Citizens and Goldman Sachs’ clients: Beware!

The news that Greg Smith, executive director of Goldman Sachs’ European equity derivatives business, resigned yesterday accusing the Wall Street bank of being morally bankrupt is the latest reminder of the morally dubious practices of one of the world’s biggest investment banks. Among its many divisions is a commodity derivative trading arm - big enough that the firm is generally regarded as one of the two top players in food and other commodity speculation, which experts increasingly agree is contributing to global food price spikes.

As our 2010 report highlighted, in 1991 lobbying by Goldman Sachs exempted many commodity speculators from the limits on trading created in the 1930s. Goldman Sachs’ commodity index fund was created the very same year. These commodity index funds have since become the primary vehicle for speculative capital involvement in food commodity markets.

Not only this, but these index funds give the bank involved two potentially conflicting roles: both arranging the buying of derivatives contracts for which they charge a fee, and selling the contract the index fund is buying. This effectively means that banks are trading against their own clients – so it’s not surprising that Smith talked of the bank's clients being described as “muppets” by senior staff at the bank, explaining: “I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them”. The way in which these deals are set up delivers a clear advantage to the financial institutions involved.

But what’s most worrying is the hold Goldman Sachs and other investment banks have over policy making. In Europe, long-overdue financial reform legislation is being discussed with a view to reducing the systemic risk that led to the recent crisis. The regulation being considered also has the potential to control speculation on food. But the UK government is resisting key clauses of the regulation, allowing loopholes that would render it ineffective.

Goldman Sachs’ extensive links with decision-makers in the EU include:

• £8.5m of donations to UK politicians from Goldman and ex-Goldman people since 1991;
• An immense lobbying presence in Brussels, including active membership of over a dozen financial sector lobby groups;
• Extensive meetings between the bank and Conservative MEPs.

So it’s hardly surprising that that UK government is resisting efforts to reign in financial speculators on food, or reform the financial sector more generally.

In his resignation letter, Smith wrote of how the bank’s “moral fiber” had been lost. The financial crisis has demonstrated that we can’t rely on the industry to be responsible in a competitive sector when such high profits are at stake. MEPs in particular are waking up to the fact that tough regulation is needed if finance is to serve the real economy, not the other way round. The next few months are a crucial time to secure the regulation that’s urgently needed – let’s seize this opportunity.