for a few years… There needn’t be anything sinister about that — though financial conspiracy theorists could have a field day with some of the connections. The issue is that they are likely to have a uniform set of preconceptions and prejudices… ”

    I thoroughly disagree with Lynn’s assumption that networks and cronyism are one and the same. Networks are the backbone of a knowledge based economy in which no one is really an independent actor, but largely dependent on their capacity to pull together the best team to get things done. There’s no doubt the Goldman team consists of very well qualified, well connected – well – guys. Not to downplay Lynn’s concerns that their formula for success could implode if they keep plowing ahead with a bit too much ego and brand (long-term greed? volatility is our friend?) invested in a strategy that may have worked in a certain place and time, but could prove to be catastrophic when rolled out as a sustainable system on a global scale.

    I think of cronyism as the sort of thing that happens when people without appropriate expertise are given positions of power – perhaps more because their loyalty can be called upon to cover for the enterprise’s faults rather than for their unique capacity to actually fix its problems.

    “…”Because the market is growing rapidly and turnover is high, people appear to be rising to positions of responsibility faster than they might do in a more developed market,” says the Hong Kong investment banker.” Cultural Revolution leaves void among accountants

  • Posted by smekhovo

    Networks are my friends. Cronyism is your friends.

  • Posted by acr

    Perhaps, but might it be suggested that cronies can exist in networks – to the overall detriment of the network. It is my impression that the greater transparency of American networks was designed to ensure that incompetent and/or corrupt cronies are ousted sooner rather than later. Remains to be seen whether the American system can maintain that transparency as it integrates with more opaque economies.

  • Posted by Joshua

    Robert Reich on Henry Paulson

    Henry Paulson’s Challenge


    “Wall Street is delighted one of their own is going to be at Treasury’s helm. The White House feels confident Paulson will be able to sell the administration’s policies better than his predecessors, Paul O’Neill and John Snow. I wish my old classmate well. But let’s get real.

    The reason consumer confidence is dropping, the dollar is dropping, the stock market is dropping, and Bush’s ratings are dropping is not because the Administration has failed to sell its economic policies. It’s because those policies are fundamentally flawed.

    If America continues to go deeper into debt, it makes no difference who’s running the Treasury. And it is going deeper into debt because households aren’t saving – indeed, household indebtedness is rising. More to the point, the federal deficit is rising. The President continues to cut taxes while spending more and more. His spending includes wars in Iraq and Afghanistan, corporate welfare to the pharmaceutical industry (disguised as a Medicare drug benefit), subsidies for Big Agriculture, and excessive pork (earmarks).

    Even if my old classmate convinces the Chinese to further revalue the yuan – which seems unlikely, given that the Chinese well understand Bush is approaching lame-duck status – these fundamentals won’t change. The dollar will continue to drop, interest rates will continue to rise, and the economy will be in deep doo-doo, as the President’s father used to say.

    At best, Paulson may be able to coordinate with the Chinese a slower drop in the dollar than otherwise. This would be an accomplishment, to be sure. Better a gradual decline than a death-defying fall. But neither would be good for American living standards. And neither gets at the basic problem.”

  • Posted by Joseph Wang

    Re: long term greed – The reference to this is Lisa Endlich – Goldman Sachs: The Culture of Success. The book itself is written by a former VP and is largely favorable to the company. Also Eric Derman, also retired GS, refers to it in his book “My Life as a Quant” (Chapter 12 when he talks about the difference between GS and Salomon Brothers.)

    One of the ironies where is that Zimbabwe has one of the worst economies but best stock markets, while China has one of the best economies but the worst stock markets. I don’t think its coincidential.

    The interesting thing is that expertise actually tends to increase the importance of personal networks. Suppose you want to hire a competent particle physicist or interior decorator or mechanic. How do you find out who is competent or incompetent. Usually this involves asking your friends for what they really think about X, Y, or Z.

  • Posted by acr

    But something as complex as a financial system forces you to rely on the competency and honesty of many people you do not know, who participate in the complex networks that make it all work. But if something goes wrong, you are going to hope that you are part of a network that has enough transparency to enable you to find the responsible person(s).

    re: “China has one of the best economies.” I’m not remotely qualified to comment on that statement. I would have to rely on Brad and others (who I do not know) in this network for their comments as to how the accounting problems and other issues may distort that statement.