Goldman Sachs (GS) CEO Says Wall Street Needs Tighter Controls

Goldman Sachs (NYSE: GS) CEO, Lloyd Blankfein, penned a piece in the Financial Times today that called for tighter regulation of the financial markets.

Blankfein said financial institutions must adopt more stringent accounting practices, accept tougher regulation and give more power to risk managers.

As the Obama administration begins to rewrite the rules governing the US banking industry, Blankfein reflects on some of the lessons from the crisis. He talked about stress testing, complexity, "outsourcing of risk management" to rating agencies damaged the system, risks inherent in off-balance sheet activities and not accurately accounting for asset values, which is often referred to as fair value accounting.

Along, with Treasury Secretary Timothy Geithner, Goldman Sachs' Blankfein is a supporter of Mark-to-Market rules. Blankfein said if more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures. He added, "For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in instruments that were deteriorating."

Regarding risk, Blankfein said, "Risk managers need to have at least equal stature with their counterparts in producing divisions. If there is . . . disagreement, the risk manager’s view should always prevail." This would definitely be a change to how a Wall Street bank operates, but a necessary one to perhaps protect us from the next crisis.

Interestingly, Goldman's Blankfein even made a reference to non-bank groups, perhaps referring to hedge funds, he says: "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."

Indeed, Blankfein did address the topic that is of much controversy, Wall Street bonuses. Blankfein said, "An individual’s performance should be evaluated over time so as to avoid excessive risk-taking. To ensure this, all equity awards need to be subject to future delivery and/or deferred exercise. Senior executive officers should be required to retain most of the equity they receive at least until they retire, while equity delivery schedules should continue to apply after the individual has left the firm."

Goldman Sachs' Lloyd Blankfein concluded by saying the government does still need to let banks take risks, such as in the derivatives market, but it just has to let them do it in a more controlled manner. He said, "Most of the past century was defined by markets and instruments that fund innovation, reward entrepreneurial risk-taking and act as an important catalyst for economic growth."

Blankfein does feel tighter controls are necessary to regaining the public's trust, but at the same time, he says it important that banks can still take the necessary risks to produce profits.

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