Why…

…Aren’t Presidential Candidates Talking About the Federal Reserve?

Yes, why? Much of our economic and financial lives are being guided by an unelected board of Federal Reserve governors who have been flying blind for about 8 years now…manipulating interest rates and asset markets to what end? Nobody seems to know, except to try to prevent a financial reckoning for previous misguided policies. A less charitable interpretation is the financial industry’s desire to keep the casino open as the only game in town.

By Jordan Haedtler

In an election fueled by populist anger and dominated by talk of economic insecurity, why aren’t any of the presidential candidates talking about the Federal Reserve?

After nearly a decade of high unemployment, severe racial and gender disparities and wage stagnation, voters are heading to the ballot box in pursuit of a fairer economy with less rampant inequality. In California and New York, low-wage workers are celebrating historic agreements to raise the minimum wage to $15 per hour. And the economy and jobs consistently rank among the top concerns expressed by voters of all political stripes.

One government institution reigns supreme in its ability to influence wages, jobs and overall economic growth, yet leading candidates for president have barely discussed it at all. The Federal Reserve is the most important economic policymaking institution in the country, and it is critical that voters hear how candidates plan to reform and interact with the Fed.

Related: The Federal Reserve Bank, Explained [Well, kind of.]

The Fed too often epitomizes the problems with our economy and democracy over which voters are voicing frustration: Commercial banks literally own much of the Fed and are using it to enrich themselves at the expense of the American working and middle class. When Wall Street recklessness crashed the economy in 2008, American families paid the price.

At the time, JP Morgan Chase CEO Jamie Dimon sat on the board of the New York Federal Reserve Bank, which stepped in during the crisis to save Dimon’s firm and so many other banks on the verge of collapse. Although the Fed’s actions helped Wall Street recover, that recovery never translated to Main Street, where jobs and wage growth stagnated.

Commercial banks should not govern the very institution that oversees them. It’s a scandal that continues to threaten the Fed’s credibility. An analysis conducted earlier this year by my parent organization, The Center for Popular Democracy, showed that employees of financial firms continue to hold key posts at regional Federal Reserve banks and that leadership throughout the Federal Reserve System remains overwhelmingly white and male and draws disproportionately from the corporate and financial world.

Yellen-and-Rate-Hike-cartoon

When the Fed voted in December to raise interest rates for the first time in nearly a decade, the decision was largely driven by regional Bank presidents — the very policymakers who are chosen by corporate and financial interests. In 2015, the Fed filled three vacant regional president position, and all three were filled with individuals with strong ties to Goldman Sachs; next year, 4 of the 5 regional presidents voting on monetary policy will be former Goldman Sachs insiders. Can we trust these blue-chip bankers to address working Americans’ concerns?

Yet despite the enormous power it wields and the glaring problems it continues to exemplify, the Fed has received little attention this election cycle. As noted by Reuters last week, two of the remaining candidates for president, Hillary Clinton and John Kasich, have been mute on what they would do about the central bank. Donald Trump’s sporadic statements about the Fed have been characteristically short on details, prompting former Minneapolis Federal Reserve Bank President Narayana Kocherlakota to call for Clinton, Trump and all presidential candidates to clarify exactly how they plan to oversee the Fed’s management of the economy. Ted Cruz has piped up about the Fed on a few occasions, although his vocal endorsement of “sound money” and other policies that contributed to the Great Depression warrant clarification. [One expects that none of the candidates really understand the arcana of central banking and prefer to leave well enough alone.]

The most detailed Fed reform proposal from a presidential candidate to date was a December New York Times op-ed in which Bernie Sanders wrote that “an institution that was created to serve all Americans has been hijacked by the very bankers it regulates,” and urged vital reforms to the Fed’s governance structure.

On Monday, Dartmouth economist Andy Levin, a 20-year Fed staffer and former senior adviser to Fed Chair Janet Yellen and her predecessor Ben Bernanke, unveiled a bold proposal to reform the Federal Reserve and make it a truly transparent, publicly accountable institution that responds to the needs of working families. [That’s pretty vague, as the interests of all are best served by a monetary policy that insures the stability of the price level and value of the currency as a unit of exchange and store of value. Employment growth is best addressed through fiscal policy.]

The New York primary provides a perfect opportunity for the remaining presidential candidates to tell us what they think about the Federal Reserve. Candidates in both parties should specify whether they support Levin’s proposals, and if not, articulate their preferred approach for our federal government’s most opaque but essential institution.

As Trump, Cruz and Kasich gear up for a potentially decisive primary, they would do well to respond to the many calls for clarity on the Fed. And on Thursday night, Sanders and Clinton will have the chance to clarify their stances on the Fed when they debate in Brooklyn, just a few miles away from Wall Street and the global financial epicenter that is the New York Federal Reserve Bank.

As New York voters get ready to decide which of the remaining candidates would make the best president, they will be asking themselves which candidate will better handle the economy. The candidates’ positions on the Fed must be part of the equation.

Over Fed

The Making of Financial Policy

BHOBank

The following is excerpted from an article by Jay Cost:

How about Wall Street reform? Obama likes to pose as a people-versus-the-powerful crusader, but he staffed his administration with friends of the big banks. Unsurprisingly, that has enormously influenced policy.

David Skeel, a professor at the University of Pennsylvania Law School, writes about the framework “that would eventually become the Dodd-Frank legislation,” in particular the resolution rules that enables Treasury to intervene when too-big-to-fail institutions fall into distress.  He explains:

Both the resolution rules and the overall framework read as if they had been written by Timothy Geithner in consultation with the large banks he had worked with as head of the New York Fed. Geithner would get all of the powers that he and former Treasury Secretary Henry Paulson wished they had when they intervened with Bear Stearns, Lehman Brothers, and AIG. But the framework also did not overly ruffle the feathers of the largest financial institutions. There was no call to break them up…While systemically important status might subject the biggest institutions to greater oversight, it also would bring benefits in the marketplace. They could borrow money more cheaply than could smaller competitors, because lenders would assume they would be protected in the event of a collapse, as the creditors of Bear Stearns and AIG were.

The suspicion that the legislation might be a little too accommodating to the largest banks was further aroused by the discovery that David, Polk & Wardell, “a law firm that represents many banks and the financial industry’s lobbying group,” as the New York Times put it…had been deeply involved in the early drafting of the legislation. Treasury had worked from a draft first written by Davis Polk, and the legislation literally had the law firm’s name on it when Treasury submitted it to Congress, thanks to a computer watermark that Treasury had neglected to delete.

That’s not all. In Confidence Men, Ron Suskind reports that Obama instructed Geithner to develop a plan to break up Citi — as a warning to the other banks and a signal to the broader marketplace that the government was in charge, not the banks. But, per Suskind, Geithner disobeyed Obama, and never put together the plan. He suffered no consequences.

The best that can be said about this president and Wall Street is that, when it mattered most, he was a passive observer in his own administration. He allowed shills to write a bill enormously favorable to the biggest interests.

Gambling with Debt and Leverage

banksters

This article explains the simple problem with the modern world of banking and finance: too much debt leverage promoted by misguided tax and regulatory policies. The root cause of every financial crisis is excessive leverage funded by cheap credit. The solution is more equity on the part of shareholder owners through higher capital ratios. The essence here is RISK and the proper pricing of that risk. This means more skin in the game for those who control the financial risks. Then they can absorb the rewards or the failures of risk-taking, not the taxpayers. Of course, less leverage also means less bang for the buck, which implies banking should become the boring business it was meant to be.

From the NY Times:

We’re All Still Hostages to the Big Banks

By ANAT R. ADMATI

NEARLY five years after the bankruptcy of Lehman Brothers touched off a global financial crisis, we are no safer. Huge, complex and opaque banks continue to take enormous risks that endanger the economy. From Washington to Berlin, banking lobbyists have blocked essential reforms at every turn. Their efforts at obfuscation and influence-buying are no surprise. What’s shameful is how easily our leaders have caved in, and how quickly the lessons of the crisis have been forgotten.

We will never have a safe and healthy global financial system until banks are forced to rely much more on money from their owners and shareholders to finance their loans and investments. Forget all the jargon, and just focus on this simple rule.

Mindful, perhaps, of the coming five-year anniversary, regulators have recently taken some actions along these lines. In June, a committee of global banking regulators based in Basel, Switzerland, proposed changes to how banks calculate their leverage ratios, a measure of how much borrowed money they can use to conduct their business.

Last month, federal regulators proposed going somewhat beyond the internationally agreed minimum known as Basel III, which is being phased in. Last Monday, President Obama scolded regulators for dragging their feet on implementing Dodd-Frank, the gargantuan 2010 law that was supposed to prevent another crisis but in fact punted on most of the tough decisions.

Don’t let the flurry of activity confuse you. The regulations being proposed offer little to celebrate.

From Wall Street to the City of London comes the same wailing: requiring banks to rely less on borrowing will hurt their ability to lend to companies and individuals. These bankers falsely imply that capital (unborrowed money) is idle cash set aside in a vault. In fact, they want to keep placing new bets at the poker table — while putting taxpayers at risk.

When we deposit money in a bank, we are making a loan. JPMorgan Chase, America’s largest bank, had $2.4 trillion in assets as of June 30, and debts of $2.2 trillion: $1.2 trillion in deposits and $1 trillion in other debt (owed to money market funds, other banks, bondholders and the like). It was notable for surviving the crisis, but no bank that is so heavily indebted can be considered truly safe.

The six largest American banks — the others are Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — collectively owe about $8.7 trillion. Only a fraction of this is used to make loans. JPMorgan Chase used some excess deposits to trade complex derivatives in London — losing more than $6 billion last year in a notoriously bad bet.

Risk, taken properly, is essential for innovation and growth. But outside of banking, healthy corporations rarely carry debts totaling more than 70 percent of their assets. Many thriving corporations borrow very little.

Banks, by contrast, routinely have liabilities in excess of 90 percent of their assets. JPMorgan Chase’s $2.2 trillion in debt represented some 91 percent of its $2.4 trillion in assets. (Under accounting conventions used in Europe, the figure would be around 94 percent.)

Basel III would permit banks to borrow up to 97 percent of their assets. The proposed regulations in the United States — which Wall Street is fighting — would still allow even the largest bank holding companies to borrow up to 95 percent (though how to measure bank assets is often a matter of debate).

If equity (the bank’s own money) is only 5 percent of assets, even a tiny loss of 2 percent of its assets could prompt, in essence, a run on the bank. Creditors may refuse to renew their loans, causing the bank to stop lending or to sell assets in a hurry. If too many banks are distressed at once, a systemic crisis results.

Prudent banks would not lend to borrowers like themselves unless the risks were borne by someone else. But insured depositors, and creditors who expect to be paid by authorities if not by the bank, agree to lend to banks at attractive terms, allowing them to enjoy the upside of risks while others — you, the taxpayer — share the downside. [Heads we win, tails you lose.]

Implicit guarantees of government support perversely encouraged banks to borrow, take risk and become “too big to fail.” Recent scandals — JPMorgan’s $6 billion London trading loss, an HSBC money laundering scandal that resulted in a $1.9 billion settlement, and inappropriate sales of credit-card protection insurance that resulted, on Thursday, in a $2 billion settlement by British banks — suggest that the largest banks are also too big to manage, control and regulate.

NOTHING suggests that banks couldn’t do what they do if they financed, for example, 30 percent of their assets with equity (unborrowed funds) — a level considered perfectly normal, or even low, for healthy corporations. Yet this simple idea is considered radical, even heretical, in the hermetic bubble of banking.

Bankers and regulators want us to believe that the banks’ high levels of borrowing are acceptable because banks are good at managing their risks and regulators know how to measure them. The failures of both were manifest in 2008, and yet regulators have ignored the lessons.

If banks could absorb much more of their losses, regulators would need to worry less about risk measurements, because banks would have better incentives to manage their risks and make appropriate investment decisions. That’s why raising equity requirements substantially is the single best step for making banking safer and healthier.

The transition to a better system could be managed quickly. Companies commonly rely on their profits to grow and invest, without needing to borrow. Banks should do the same.

Banks can also sell more shares to become stronger. If a bank cannot persuade investors to buy its shares at any price because its assets are too opaque, unsteady or overvalued, it fails a basic “stress test,” suggesting it may be too weak without subsidies.

Ben S. Bernanke, chairman of the Federal Reserve, has acknowledged that the “too big to fail” problem has not been solved, but the Fed counterproductively allows most large banks to make payouts to their shareholders, repeating some of the Fed’s most obvious mistakes in the run-up to the crisis. Its stress tests fail to consider the collateral damage of banks’ distress. They are a charade.

Dodd-Frank was supposed to spell the end to all bailouts. It gave the Federal Deposit Insurance Corporation “resolution authority” to seize and “wind down” banks, a kind of orderly liquidation — no more panics. Don’t count on it. The F.D.I.C. does not have authority in the scores of nations where global banks operate, and even the mere possibility that banks would go into this untested “resolution authority” would be disruptive to the markets.

The state of financial reform is grim in most other nations. Europe is in a particularly dire situation. Many of its banks have not recovered from the crisis. But if other countries foolishly allow their banks to be reckless, it does not follow that we must do the same.

Some warn that tight regulation would push activities into the “shadow banking system” of money market funds and other short-term lending vehicles. But past failures to make sure that banks could not hide risks using various tricks in opaque markets is hardly reason to give up on essential new regulations. We must face the challenge of drawing up appropriate rules and enforcing them, or pay dearly for failing to do so. The first rule is to make banks rely much more on equity, and much less on borrowing.

Where the Elites Get Their Meat

Below are a couple of WSJ articles that indicate the way things look from the top down in our crapitalist society these days. First up are the financial elites. Public securities markets are the principle means by which individuals can participate in the success of large capitalist enterprises as something more than a labor cost. You may not be able to create a company like Apple, but you can buy its shares and receive a share of its success. The effect of devising policy that discourages public filings in favor of private placements means the door closes on the little guy and only the insiders get the sweet deals, which they then spin off to fleece the public after the easy profits have been squeezed dry. This is how capitalism concentrates wealth and don’t think our politicians are not pigs at the trough when it comes to insider deals.

The second article is offered in the “fair and balanced” spirit to show how our labor leaders play their political game by devouring their own members. Yessiree, the labor elites feed off their workers’ hard-earned incomes, while the financial elites feed off those workers’ savings. The wolves are eventually going to run out of sheep…

How different this Animal Farm would be if the shepherds decided to represent the interests of all to participate in the bounty of free enterprise.

Who Needs Wall Street?

Public debt and equity issues fell to $1.07 trillion between 2009 and 2010, while private issues rose to $1.16 trillion.

By DANIEL GORFINE AND BEN MILLER

A tectonic shift is under way in how companies raise money—and it will have a profound impact on U.S. investors and markets. According to the Securities and Exchange Commission’s most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.

Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April.

The crowd funding provisions in the JOBS Act are intended to democratize investment opportunities using the Internet and have attracted the most public attention. But another part of the law may have the most impact.

Here is the background. U.S. securities laws have a private-market exemption, called Regulation D, that allows companies to sell securities to accredited investors with high net worth (essentially more than $1 million excluding a home). The exception means the companies don’t have to go through the SEC’s costly and time-consuming registration and reporting requirements for public offerings. The securities can also be resold to financial institutions that hold a required minimum value of securities investments.

But the securities laws have also banned general solicitations for these private-market offerings—and Title II of the JOBS Act lifts this ban. This means that a company, investment fund or seller now can publicize its offerings via the Internet or traditional advertising media, as long as the ultimate investors are accredited or qualified institutional buyers.

One of the most significant advantages that public markets have held over private markets is the ability to generate substantial market liquidity by advertising to a wider public. Once the SEC implements the legislation, that advantage will gradually fade away.

Until the JOBS Act, Regulation D effectively allowed companies and funds to raise capital only from investors with whom they already have a pre-existing relationship. So money typically flowed into a deal through broker-dealers or arbitrary social networks. This process shuts out a wide swath of prospective investors and, thanks to the lack of a robust trading market, results in lower prices for the securities.

By rolling back the ban on general solicitation, fund offerings and resales of unregistered securities can now flow through vast Internet-based broker-dealers and other finance networks, potentially giving a steroid shot to private capital markets.

According to the Angel Capital Association, there are 8.6 million accredited investors nationwide, of which only 3.1% currently invest in business startups through private markets. The large pool of untapped investors and capital may result simply from a shortage of information regarding investment opportunities or concerns over private market liquidity.

Thanks to the JOBS Act, private capital markets will enjoy increased transparency and therefore greater efficiency. They will also likely experience substantial new capital inflows due to the widespread advertising of offerings. If high-quality companies and funds have access to broad and deep pools of capital in private markets, then the question becomes why many of them would bother with the regulatory compliance and shareholder-management costs of public markets.

We anticipate a paradigm shift in how companies raise money, as they increasingly shun the highly regulated, costly and volatile public markets in favor of now deeper and more efficient private markets. This could be a boon for capital formation.

But it could also mean fewer investment opportunities for the general public. The most promising companies may delay or never file IPOs and instead seek capital on private exchanges not accessible to those who don’t qualify as accredited investors—which is 97% of the U.S. population. Meanwhile, novice accredited investors may be bombarded with solicitations for private placement opportunities, without some of the regulatory oversight provided in public markets.

For lawmakers and regulators, however, perhaps the lessons from the success of private markets can help with a reform of public securities regulations, many of which were written nearly a century ago and, at least in part, are the reason for the continuing privatization movement.

——————–

Michigan Union Tell-All

A memo shows how unions hope to keep coercing worker dues.

When Michigan became the 24th right-to-work state late last year, everyone knew unions would try to overturn or otherwise neuter the law. Less expected was that they would do so at the expense of their own members.

That’s the message from a December 27-28 memo to local union presidents and board members from Michigan Education Association President Steven Cook, which recommends tactics that unions can use to dilute the impact of the right-to-work law. One bright idea is to renegotiate contracts now to lock teachers into paying union dues after the right-to-work law goes into effect in March. Another is to sue their own members who try to leave.

“Members who indicate they wish to resign membership in March, or whenever, will be told they can only do so in August,” Mr. Cook writes in the three-page memo obtained by the West Michigan Policy Forum. “We will use any legal means at our disposal to collect the dues owed under signed membership forms from any members who withhold dues prior to terminating their membership in August for the following fiscal year.” Got that, comrade?

Also watch for contract negotiations in which union reps sign up members for smaller pay raises and benefits in exchange for a long-term contract. “We’ve looked carefully at this and believe the impact of RTW [right to work] can be blunted through bargaining strategies,” Mr. Cook writes.

The union filed its inevitable lawsuit against the law last week. But in his memo, Mr. Cook admits this is a long shot, as is a challenge based on technicalities like the law’s carve-out for police and fire fighters. “Because of wording contained in the Act,” Mr. Cook writes, “challenging the carve out might not strike down the Act but could merely put police and fire into the same RTW pit the rest of us are in.”

Unions may have learned from last year’s meltdown in Wisconsin over Governor Scott Walker’s reforms. While Big Labor waged an unrelenting campaign to overturn the law in court and to recall Mr. Walker and Wisconsin legislators, there has been little serious discussion of a similar effort against Governor Rick Snyder in Michigan. “If the goal is to undo RTW, this is the least appealing of the options,” Mr. Cook writes of potential recalls.

The pattern in new right-to-work states is that union membership plunges when it is voluntary. That’s what happened in Wisconsin and Indiana, and it will probably happen in Michigan too.

Yet the most revealing news in the Cook memo is how little the union discusses assisting workers so more will voluntarily join unions. Instead the focus is how to continue coercing workers to keep paying dues. No wonder that the percentage of government workers who belong to unions fell last year. The Cook memo is damning proof that the main goal of union leaders is to enhance the power of union leaders, not of workers.

Why would anyone want to read that?

Excerpt from a book review in The New Republic of the latest Wall Street expose, Why I Left Goldman Sachs: A Wall Street Story. Review by Michael Lewis, author of Liar’s Poker (and Moneyball). Full text here:

Stop and think once more about what has just happened on Wall Street: its most admired firm conspired to flood the financial system with worthless securities, then set itself up to profit from betting against those very same securities, and in the bargain helped to precipitate a world historic financial crisis that cost millions of people their jobs and convulsed our political system. In other places, or at other times, the firm would be put out of business, and its leaders shamed and jailed and strung from lampposts. (I am not advocating the latter.) Instead Goldman Sachs, like the other too-big-to-fail firms, has been handed tens of billions in government subsidies, on the theory that we cannot live without them. (Blog note: Thank you, Tim Geithner, Ben Bernanke, and President Obama.) They were then permitted to pay politicians to prevent laws being passed to change their business, and bribe public officials (with the implicit promise of future employment) to neuter the laws that were passed—so that they might continue to behave in more or less the same way that brought ruin on us all. And after all this has been done, a Goldman Sachs employee steps forward to say that the people at the top of his former firm need to see the error of their ways, and become more decent, socially responsible human beings. Right. How exactly is that going to happen?

If Goldman Sachs is going to change, it will be only if change is imposed upon it from the outside—either by the market’s decision that it is no longer viable in its current form or by the government’s decision that we can no longer afford it. There is a bizarre but lingering aroma in the air that the government is now seeking to prevent the free market from working its magic in the financial sector-another reason that the Dodd-Frank legislation is still being watered down, and argued over, and failing to meet its self-imposed deadlines for implementation. But the financial sector is already so gummed up by government subsidies that market forces no longer operate within it. Could Goldman Sachs fail, even if it tried? If someone invented a cheaper way to finance productive enterprise, would they stand a chance against the big guys?

Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher’s office and offers to write up his experiences, the publisher looks at him blankly and asks, “Why would anyone want to read that?”

Exactly.

Who Buys Whom? The Politics of Wall Street.

This article helps explain the cozy relationship between Washington and Wall Street. Most voters think Wall Street has always favored Republicans, but it was the Clintons who recognized how they need to court the financiers in order to control national politics. You can be sure the Clintons are having fits watching Obama undo all this work in two short years. Many of the financial policymakers working in his administration are Wall St. alumni, but Obama took the money and then used the bankers as political scapegoats. That’s not how Faustian bargains usually work out.

From the WSJ:

Goldman Turns Tables on Obama Campaign

 By LIZ RAPPAPORT and BRODY MULLINS

 

When Barack Obama ran for president in 2008, no major U.S. corporation did more to finance his campaign than Goldman Sachs Group Inc.

This election, none has done more to help defeat him.

Prompted by what they call regulatory attacks on their business and personal attacks on their character, executives and employees of Goldman Sachs have largely abandoned Mr. Obama and are now the top sources of money to presidential candidate Mitt Romney and the Republican Party.

In the four decades since Congress created the campaign-finance system, no company’s employees have switched sides so abruptly, moving from top supporters of one camp to the top of its rival, according to a Wall Street Journal analysis of campaign-finance data compiled by the nonpartisan Center for Responsive Politics.

Employees at Goldman donated more than $1 million to Mr. Obama when he first ran for president. This election, they have given the president’s campaign $136,000—less than Mr. Obama has collected from employees of the State Department. The employees have contributed nothing to the leading Democratic super PAC supporting his re-election.

By contrast, Goldman employees have given Mr. Romney’s campaign $900,000, plus another $900,000 to the super PAC founded to help him.

Underscoring the magnitude of the reversal, Goldman has been the No. 1 source of campaign cash to Democrats among companies during the 23 years the Center for Responsive Politics has been collecting such data.

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In interviews with more than a dozen past and current Goldman executives, many said they felt betrayed by Democratic lawmakers and the White House, for years considered friendly allies. Several Goldman executives said they didn’t want to speak out publicly against the president, and that their donations speak for themselves.

Jim Donovan, a banker formerly in charge of Goldman’s relations with Bain Capital, the private-equity firm once run by Mr. Romney, helped draw his colleagues’ attention to the GOP candidate. “As a longtime friend to Mitt and Ann, I can attest that his conviction and strength on fixing the U.S. economy is compelling as are his values,” said Mr. Donovan, who handles Mr. Romney’s personal investments. “That is why there has been such a strong outpouring of support for Mitt from all sectors.”

A Goldman spokesman said, “Donations are made by individual employees according to their own views.” Goldman is prohibited by law from making corporate donations to political candidates; the firm also has a rule against donating to super PACs and other independent entities.

Resentments against the White House began, said senior Goldman executives, because the firm thought it would be consulted when the Obama administration began crafting regulations in response to the financial crisis. They weren’t. Instead, they were surprised by a measure dubbed the Volcker rule, which would damage one of Goldman’s lucrative businesses.

Goldman executives, especially those who had raised millions of dollars for Mr. Obama’s election, said they were offended by the president’s populist rhetoric, including his famous quip about “fat cat bankers.”

“Look at what he did—he attacked those guys and made it personal,” said Rick Hohlt, a financial-services lobbyist. “In the old days you give money because you want to have a seat at the table even if you get screwed. But they weren’t even offering a seat at the table.”

Both the White House and the Obama campaign declined to comment on the Goldman contributions.

The alarm sounding Goldman’s shift came during a May 2011 Romney fundraiser at the Ritz-Carlton hotel in Manhattan, not far from the firm’s headquarters in Battery Park. The private luncheon was attended by so many senior executives that people referred to it as Mr. Romney’s “cotillion,” his debutante-style introduction into Goldman society.

Goldman’s changing allegiance reflects a broader turnabout in the financial-services industry, once a top source of campaign cash for the Democratic Party.

Employees of J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp., Morgan Stanley and Goldman Sachs—five politically active banks—donated $3.5 million to Mr. Obama in 2008. They have given Mr. Obama $650,000 for the 2012 race, while sending $3.3 million to Mr. Romney.

Financial services was the second-largest source of campaign money to Mr. Obama’s 2008 election, donating a record $43 million. This election, people in the industry have given him $12 million. Mr. Romney, meanwhile, has received more than twice as much, making the financial-services sector his top source of campaign money.

At Goldman, the switch goes beyond the presidential contest. In 2008, its employees gave 75% of their $6 million in donations to Democrats; this election, 75% of their $6.5 million in contributions has gone to Republicans.

Both presidential candidates have plenty of campaign money. Mr. Obama announced this weekend he had raised a record $181 million in September.

Republicans haven’t yet said how much Mr. Romney raised last month. In August, both sides broke previous records: the Obama campaign and its affiliates raised $114 million; Mr. Romney and his affiliates took in $111 million.

In total, Democrats have raised $742 million for the 2012 presidential election, while Mr. Romney has raised $638 million. Super PACs supporting Mr. Romney have far outraised those backing Mr. Obama, but labor unions are countering that spending with their own.

“Government Sachs,” as the firm is known to its detractors, has long seen executives move seamlessly between Washington and Wall Street. Goldman has supplied, for example, two former Treasury secretaries—Democrat Robert Rubin and Republican Henry Paulson—and a former U.S. senator, former chief executive Jon Corzine, a Democrat in New Jersey.

The mingling of finance and politics began in the 1930s with Sidney Weinberg, a self-made man who ran Goldman for three decades and was a top fundraiser for Franklin D. Roosevelt. With Mr. Roosevelt’s blessing, he formed the Business Advisory and Planning Council, the trade group that introduced executives to government leaders.

Since the Center for Responsive Politics began tracking campaign donations by company employees in 1989, people at Goldman have given more than $22.4 million to the Democratic Party and its candidates. That is the most among employees of all companies and on par with the largest labor unions. Goldman is between the AFL-CIO, $18.5 million, and the United Auto Workers, $27.5 million—totals that include donations from both employees and the unions. The American Federation of State, County and Municipal Employees is the largest contributor to Democrats at $45 million.

In March, the company’s CEO, Lloyd C. Blankfein, sent a companywide email to Goldman employees encouraging them to donate to the Goldman PAC, which doesn’t give to presidential candidates. Mr. Blankfein has identified himself as a Democrat but hasn’t donated much to the party since a $35,000 contribution in 2007.

Goldman president Gary D. Cohn gave $75,000 to Democrats in 2008. In this election season, he has given $35,000—75% to Republicans. Newly named Chief Financial Officer Harvey Schwartz has spent more than 90% of his donations this season on Republicans after a lifetime of Democratic giving.

After the financial crisis, Goldman became politically toxic, its name increasingly associated with greed and excessive pay. Politicians from both parties began returning donations.

Goldman executives complained they weren’t being heard in Washington, and one reason cited was the Dodd-Frank financial services regulation bill supported by Mr. Obama and congressional Democrats. Analysts say the new rules—including demands on how much cash cushion banks must store, their use of derivatives and limits on risk-taking—have shrunk bank profits in the past two years.

Wall Street pressed hard against the new rules, but many investors were heartened by the increased oversight. Goldman’s shares have rebounded 35% since their low point in October 2008, closing Monday at $119.46 a share. The S&P 500, measuring the largest U.S. companies, has rallied 62% in the same period and has more than doubled since its rock bottom in March 2009.

Four years ago, Goldman shared in bailout funds from the Troubled Asset Relief Program, money the firm said at the time it didn’t need. The capital helped rebuild investor confidence, but made Goldman more accountable to regulators.

One part of the new law, the Volcker rule, was designed to limit risk-taking—in particular, trading by banks for their own profit rather than for customers, known as proprietary trading.

Though the final rule has yet to take effect, Goldman has already shut down proprietary trading desks, divested other investments and shed securities. The desks had generated about $200 million in revenue a quarter. Revenues from this business unit accounted for as much as 10% of revenue some years.

The rule wasn’t targeted at Goldman, but it hit the firm harder than other Wall Street firms because Goldman Sachs doesn’t offer such retail services as credit cards or home mortgages to make up for lost profits.

In April 2010, the Securities and Exchange Commission accused it of financial misdealing in a mortgage-related deal. The SEC said the firm misled some clients by selling them mortgage-related securities months before the crash of the housing market. They alleged it was unfair to not disclose that another client, a hedge fund, had helped design the securities and bet they would fail.

After the SEC filed charges, Democrats called Mr. Blankfein and other Goldman executives to Capitol Hill for days of televised hearings. Democratic Sen. Carl Levin of Michigan accused Goldman of “unbridled greed” and, a year later, of lying to Congress.

Goldman agreed to pay a $550 million fine. It acknowledged mistakes but not any wrongdoing. The Justice Department said in August that it wouldn’t investigate Mr. Levin’s allegation of contempt of Congress.

The last straw for many came two weeks later. At the annual White House Correspondents Dinner, the president drew laughs at their expense. “All of the jokes here tonight are brought to you by our friends at Goldman Sachs,” Mr. Obama said, referring to the SEC allegations. “So you don’t have to worry—they make money whether you laugh or not.”

A year later, Goldman senior executives held their Romney fundraiser at the Ritz-Carlton, drawing 80 people.

Mr. Romney was introduced by John Whitehead, a former Goldman chief who served as a deputy secretary of state in the Reagan administration. Mr. Whitehead is what Goldman partners call a “credentializer,” someone whose political opinions matter at the firm. Executives attended from all arms of Goldman—including investment banking, money management and technology banking.

The event raised about $70,000. But to Goldman executives, more important was the signal that it was acceptable to support the Romney campaign.

Muneer Satter, then a Goldman partner, encouraged his colleagues to open their wallets. Based in Chicago, Mr. Satter supported Mr. Obama before his 2008 presidential bid. Mr. Satter also donated to Mr. Romney’s unsuccessful effort to win the Republican nomination that year.

This election, Mr. Satter is backing Mr. Romney. He is helping with fundraising and donated $310,000 to a super PAC supporting Mr. Romney. “There are people on both sides of the aisle and there always have been at Goldman,” he said. “People make their own judgments about who can actually solve problems.” He said he believed Mr. Romney was best suited to help the economy and the nation.

Mr. Satter, who left Goldman in June on good terms, had worked in private-equity funds imperiled by the Volcker rule.

Goldman partner Henry Cornell donated to Mr. Obama in 2008 and is now a vocal Romney supporter. Soon after Mr. Romney announced he was running for president, Mr. Cornell sent him a check for $2,500.

In May, Mr. Cornell held a fundraising dinner for Mr. Romney at his apartment in Manhattan’s Upper East Side. There were four dinner tables, each seating 10 people at $75,000 a plate. Among the guests was Mr. Cohn, the president of Goldman, who didn’t pay to attend.

Bruce Heyman, a 32-year Goldman executive based in Chicago, is one of the firm’s few outspoken Obama supporters. “I am sensitive to the emotions” of Wall Street, he said. “But if you look at the facts, Mr. Obama is pro-business.”

Mr. Heyman serves as a top fundraiser for Mr. Obama, and his wife is helping run the president’s re-election campaign in Illinois. Last month, he was one of a handful of Goldman executives in Charlotte, N.C., to attend the Democratic National Convention.

On the night of the keynote speech by former President Bill Clinton, Mr. Heyman met with two other Goldman executives: Jennifer Scully-Lerner, a former staffer at the Democratic National Committee, and Jake Siewert, a former aide to both Mr. Clinton and Treasury Secretary Timothy Geithner.

At a party that night, they joked they were probably the only Goldman people at the convention.

Taleb on Uncertainty, Predictability, Risk and Fragility

This presentation sounds esoteric, but the basic analogy to nature is fairly simple. Nature survives by organizing itself through decentralization and diversification. Uncertainty then, does not often result in catastrophes (the dinosaurs are the principal exception). We should be organizing our society the same way – by using markets to decentralize and diversify. Our political institutions too. For example, health care cannot be centralized without dehumanizing the patient.