Don’t tread on me…tread on them!

Goldman Sachs second-in-command Gary Cohn warned those assembled at the World Economic Forum in Davos, Switzerland that the drive to impose more regulation on banks could cause the next crisis by pushing risky activities towards hedge funds and other lightly supervised entities.

According to the Financial Times, Cohn said: “In the next few years, the unregulated sector will grow at an exponential rate.  Risk is risk. My concern is that … risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector.”

The FT continued: “One hedge fund manager in Davos dismissed Mr Cohn’s remarks as “self-interested”, however, saying banks use such arguments because they are concerned about losing lucrative business to new entrants.”

Cohn’s remarks are self interested, as are his arguments that regulators ought to focus their attentions elsewhere.  He is also right–the unregulated shadow banking sector could well be the center of a future financial meltdown (remember Long-Term Capital Management?).  The answer, of course, is not to lighten up on the regulations that Goldman faces, but to apply those (especially requirements having to do with capital adequacy and transparency) to other parts of the financial system as well.

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