Bloomberg News

Goldman Sachs’s Central Bank Connections Reach Ever Deeper

July 01, 2011

(Updates with Weber’s UBS appointment in 10th paragraph.)

July 1 (Bloomberg) -- The revolving door between Goldman Sachs Group Inc. and central banks is spinning again.

The fifth-biggest U.S. bank by assets said yesterday it hired Bank of England economist Andrew Benito after recruiting Huw Pill from the European Central Bank in May and Naohiko Baba from the Bank of Japan in January. Moving in the other direction, Ben Broadbent, Goldman Sachs’s ex-chief U.K. economist, started at the Bank of England last month. Former vice chairman Mario Draghi will take up the presidency of the ECB in November.

The targeting of central banks reflects the value banks such as New York-based Goldman Sachs place on the skills economists gather working in policy-making at a time when growth in advanced economies is struggling to gain momentum. Meantime, governments seeking top officials are again turning to Goldman Sachs for top decision-makers 12 months after it settled U.S. fraud claims and almost four years since the start of the worst financial crisis since the Great Depression.

“The people they’re hiring from central banks tend to have valuable understandings of monetary policies, currencies, what’s going on with regulation and have access to all sorts of important people,” said Roy Smith, a finance professor at New York University and former Goldman Sachs partner. “Goldman Sachs has taken a bashing in the crisis. It’s bound to be near the bottom or recovering now, as there’s nothing of substance to follow the charges. Governments recognize that to be the case.”

‘Talented People’

Benito, who most recently served as a senior economist at the Bank of England’s structural economic analysis division, arrived at Goldman Sachs this week as senior European economist based in London, according to an internal memo obtained by Bloomberg News. Fiona Laffan, a Goldman Sachs spokeswoman, confirmed the memo’s contents. She declined to comment further.

Pill, the ECB’s deputy director general of research, will start at the firm as chief European economist in August, succeeding Erik Nielsen, who will become global chief economist at UniCredit SpA, Italy’s biggest bank. Baba joined in January as chief economist for Japan after leading financial systems analysis at the country’s central bank.

“Investment banks seek out talented people and those who have skills, insight and access to how policy decisions are made are very attractive,” said Peter Hahn, a former Citigroup Inc. banker who lectures on finance at London’s Cass Business School.

Mario Draghi

The Securities and Exchange Commission sued Goldman Sachs last year for misleading investors in a mortgage-linked investment that was sold in 2007. Then British Prime Minister Gordon Brown said the firm’s employees showed “moral bankruptcy” amid calls to ban the company from government work. Goldman Sachs paid $550 million in July to settle the SEC’s civil claims.

Bank of Italy Governor Draghi’s three years as a vice chairman of Goldman Sachs’s international division from 2002 to 2005 became an obstacle to his candidacy to run the ECB before his German rival Axel Weber dropped out. Goldman Sachs arranged currency swaps that helped Greece hide the extent of its budget deficit. Draghi said on June 14 he “had nothing to do with this deal whatsoever” and that it had started before his arrival.

Goldman Sachs isn’t alone in recruiting central bankers. UBS AG, Switzerland’s biggest bank, said today it plans to appoint former Bundesbank President Weber to its board and then make him chairman in 2013. Barclays Plc said in May it hired Brian Madigan, the Federal Reserve’s former top staff adviser on interest-rate policy, to provide counsel on economic research and regulation.

Rate Forecasts

Benito’s arrival marks a further reshaping of Goldman Sachs’s economic division after Jim O’Neill stepped down last year after about a decade running the department. O’Neill, now chairman of Goldman Sachs Asset Management, was replaced by Jan Hatzius and Dominic Wilson.

Educated at the universities of Warwick and Cardiff, Benito worked at the Bank of England for 11 years, according to the memo from Goldman Sachs. He also spent time at the Bank of Spain and the International Monetary Fund. His research work has focused on consumer spending and the housing market.

Goldman Sachs economists predict the Bank of England will raise its benchmark rate from 0.5 percent in November, although they say the chances of a delay are growing amid anaemic growth. They expect the ECB to lift its key rate to 1.75 percent by the end of the year from 1.25 percent before adding another 75 basis points next year. They anticipate the Fed and Bank of Japan will leave borrowing costs at about zero through 2012.

‘Government Sachs’

Goldman Sachs has been a breeding ground for central bankers. Broadbent is the third Goldman Sachs alumnus to sit on the Bank of England’s Monetary Policy Committee since its creation in 1997. In his first vote on policy in June, he sided with the majority choosing to leave the U.K.’s benchmark rate unchanged. Former MPC members David Walton and Sushil Wadhwani also had Goldman Sachs on their resumes before joining the central bank.

Bank of Canada Governor Mark Carney and Fed Bank of New York President William Dudley both previously worked for Goldman Sachs. Former U.S. Treasury secretaries Robert Rubin and Henry Paulson ran the bank before entering government, helping to earn the company the nickname “Government Sachs.”

“Goldman Sachs partners are extremely fortunate that due to the success of their firm they can afford to go into public service sooner than their competitors,” said Philip Keevil, a partner at New York-based advisory firm Compass Advisers LLP.

--With assistance from Ambereen Choudhury in London and Michael J. Moore in New York. Editors: Edward Evans, Simone Meier

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


Later, Baby
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus