
Lawrence Lessig: What's really wrong with Goldman Sachs - shawnee_
http://www.cnn.com/2012/03/15/opinion/lessig-goldman-sachs/index.html
======
yaix
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.

~~~
redcircle
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?

------
twoodfin
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.

~~~
JoelSutherland
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.

~~~
anamax
> These are companies that are hired because they are licensed to do
> something.

What fraction of GS biz actually involves licensed activities?

Yes, stock brokers are licensed, but bankers aren't.

Most types of financial advisors aren't licensed.

Are any traders licensed?

~~~
hncommenter13
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.

~~~
Drbble
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.

~~~
hncommenter13
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.

------
qdog
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.

~~~
simplefish
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.

~~~
qdog
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.

~~~
simplefish
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.)

[1]:
[http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Fail...](http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Failed_1995_Leach_bill.3B_expansion_of_Section_20_affiliate_activities.3B_merger_of_Travelers_and_Citicorp)

[2]: [http://dealbook.nytimes.com/2012/03/05/advising-deal-
goldman...](http://dealbook.nytimes.com/2012/03/05/advising-deal-goldman-
sachs-had-all-angles-for-a-payday/)

~~~
qdog
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...](http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000)

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.

~~~
simplefish
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.

------
ANH
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.

~~~
pradocchia
permalink:
[http://www.econtalk.org/archives/2012/03/derman_on_theor.htm...](http://www.econtalk.org/archives/2012/03/derman_on_theor.html)

------
Shane_Wolf
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.

~~~
nitrogen
_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.

~~~
Shane_Wolf
I can agree with that.

------
eternalban
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?

~~~
roc
What 'blitz'?

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.

~~~
tptacek
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.

~~~
roc
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.

~~~
eternalban
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
..)

~~~
roc
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.

------
snowwrestler
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.

~~~
Lazare
This doesn't directly answer your question, but it's related:
<http://news.ycombinator.com/item?id=3711278>

------
milkshakes
_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._

------
signalsignal
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.

------
b2spirit
Sachs pronounced sucks.

