Goldman's regulation views may aid its cause

NEW YORK Tue Feb 10, 2009 4:07am EST

NEW YORK (Reuters) - Goldman Sachs (GS.N) Chief Executive Lloyd Blankfein, preparing for highly charged Congressional hearings this week, called for stricter regulation and expanding oversight to the largest hedge funds.

By penning his opinion article in Monday's Financial Times, Blankfein may win over U.S. lawmakers who are under pressure to overhaul the nation's failed regulatory system, industry experts said.

"It's going to be an incredibly hostile environment. Bank CEOs are not negotiating from a position of strength," said Bert Ely, a veteran business consultant in the Washington area. "Blankfein's saying 'We'll play ball, but we do have concerns.' I think this is going to be the posture for everybody who will be there."

On Wednesday, Blankfein and executives from seven other banks that received $125 billion (84.5 billion pounds) in Treasury capital last year will appear before the House Financial Services Committee. Goldman received $10 billion under the Troubled Asset Relief Program.

The market meltdown and the mounting cost of the taxpayer-funded bailout has fuelled a backlash against banks and their executives. The public and lawmakers say banks are not redeploying the capital as needed mortgages and loans.

Still, Blankfein may have helped diffuse some of that anger and steer the direction of regulatory changes.

"He's taking the politically wise high road. The need for so much regulation is abhorrent, but the industry demonstrated that it's absolutely required," veteran banker and Lane Berry & Co co-founder Frederick Lane said. "This gives Blankfein a voice at table and it helps his own lobbying effort."

Among other proposals, the head of the world's largest investment bank said capital, credit and underwriting standards should fall under more proactive regulation. He also called for applying fair value accounting consistently across companies and for greater cooperation among regulators worldwide.

"For policymakers and regulators, it should be clear that self-regulation has its limits," Blankfein wrote. "At the very least, fixing a system-wide problem, elevating standards or driving the industry to a collective response requires effective central regulation and the convening power of regulators."

Blankfein also said he was in favour of expanding regulation to the largest hedge funds.

"All pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation," he wrote.

Blankfein speaks from a position of relative strength, since Goldman generated $2.3 billion of profit last year. The top executives at Goldman were also early in announcing they would forego bonuses.

The bank paid out $11 billion in salaries, bonuses and benefits last year.

In the aftermath of Lehman Brothers' LEHMQ.PK collapse, Goldman became a bank holding company under Federal Reserve watch. The conversion meant Goldman entered a new era of closer scrutiny and restrictions on how it does business.

The Securities Industry and Financial Markets Association, Wall Street's lobbying group, called for similar regulatory change in October. The group favours broader oversight across all types of financial firms.

"A financial markets stability regulator with oversight of insurance companies, private equity firms, hedge funds and other financial firms that are systemically important is absolutely key to building a stronger, more robust financial system," SIFMA spokesman Travis Larson said on Monday.

Tamar Frankel, a Boston University professor and expert on regulation, said Blankfein's opinion piece acknowledges that regulators are needed to impose fair play.

"He is saying is the government needs to limit antisocial behaviour from the outside because we can't do it on the inside. As we've seen, self-regulation was not effective," Frankel said. "The most important thing is restoring public trust, and Blankfein shows he recognized that."

(Editing by Tim Dobbyn)