Goldman Sachs and derivatives lobby group ISDA
When the 2008 financial crisis hit, derivatives, a little-known financial instrument, were identified as having played a key role. They also played a part in the 2008 food crisis and the 2010 euro crisis. As a result, there were calls for tighter regulation. But ISDA, the association of derivatives traders, and its notable member Goldman Sachs, have aggressively lobbied to make sure this hasn’t taken place.
The global market in derivatives was valued at 457 trillion dollars in 2007 yet this lucrative financial product went on to play a key role in the 2008 financial crisis, causing economic instability and millions of job losses worldwide. Derivatives played a part in the 2008 food crisis, which left an extra 100 million people starving or hungry, and in the 2010 ‘euro-crisis’ which destabilised the Greek economy. No wonder that world’s second richest man, Warren Buffet, renamed them “financial weapons of mass destruction”.
The derivatives market is characterised by a lack of transparency and lax regulation. They are mostly traded ‘over-the-counter’ without public oversight. This left regulators with little chance of spotting the emerging crisis, and with few tools to prevent or mitigate it.
The case for tighter regulation seemed clear, but there is little prospect of this becoming a reality, due in no small part to concerted lobbying by the derivatives industry. This was spearheaded by the International Swaps and Derivatives Association (ISDA) and its members, including investment banks Goldman Sachs, Deutsche Bank and BNP Paribas, which benefit from the unregulated trade. Goldman Sachs, the most profitable investment bank and a key player in ISDA's lobbying, has warned that regulation might drive it out of Europe.
Alert to the threat of regulation, ISDA moved quickly. It positioned itself on the European Commission’s “Working Party on Derivatives” and took the lead, promoting proposals that left derivatives unregulated. It also pushed the Commission to set up an ‘expert group’ on derivatives, which is dominated by its members.
Goldman Sachs, manoeuvred itself into this group, just as it got itself onto almost all of the Commission’s advisory groups on financial market regulation after the crisis.
By effectively controlling the advice the Commission received, Goldman Sachs and ISDA managed to refocus on more moderate forms of regulation. ISDA also launched a propaganda offensive to steer MEPs away from considering effective regulation, including running workshops in the European Parliament to “educate” MEPs’ assistants. ISDA has also lobbied to avoid restrictions on food commodity speculation, claiming that speculation causes “no financial systemic risk”.
The proposals tabled on food speculation as a result are even weaker than the reforms adopted in the US, and a ban on speculative instruments can only be applied under certain conditions and circumstances.