Bad for the Economy and Society

Goldman Sachs’s new initiative — $500 million for small businesses, with some funding to come from its charitable arm — is the investment firm’s latest attempt to show the world that it’s a hero, not a villain, of the economic crisis. But Goldman is neither one. It’s a financial company with a fiduciary responsibility to shareholders.

Goldman’s job is to wring as much profit as possible out of a broken Washington regulatory system. That system allows the firm to benefit from lenders’ expectation of future government bailouts.

In this respect, Goldman’s initiative may be narrowly good for shareholders. It will help Washington see how politicians, too, can benefit by keeping the financial system unreformed (or pretend-reformed), creating bigger short-term profits. That is, Goldman makes tons of money thanks to an implicit taxpayer “too-big-to-fail” subsidy, and it will give a little bit of that money back in ways that please important political constituencies like the National Federation of Independent Business on the right and the National Urban League on the left, each of which will help the firm with its small-business undertaking.

Because it sweetens too-big-to-fail politically, the charitable initiative is bad for the economy and society.

Until we fix too-big-to-fail, small businesses are at a disadvantage created by government. All companies, including Goldman, compete for the same financial resources. When a local bank can lend its money to Goldman at no risk thanks to too-big-to-fail (by purchasing Goldman bonds), why would it lend money to a risky start-up company with no such backing?

If Goldman wanted to act selflessly, it would direct its public relations team and its smart executives to explain clearly to Washington politicians why it’s so important to end too-big-to-fail. The firm would explain further that it’s not that difficult to do so.

But that is not Goldman’s job. In fact, such an effort would be bad for the firm’s shareholders, at least in the short term. Washington has no such excuse.