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The Baseline Scenario

The Baseline Scenario

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Three Modest Proposals For Goldman Sachs
What Did Goldman Know And When Did It Forget It?

Three Modest Proposals For Goldman Sachs

Posted: 27 Apr 2010 03:28 PM PDT

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

At this stage in the proceedings, the Goldman Sachs’ public relations people must be feeling more than a little down. The firm’s lawyers are still breathing fire, Lloyd Blankfein trod the fine line between not being apologetic and actually saying “it’s capitalism, stupid”, and the more junior executives interrogated today did not say anything blatantly incriminating. But the public image of the firm around the world – including with finance ministers and pension funds – has taken a severe beating.

In the interests of finding a more positive and cooperative way forward, here are three suggestions for the PR team to take up with senior management – once they are in mood to think long-term about their “franchise value” again.

1. Come out in support of some form of financial reform. The really clever move would be to support something that is not likely to pass, such as size restriction on the biggest banks – keeping in mind that this would hinder JP Morgan Chase and Citigroup much more than Goldman (which was a much safer size not so long ago). Almost as smart would be to endorse the consumer protection agency for financial products – given that Goldman does not deal with many retail investors. In any case, surprise us with support for something that the administration in general or Mr. Volcker in particular is proposing.

2. Create a corporate pledge not to use “astro turf”/fake grass-roots organizations to spread disinformation, then invite other leading firms to sign on. The current leading fraud in this area is incredibly embarrassing for the financial sector; in the language of Jamie Dimon, it self-demonizes the entire industry. Why would you, Goldman Sachs, want this? This is not a good trade and it is getting worse; the traditional deniability claims will not help against the coming backlash. Close the position – and make sure you get maximum public relations points for doing so.

3. Settle the SEC case as soon as possible. Pay whatever it takes. Agree to change the nature of your business, if necessary. You know that the next crazy boom will take a different form in any case. All the feds really want to do is to bolt the stable door after the horse is long gone; at least allow them that face-saving measure.

Goldman Sachs is at a crossroads. Either they can significantly change their image in our society or they can face the consequences. All the senators I saw at the hearing today were angry, with good reason, with one or more (or all) of Wall Street’s practices.

Senator Ted Kaufman is not a lonely voice any more. He has brought a lot of smart, motivated, and focused mainstream people with him. Goldman should get out of ahead of this curve as quickly as possible – and the other big players on Wall Street should do the same. If the megabanks do not take major steps towards making amends (and themselves safer, in a deep structural sense), we are heading for a long and painful (for the banks and their employees) period of confrontation. It is all so unnecessary.

The Wall Street temptation, of course, will be to just increase campaign contributions – and I’m sure we will see some of that. But remember that Goldman has already become toxic in some European quarters. Politicians would be well advised not to accept their donations at this time; and Goldman would do much better to find more positive, pro-society ways to address the Senate’s legitimate concerns about their behavior.

What Did Goldman Know And When Did It Forget It?

Posted: 27 Apr 2010 09:26 AM PDT

By Simon Johnson

There is a live blog on the Goldman Sachs hearing now on the Lehrer NewsHour website, including comments by Paul Solman and me. The interaction between Goldman and the Senators – Democratic and Republican – is fascinating.

The Goldman executives so far seem to be struggling to recall exactly what happened. The Senators are pressing them hard. This is much more than theater. This is (some) people trying to figure out exactly who did what to whom.

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