Simon Johnson, the former IMF chief economist who is now a professor at MIT’s Sloan School of Management recently spoke at INET’s conference in Bretton Woods on a panel on “Too Big to Fail.”
He told the room that Goldman is still too big too fail; it simply has to be bailed out if it fails at this point.
We’ve transcribed part of his speech:
“Who in the room thinks that if Goldman Sachs hit a rock, a hypothetical rock — I’m not saying they have, I’m not saying they will — today, who here thinks they would be allowed to fail, like Lehman Brothers did, unimpeded by any government bailout, starting Monday morning? Can Goldman Sachs fail?”
“I’ve asked this question around the country and only one person has ever raised his hand. It was in New York. He had a big short position in Goldman stock. That’s New York.
“Seriously, it can’t happen. Goldman is a $900 billion bank, total balance sheet. You might want to say its too big to fail, or you might want to use the language of Mervyn King, ‘too important to fail.
“You wouldn’t allow it to fail. I wouldn’t allow it to fail if it was my decision, you wouldn’t either. It’s too scary today, given the nature of the global economy. And from that scariness comes power.”
Later, he discusses why reform hasn’t happened.
“Let me tell you why this isn’t happening.
“The bankers want to continue to be paid on a unadjusted for risk, return on equity basis. Of course they do. And the way they get nice compensation packages is by taking a great deal of leverage…
“The executives of the top 14 financial institutions took out in cash $2.6 billion between 2000 and 2008. They top 5 took out $2 billion.
“They are, in order: Sandy Weill, who built Citigroup, which then blew up, after his watch. Henry Paulson, who built Goldman Sachs, and was the point-man lobbying the government to lower leverage caps, for investment banks, which even now Larry Summers says was a great mistake. Goldman Sachs blew up. Angelo Mozilo, number 3, built Countrywide and that actually built up on his watch. Dick Fuld, number four, Lehman Brothers, and Jimmy Cayne, Bear Stearns.
“Those 5 people took out $2 billion. So that’s the private gain, one measure of it.
Then he explains what the banks did to us.
“What’s the public loss? Larry Summers said from this podium yesterday that the TARP money would be repaid from banks and that’s probably true, but that’s not the cost. Is it 8 million jobs lost? Is it a 6% fall in unemployment and we’re still 5% down below the peak? Is it the increase in net federal government debt held by the private sector in the United States?
“Compare the congressional government office medium term forecast for debt to GDP on that measure before the crisis and after the crisis. It’s a 40% increase. That is a serious banking crisis.
“THAT’s the cost we’re looking at. That’s what the banks did to us. They got bailed out. And we have done nothing significant that will prevent this from happening again.”
Via the Economist