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Marketplace Scratch Pad

When the hare controls the hound

Scott Jagow Sep 9, 2009

At a speech in Frankfurt today, Goldman Sachs CEO Lloyd Blankfein said some investment banking products are socially useless. And so are guaranteed multi-year contracts for Wall Street bankers.

From Bloomberg:

“The industry let the growth and complexity in new instruments outstrip their economic and social utility as well the operational capacity to manage them,” Blankfein said…

Blankfein said calls for a wholesale reform of the regulatory regime are appropriate after the financial crisis, though he warned against completely outlawing risk because it would hurt innovation and economic growth.

We should resist a response “that is solely designed around protecting us from the 100-year storm,” Blankfein said. “Taking risk completely out of the system will be at the cost of economic growth.”

I can’t argue with that. I just wonder what he’s up to. Is he calling for tough regulation because he knows it won’t actually happen? Or is he trying to steer the dialogue in a certain direction? He seems to be focusing on compensation, rather than the oversight of financial products and banking activities. And based on the observers I’ve talked to, compensation really should be the top priority because that’s what motivates extreme risk-taking.

Blankfein says guaranteed multiyear contracts should be banned and the clawback of pay should be allowed to discourage risk-taking.

“Compensation continues to generate controversy and anger,” Blankfein said. “And, in many respects, much of it is understandable and appropriate. There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year.”

The question is — will this regulation ever happen? And who’s in charge here?

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