A specific culture is not only the "Secret Sauce" of Goldman Sachs, but of our Western society at large, especially of the Northern European society (and its derivatives, all those formed by the ideas of the Enlightenment and with our Generalized Reciprocity, as R. Putnam [Book: "Bowling Alone"] calls it). Our current economic system, starting in the late senventies, is rapidly destroying that very basis of our societies' Secret Sauce. Sucks.
Paul Goodman published "Growing Up Absurd" in 1960. I wonder how much of our secret sauce is based on people trying to escape the absurdity of their environments --- would we have a Silicon Valley if people felt comfortable and happy remaining in their childhood communities?
This is a fairly content-less piece. As near as he comes to naming a specific problem or proposing a specific solution is this quote:
> Robert Reich, for example, has long argued that "professional companies should not be permitted to become publicly held corporations." As he puts it, "Such a step puts them into high-stakes competition for investors, pushing them to maximize profits over their responsibilities to the public."
And even that's pretty hand-wavy. What makes a "professional company" and why would such a thing have a "responsibility to the public" above and beyond any other company?
Goldman may be a bogeyman to a lot of folks, but at least they had the sense to get out of the crazy CDO world as fast as they could. If you're going to spend pages explaining how "toxic" the environment is there, some specific, verifiable examples would be nice. Neither Smith nor Lessig provide any. Goldman's clients aren't morons, and if they thought they could do better elsewhere, they were and are free to stop doing business with GS. Until you can really nail Goldman with black and white evidence of fraud, it's hard to take these generalized allegations seriously.
Assuming this comment is a response to what the article said, your reasoning is circular. Lessig blames both the change in laws/regulations and Goldman going public for the issues.
We can't nail Goldman with fraud under the existing laws. That's his point: laws and regulations should be reverted/changed to criminalize some of their current behavior.
Professional Companies are companies that provide professional services. These are companies that are hired because they are licensed to do something. They need to be licensed because their field is sufficiently complex or opaque that their clients cannot evaluate their competence or trustworthiness.
He suggests these company should not be able to go public because this class of companies cannot be fairly evaluated by the market without creating perverse incentives.
This is not quite correct. Senior bankers (and certainly senior institutional salespeople, of which Greg Smith was one) are typically required by their firms to be licensed by FINRA. Certainly not all investment bankers or traders are required to be licensed (and I don't think they should be), but a significant fraction are.
Also, fwiw, mortgage brokers and lawyers are required to be licensed in almost every state. Licensing--or lack thereof--has little to do with ethical behavior.
Licensing almost always includes a legal commitment to specific ethical behaviors, fiduciary duty and the like. That is one of the main differences between licensed professionals and flea market vendors. Doctors, lawyers, and engineers all make specific ethical commitments in order to win authorization to practice.
That's true, almost every license for any profession (including everything from accountants to sports agents to, in some states, interior decorators and hair braiders) has an ethics component.
My point is that it's trivial to find examples of unethical behavior by folks with licenses, so clearly the license alone isn't sufficient. Many bankers are already licensed, and licensing won't change the behavior of the ones inclined to take huge risks. Maybe it helps at the margin, but it's not a cure all by any means.
I'm sorry, Lessig didn't name a single repealed regulation in his piece, nor how maintaining such a regulation would have concretely affected some action that Goldman took. As I said, it's hand-waving.
"The Big Short" provides a great deal of context to the behavior of financial services firms, and Lessig's arguments seem to completely align.
The problem with financial services companies being public is that the investors aren't leveraging their own money when they make risky bets. If a bet goes sour, the stockholders are ultimately responsible for absorbing the loss.
Goldman and its ilk are scrutinized for good reason. It's strange that you should compliment them for exiting the CDO market. Shouldn't they instead be condemned for entering it in the first place?
What about the SEC investigation into Goldman knowingly selling junk securities to customers [1]? The fact that they were only fined $550m suggests that - as Lessig argues - we are under-regulated. This shouldn't be allowed to happen in the first place.
The problem you describe infects all public corporations, not just in the finance industry. It is why management of big public companies tend to pillage, not produce.
> And even that's pretty hand-wavy. What makes a "professional company" and why would such a thing have a "responsibility to the public" above and beyond any other company?
I suspect he's using the word "professional" here in the more traditional form. He's roughly referring to careers like doctor, lawyer, banker, where there is usually formal licensing based on public interest.
That's e.g. why there is a lot more paperwork to file when you start a hospital or a bank than a widget shop.
I believe you are missing the point. It is not about who provides a better service, or fraud. It is about long-term stability.
Goldman has made extraordinary profits. And done well for their customers. But it is becoming increasingly clear that the outlook is becoming more and more myopic. Profit ≠ Profit, if one is short-term and one is long-term. They are different beasts. Goldman used to be the king of kings with respect to earning long-term profit. Mr. Smith points out that long-term profit has been sidelined for short-term profit. Both are still profit - but one has a sustainable culture, one does not. This is a more nuanced issue than 'good company', 'bad company' - the qualification, 'in the moral way' becomes necessary.
A professional corporation is a specific type of corporation.
Legal regulations applying to professional corporations typically differ in important ways from those applying to other corporations. Professional corporations [...] do not usually afford [...] the same degree of limitation of liability as ordinary business corporations.
I may be wrong but I interpreted a "professional company" as a "professional services company" Companies where the main value offered is the services of the partners of the firm. As far as I knew, these companies were not public because they reserve stock for the professionals working in the firm.
This is one of the few things I've read on CNN in a long time I like. Lessig doesn't go into details about regulations, but I would think most people are familiar with the repeal of Glass-Steagal and the de-regulation that began under Reagan in the 80's.
GS has a conflict of interest, because it trades on both ends. It sells products to a client, but is often on the opposing side of those trades. That's why GS is so profitable, at least in the short term. The funny thing is all the people trying to defend GS, as though having undisclosed interest in the deals they do with clients is just fine. Looking back on the wreckage, bank bailouts and other things that have nearly brought the economy to a halt the last few years, I don't really understand how average people who don't have a vested interest in wall street banking can support any of those firms.
Actually, no, most people are NOT familiar with the repeal of Glass-Steagall (not Glass-Steagal, incidentally). Including you; if you were you'd realize that there's no coherent argument for how the so-called "repeal" of Glass-Steagall[1] actually led to the financial crisis or to increased profits for GS. Lessig didn't name an actual regulation that might have caused this, and neither have you. There's a reason.
Further, you fundamentally misunderstand how markets work, what GS is doing in these cases, and even what a conflict of interest is. What GS is doing is called "being a broker"[2]. If you don't understand what a broker is, then you may not be well placed to pontificate on financial markets.
[1]: Everyone and their dog likes to trot out the "repeal of Glass-Steagall" and feel clever. If pressed, a few of them will even stammer out something about it being a law that seperated investment and commercial banking. In actuality, the main function of Glass-Steagall was setting up the FDIC, and it's never been repealed. It did contain a lot of other rule changes and regulations, most of which have been repealed decades ago - and good riddance. Do you think it should be illegal to offer interest on a checking account? No? Great, you too are a supporter of the "repeal" of Glass-Steagall. As for the restriction on retail and investment banking...god only knows how that's supposed to have prevented any problems. Not only did it not do what it claimed to do (Citibank merged with Saloman Smith Barney while the rules were nominally still in effect), nobody can explain how the rules intention would have done anything worthwhile. None of the competing theories of "what went wrong" and "how to stop it" have anything to do with seperating commercial and investment banking (and none of the large merged banks failed while several large banks with only commercial or only investment banking operations did fail). So...
[2]: Of course, maybe you want to argue that being a broker is illegal? Or should be illegal? Pull the other one, it's got bells on.
Ok, you got me, more concisely, Sections 20 and 32 of the Glass-Steagall act of 1933 were repealed in 1999 after at least two decades of hard lobbying.
"Then, in 1998, in an act of corporate civil disobedience, Citicorp and Travelers Group announced they were merging. Such a combination of banking and insurance companies was illegal under the Bank Holding Company Act, but was excused due to a loophole that provided a two-year review period of proposed mergers" - http://www.commondreams.org/view/2009/11/12-8
So, without the repeal, Citibank would have probably been forced to release Travelers, at the least. Volcker and the Fed were opposed to slackening of regulations without new regulations in 1982 when the FDIC ruled in favor of banks being able to take on subsidiaries to underwrite and deal in securities.
The reason it's important to separate the banking activities, is risk. As we have recently seen with MF Global, trusting a company to follow rules about accounts not being used to cover trades are not well followed.
I make no claims of expertise on brokers. GS, however, was both a partner to the trades it made and the broker to clients. Basically betting against the people it was selling securities to. http://www.sec.gov/news/press/2010/2010-59.htm
Technically I suppose GS wasn't on the other side of the trade, but since Paulson & Co. were paying GS to offer trades without full disclosure, I'd say it's pretty close.
I make no money (currently) from financial firms outside of my 401(k) holdings, I only make comments on random message boards, but I don't think my viewpoint is as foolish as you would have it be.
Heh. First, Commondreams is not necessarily the best source for a citation. Let's turn to Wikipedia, which explains the Citibank/Travelers merger is fairly decent detail[1]. In short, while there was a time limit of five years (the two years is only without Fed approval, which in this case they would have received), that only applied to Travelers, not to Citibank owning the investment bank Salomon Smith Barney. But that's really a minor quibble. Let's step back and think about the overall purpose of those restrictions.
The standard "Glass-Steagall repeal caused the crisis!" meme focuses on the idea that we don't want banks wagering FDIC-insured retail deposits on the financial markets and going bust, taking our savings accounts with them. And maybe we don't - but this did not actually happen. No retail bank went bust due to their investment banking arms getting overextended. Instead we saw retail banks go bust due to their retail banking operations (specifically, mortgages), and we saw investment banks go bust due to their risky bets on markets. Both of those were always legal under Glass-Steagall.
If the standard "Glass-Steagall repeal is evil" meme has any validity at all, it would seem to be in relation to AIG; an insurer who went bust after making risky bets on the financial markets. Surely Glass-Steagall repeal allowed THAT, right? Nope! The one form of intermingling that actually caused problems during the crisis is the one that wasn't banned by Glass-Steagall. It's no wonder that no serious analysts thinks Gramm-Leach-Bliley had any real impact on the crisis.
So yes, as you say, without repeal Citibank would have been forced - eventually - to sell Travelers. And this would have done...precisely nothing, because as it turns out the purchase of Travelers by Citibank was one of the biggest duds of all time. Nobody actually wants to buy insurance at their bank, and giving access to Citibank (who already had a huge pool of retail deposits) access to the huge pool of premiums Travelers had...did, as near as we can tell, nothing whatsoever. And again, other than AIG (who had no retail banking operations), no major insurance company went under during the crisis, nor did any major bank which went under have an insurance arm. So once again, we ask: Did Glass-Steagall actually prevent anything meaningful?
As for MF Global...yes, they've the villain du jour, and very bad people. But they were not a retail bank, and their operations would have been allowed (or, if you prefer, would have been just as illegal) under Glass-Steagall. Again, what purpose do you think the restrictions in Glass-Steagall served? The only answer is "not letting banks gamble with insured deposits on the financial markets", and MF Global did not do that, and so Glass-Steagall repeal did not impact MF Global. (More generally, what MF Global did is illegal, and so any attempt to argue that MF Global proves we need more regulation is inherently flawed.)
As for the comments about brokers... we're talking past each other. However, since you mention it: There's a lot less than meets the eye to the ABACUS deal. At core, GS's wrongdoing was misrepresenting who picked the CDOs. That's illegal and serious, but they weren't on either end of the trade, much less both. They were more like a sporting goods store selling both AP bullets and body armor to both sides of a gang war. They profited on both ends of the deal, but they couldn't care less which side won. Mind you, GS has often managed to find themselves on both ends of a deal. Check out the deal where GS "helped" El Paso Corp sell itself - suspiciously cheaply - to Kinder Morgan, which GS had a big stake in[2]. Dodgy as fuck. And the deal where GS "helped" Burlington Northern sell itself - suspiciously cheaply - to Warren Buffet (a very big investor in GS) wasn't much better... (Mind you, neither had anything to do with Glass-Steagall.)
There is the point that the investment arms of these banks were "bankrolling" the retail arms. They in fact provided the capital to take the mortgages off the retail banks hands (typically for more than they were worth). This had the effect of encouraging the retail arms to lend to even riskier clients; a positive feed back loop. I think there is probably a case that even a "chinese wall" between these two arms may have reduced the investment arms inducement of the retail arm to take on board such huge risks. As you state though legislating against this is difficult, many so called experts didn't see, or refused to see, this coming. If you put up new rules people will find new ways to get around them. Maybe a social responsibility requirement of the board in the Corporations Act might help? Who knows...
I just cited the commondreams article because it was where I read the snippet (linked from Wikipedia) about Travelers and that's what Glass-Steagall would have clearly had an effect on (regardless of whether it mattered in the long run). As I said, the FDIC ruling in 1982 seemed to open the door to commercial banking being able to hold subsidiaries that deal in securities. Perhaps by the time the sections were repealed in 1999, it had little effect, but there were two decades of financial shenanigans leading up to that point.
If the repeals in 1999 had no effect, why did they need to be repealed?
MF Global is just an example of a firm not following rules about trading accounts.
I think the rules in glass-steagall at the least had a chilling effect, which once removed made the banks suddenly see high returns from high risk. The run into CDO's and new derivatives in 2000-2008 timeframe would still have happened, but I highly doubt the list of endangered banks would be quite as high as it is today. I check the list of newly closed banks every Friday at calculatedriskblog.com.
Greenspan's devotion to market efficiencies also made the Fed unwilling or unable to enforce or implement new regulations, or push congress for power to regulate new financial instruments.
I don't do this stuff for a living, so I'm not going to go find all the regulations and ruling over the last 30 years, but I occasionally listen to guests on The Daily Show that seem to know quite a bit about how financial markets work and read here and there, and my conclusion is that de-regulation up to and even beyond Glass-Steagall repeals in 1999 at the very least amplified the recent financial bombs in the US and around the world. I don't think there is a single "Aha!" moment, it has been a growing problem for 30 years. Quite possibly one of the worst items was a regulation...of de-regulation http://en.wikipedia.org/wiki/Commodity_Futures_Modernization...
Your points on GS seem to line up with the original point about GS being jerks to their clients..."They profited on both ends of the deal, but they couldn't care less which side won". That's the point of the guy that quit, right? GS is screwing their clients, they don't care if the client wins or loses as long as GS wins.
Maybe I'll be less enthusiastic about the rules of Glass-Steagall, but my overall opinion that banking fraud is more rampant after de-regulation and that if I came into a sum of millions the last place I'd trust with my investments is GS, is not changed.
My point is fairly narrow: People love to blame Glass-Steagall, and yet consider the roll call of shame during the GFC: Northern Rock, Bear Stearns, Countrywide, Fannie Mae, Freddie Mac, Merryl Lynch, AIG, Lehman Brothers, HBOS, Fannie Mae, HBOS, Lloyds TSB. Every one of those is on the list for two reasons:
1) Being very large ("too big to fail").
2) Having done stupid things which would have been legal under the restrictions of Glass-Steagall. The details of what each did differ, but in every case the stupid actions did not cross a line between retail and investment arms, or retail and insurance arms.
I think that, if you review the list, it's screamingly obvious that size matters hugely, and any regulation reasonably expected to stop the "too big to fail" problem should be looked at very favourably. (Note: No such regulation has been passed, or seriously proposed.) And to a lesser degree, there are some good arguments to be made for bringing regulation of the "shadow banking" sector into line with the rest of the industry, extending deposit insurance to money market accounts[1], and possibly for reducing government involvement in the mortgage industry[2].
What's not obvious is why a regulation that banned something none of the entries on that list were doing would have helped. You say that it had a "chilling effect", but I'm sceptical. If it wasn't for Glass-Steagall, AIG wouldn't have decided to bet the farm on house price stability? Can you articulate any mechanism for how this might have occured?
(If only Citigroup or Wachovia had failed, there'd be an argument that Glass-Steagall repeal helped create "too big to fail" companies by allowing large specialized firms to merge into behomoth diversified firms - but of course, none of those diversified firms failed. If anything, there's a better argument for how Glass-Steagall repeal helped reduce the damage from the crisis.)
[1]: These factors were significantly involved in several of the largest bank failures.
[2]: From the point of view of the taxpayer, the most expensive failures all involved mortgages, most of all Fanny Mae. Abolishing the GSEs and walking back the bi-partisan multi-decade obsession with boosting home ownership rates seems sensible to me. Even today, the idea is highly controversial though.
There's always someone who speaks at great length about finance while being clueless about the subject.
>(and none of the large merged banks failed while several large banks with only commercial or only investment banking operations did fail)
They didn't fail because the government bailed them out. The government bailed them out because the disruption to society caused by large COMMERCIAL banks failing was intolerable. They needed to be bailed out because they took great risks on the INVESTMENT side. This merger of the investment and commercial side was prohibited by Glass-Steagall. Which brings us around to our initial point: the financial crisis was substantially exacerbated by the repeal of parts of the Glass-Steagall Act, which allowed the risk-taking of the investment banks to imperil commercial banking.
And no, Glass-Steagall doesn't have anything to do with offering interest on checking accounts.
"There's always someone who speaks at great length about finance while being clueless about the subject. [...] And no, Glass-Steagall doesn't have anything to do with offering interest on checking accounts."
snicker Try section 11(b), which was implemented as the infamous "Regulation Q". Normally I'd refrain from mocking someone for an innocent error on a side point, but the irony here is just too delicious. Even if you are completely clueless about Glass-Steagall, this is discussed in detail in the Wikipedia page about it. It takes a special person to know nothing about a subject, not even do the 20 seconds of research needed to confirm a claim, and still feel like insulting other people for their factual claims is a good idea.
(As for your substantive point... No. Countrywide, for example, was not taking risks on the "investment side" under the meaning of Glass-Steagall; they didn't even have an investment side. The core damage there was a pure-play retail bank making crap loans, and Glass-Steagall says that's awesome. You're arguing against the repeal of a regulation which never existed. Might have been a good one though.)
The most recent Econ Talk (http://www.econtalk.org/) is an interview with a former Goldman quant who said that Goldman's culture changed "markedly" for the worse when it went public. Before that, Goldman's partners had a huge incentive to make sure "psychopaths" weren't handling the money, and access to capital was quite limited. Capitalization was a constant problem, and they fought for it. After going public, that problem went away, and so did the fear of the psychopaths.
It is a world of buy and selling securities. There is always someone else on the other end. GS was one of the first to realize that the subprime mortgage market was about to blow up. To cover their asses they began selling everything they owned and at the same time bought CDS's.
So if a German bank that GS does business with still thinks its a good idea to buy some CDO packaged with "AAA" bonds without doing their diligence then GS should have every right to sell them some CDO's, and also short those same securities. They realized there was a problem before everyone else, and they exploited those people to profit from them.
Isn't that how the business world works? Especially with start-ups? You look for inefficiencies and try to capitlaize on them. You use the information that others dont have to create value.
Isn't that how the business world works? Especially with start-ups? You look for inefficiencies and try to capitlaize on them. You use the information that others dont have to create value.
I don't know about other startups, but speaking for myself, I don't consider the hoarding of information a virtue. I use capabilities that others don't have to create value. Taking advantage of information asymmetry is, IMO, exploitative rather than creative.
While I am /in no way/ a fan of GS (or the entire sector), I find the sudden blitz on GS to be quite smelly. First NYTimes publishes a relatively random VP's resignation slam-bye. Matt T. from Rollingstones was also cheerleading. And of course, NYTimes had a front page story followup. And now, this.
What is going on? Have they found their scapegoat for the generally sociopathic (and well hated) sector?
There was one bridge-burning editorial by an outgoing VP. Then you have Taibbi doing what he's done day-in, day-out for quite some time now. And after that is just the 24-hour news groups doing what they do, which is latching onto and flogging the stories of the day that are generating interest.
And when you mix Rage-At-Wall-Street with what amounts to a Gossip column, the reader response is pretty predictable.
GS has thousands and thousands of VPs, many with as few as one direct report. This particular former VP apparently had zero direct reports. Part of what makes this story smelly is the prominence being given to this one voice; very little of the reporting on the story puts his title (normally a fairly senior one) into perspective.
According to the Dealbook post mentioned downthread, almost 1/3rd of all of Goldman's employees have the same title this person does.
And I'm pretty sure that if any of those other VPs were willing to pen a bridge-burning gossip piece, plenty of editors would be competing to give them space.
Similarly, the tilt in coverage can't be a new concept for anyone here. We've known for quite some time that you can more-reliably predict news coverage based on the outlet's target market than based on the facts.
The idea that some news agencies are playing this up and others are playing it down can't possibly be a surprise.
Then how come NYTimes is mum on Dr. Pham's spill the beans press release to zerohedge.com of yesterday? (Google: Pham CGO, and see if NYTimes.com shows up ..)
It's a good question, but I would suggest it's just that robosigning as a topic never much caught on with the wider public. (tragically)
And if we're still talking about possible evidence of concerted press collusion, it's worth noting that Taibbi has been pounding on the robosigning drum far louder and longer than any 'traditional' news organization. So surely we can't consider his coverage of Goldman to be evidence of a concerted 'blitz' and yet discount his coverage of robosigning in making an argument of coverup.
"Dear NYTimes, I am about to resign from GS. Can we coordinate, please?" "Sure. We kept mum when GS executives were running up and down the NYC-DC corridor 'transferring' Trillions of Dollars from public treasury, but now that the damage is done, let's get righteous. It is fit to print, now." /s - not real quotes.
Lessig does not make the case for why Goldman, in particular, was so harmed by the act of going public. The incentives he cites exist for all public companies, and many public companies have existed, and done good work, for decades.
Speaking of which, before we talk about the incentives that led to Goldman's cultural decline, how about some objective confirmation that their culture has in fact declined? The article is in response to a single executive's published opinion.
Moral fiber is no doubt important. So, too, is culture. But it is a mistake to understand culture without also understanding incentives. The culture that Smith praises was the product of a firm with a particular legal form, in a particular financial environment. At just about the same time, both particularities changed. And given these changes, it is no wonder that the culture Mr. Smith celebrates soon disappeared.
This is wonderful article written by a Harvard Law professor. Normally I don't agree with lawyers, but in this case Lawrence Lessig just tells it like it is without manipulating the facts in a well-respected journal.
