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Erika James

Erika James

Erika James is the Bank of America Associate Research Professor of Business Administration at UVA's Darden School and co-author of the 2010 book, Leading Under Pressure.

Regulators can't restore trust

Q: Goldman Sachs promises to put customers' interests first. At the same time, Goldman was able to avoid serious financial trouble by hedging positions in ways that placed bets against clients. Do Goldman's leaders need a new business strategy, or do they need to just do a better job at explaining their business to regulators and the public?

The financial services industry is undergoing one of the most tumultuous times in its history and the consequence has been a precipitous decline in the public's trust in the industry and in its leadership. Clearly something new has to happen to regain that trust; and, since the level of trust in the government is at least as low as that in the banks, the banks are probably the only ones that can reasonably create the necessary change that will rebuild their reputations.

Consequently, it is in Goldman Sachs' best interest to make strategy adjustments to their business model. These adjustments must be both meaningful (i.e., have a measurably positive influence on stakeholders) and transparent (i.e., easily understood by others). Anything short of a two-pronged approach to execute on a new strategy and improve their capability to communicate is likely to lead to further troubles for Goldman.

At the end of the day, Goldman's clients and its regulators must trust that firm leaders will be open and honest about strategy, intent, and purpose. Quite simply, the more Goldman demonstrates that they understand the public's frustration and articulates a plan for change, the better positioned it is to attract and retain clients and the more likely it is to establish effective means of collaborating with regulators.

By Erika James

 |  April 27, 2010; 6:45 AM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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"At the end of the day, Goldman's clients and its regulators must trust that firm leaders will be open and honest about strategy, intent, and purpose."

This is absolute, total, utter, horse manure. I get the capitalist model and we have seen it fail us in "excessive exuberance" of both investors and financial institutions.

When the prize is billions that can be manipulated out of nothing, then the prize is too great to be left unsought. Unless (a BIG unless) there are some real jail sentences for the heads of institutions that try to play both sides of the street and damages in the tune of 20 times whatever the gain was.

That only seems draconian. Think of the tens of thousands of investors who were hurt by Goldman playing both sides of the street. So, someone goes to jail for about 1 year for each million in gain and Goldman gets fined about 20 times whatever the gain was when they played both sides of the street. We know there was something like 15 million in fees they received to create the loaded CDI's. How much did they then make by betting against them?

But watch the Thuglicans say no to any real regulatory reform and watch this happen again. We bailed out savings and loans and did not learn a thing. Now we have bailed out mega financial institutions. Have we still learned nothing?

Posted by: amelia45 | April 27, 2010 9:50 AM
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What is the cost of all this to America?

The direct cost to Goldman Sachs of this event is one that may well destroy them, and it is asked by the simple question:

Would you trust a deal that involved Goldman Sachs?

There is talk already in the Markets of Suspending Goldman Sachs shares amid rumours that their own people have started shorting Goldman Sachs.

After all the litany of sharp practices exemplified by they were “big boys” excuses and a we are not bothered about the US tax payer rescuing us we are still paying out 3.5 billion in bonuses to ourselves, accusations of corruption and market manipulation.

As well as what are seen, almost universally, as attempts to influence those involved in ensuring the markets are legal and fare, at every level, from media organisations like MSNBC, Erin Burnett and others; to the US treasury Hank Paulson, to organisations like the SEC, and up into their massive financial support of all Political parties in what is seen as a clear attempt to buy influence and prevent organisations like the SEC from investigating their practices.

No one trusts Goldman Sachs, there are already cases of people pulling out of deals with Goldman Sachs across the globe.

Have a look at the figures.

Goldman Sachs were so invested in the failure of the US economy and the housing market that if it had not happened they would now be bankrupt.

In fact that was what was about to happen when AIG started to go under.

It looks like the whole Goldman Sachs investment policy for years was to set fire to the US economy and then make their money off the insurance.

Without the AIG insurance money Goldman Sachs were due to go under.

That was why former Goldman Sachs CEO and then US Treasury Secretary Hank Paulson started the trillion dollar Bush/Paulson bailout plan.

And by doing so Hank Paulson removed the last moral hazzard to the Goldman Sachs insurance scam.

Goldman Sachs activities sound rotten, look rotten and by heck they smell rotten. And it only takes one rotten apple to spoilt the whole barrel.

So would you trust a deal with Goldman Sachs?

The real cost is the one for America.

The American financial markets are tainted by Goldman Sachs or indeed any one else who uses the they were "Big boys" excuse and get away with it. Then all foreign investors are going to assume that all US markets are just as corrupt.

That is already the way it is playing in the foreign press.

So do you think a foreign investor will trust an American financial system that lets Goldman Sachs get away with it?

Posted by: walker1 | April 27, 2010 9:41 AM
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