The Goldman Suit: Why Do We Hate Bankers?

Why does everyone hate bankers and rich people when 99% of humans want to be rich?

In this Web 3.7 world, time to market is critical. I knew when I had the thought to portray Goldman Sachs as organizational Mr. Potter to the average American’s Bedford Falls citizenry, I had to act fast. Despite my intended quickness, several publications of varying degree of import beat me to the metaphorical punch.

Don't hate the player!

But it’s not The Smatter’s role to report tainted timely news soaked with melodramatic metaphors. The Wall Street Journal does that from the Right, The New York Times does that from the Left, and then Jon Stewart makes fun of it all, from the safety and comfort of his customized left-leaning anti-swivel desk chair at The Daily Show. I respect and patiently listen to them all.

No, The Smatter exists to exploit this bifurcation of taint and foster intellectual debate toward an actual solution, which will almost always necessarily be somewhere in the Middle. In the case of SEC v. Goldman Sachs: Do exactly what you’re doing, people, and nothing more.

In our imperfect capitalistic system, BSDs take risks, and sometimes people get defrauded and/or screwed, whence our regulatory bodies swoop in to sue. Checks and balances. A little messy, but they usually do the trick.

I can’t fault the media for leaping all over a good story. We have a well-named French banker-villain (Fabulous Fab!), a monolithic financial superpower (Goldman), and millions of have-nots (everyone else) who are forced to bear witness to (gasp!) the wild success of others.

How can the most prosperous nation in the world be home to so many folks who have nothing? Nothing!

Oh, right, midterm elections are right around the corner. Bankers have been easy targets for nervous politicians for time immemorial, and that ain’t about to change.

So is this just a systematic vilification of rich people to sell papers (er, iPad apps)? If so, today’s media moguls are doing a lousy job. It used to be that you became a mogul to control the media and make sure only nice things were said about you and your rich banker pals. These days, moguls, your myrmidons are minting constant smear pieces about you and your powerful buddies. Damn the irony of technologically advanced democracy!

The issue, I think, is that common folk perceive bankers to profit nefariously from what we in the business call asymmetric information. That is, bankers know more than you do, and they profit from that knowledge. My response is a resounding so what? Bankers (and lawyers, carpenters, doctors, athletes, actors, electricians, entrepreneurs, etc.) invested their time and money to learn more about something and make some money. If you want more money, do the same. Don’t hate the player, or the game. Play the game (within the law).

Read yesterday’s WSJ opinion piece on Goldman. You’d think the SEC was populated solely with morons incapable of basic arithmetic. Goldman might not do God’s work exactly, but it is an important and valuable cog in the capitalist machine, and there’s a good chance all of this ballyhoo will result in the discovery that the firm properly played the game of CYA.

Despite its obvious bias, the Journal makes an important point. Synthetic collateralized debt obligations (CDOs), the investment instruments at the heart of the SEC’s lawsuit, are sold only to sophisticated investors who sign many pieces of paper attesting to said sophistication. The SEC came up with that very good idea, many moons ago. The SEC also says marketing materials and solicitations can’t be misleading, another helpful rule that will be enforced if Goldman did cross the line. So, why has this case become the poster child for more financial regulation?

What we need is encouragement—encourage investors of all experience levels to actually read about and understand what they’re buying as opposed to trusting the salesperson or rating agency. By definition, a “sophisticated” investor is a rich guy. Fab was just doing to guys richer than him what everyone else would love to do to Fab. An overheated modern Robin Hood, he simply wanted to take a few bucks out of pockets deeper than his. The scope of the problem widens of course when less sophisticated investors are ensnared via supposedly conservative investments in companies with insufficient risk controls (AIG, et al).

Now read the NYT piece from yesterday. It’s hard to believe that the two articles are about the same thing. The pure evil that is Goldman, with its dastardly code names and gun-slinging, overpaid traders, conspired to destroy America and maim kittens.

Anyone who bought Goldman’s stock in or around late 2008 has made a lot of money. The company’s main expense is human ingenuity, i.e., salaries. Goldman pays high salaries because the incredibly hardworking people attached to those salaries bring in much more revenue than robots or Rube Goldberg machines could. The firm’s investors know this and willingly gobble up shares in expectation of a positive return. Just ask the U.S. government, which was paid back, with hefty interest, on its investment (er, bailout) in Goldman.

I’m not condoning the behavior of every Goldman employee, especially the bad eggs idiotic enough to send arrogant emails touting their alleged shenanigans.

I am condoning the hardiness of our economic system and current level of government regulation. Things may seem like they go awry quite often, but I argue it’s really more a function of modern media’s ability to inform quickly and at scale without separating hype from truth. We’ve had some serious economic blow-ups in the past, but in the modern interconnected world, the impact of financial disasters is amplified and widely broadcast.

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My advice: Stay calm, diligently and steadily pump funds into a diversified portfolio, and hold on tight for the long haul.

That way, you’ll someday end up as rich as Mr. Potter. But, being an Opie, you’ll put that fortune toward the social good and everyone will love you.

Right?

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6 thoughts on “The Goldman Suit: Why Do We Hate Bankers?

  1. The error in your argument on CDOs is that they’re backed by investments that have no idea they’re involved (pensions, etc.) So it’s not just about protecting the buyers and sellers of CDOs which, as you point out, is unnecessary and is inherent in the transaction itself. My argument for “regulation” is merely to report the transactions publicly so outside investors know what’s up. That’s not too much to ask, is it?

    Also, no regulation changes at all would not prevent future bailouts. So to make that argument you must also argue for either
    a) future bailouts or
    b) no bailouts ever

    No changes to the current system will undoubtedly lead to future bailouts and, quite possibly, insanely high unemployment for many, many years. I hate bailouts and the behavior they encourage so I’d rather have some system where bailouts aren’t an option but that doesn’t simply allow massive banks to fail and cause a decade long ripple effect on the economy.

    What says The Smatter?

  2. I prefer “casual omission” to “error”, but your point is well taken nonetheless.

    By issuing debt in the U.S., you’re playing by the rules of the U.S. markets, in which it’s perfectly acceptable to create derivatives. When you issue a bond, you’re supposed to pay it back, with interest. It’s the uncertainty around the timing and likelihood of those debt payments that creates the risk, and therefore the financial opportunity, in derivatives. Some parties want to reduce risk, others want to make money, and they work in concert to come to market rates. If people and companies borrowed responsibly and paid back their debts on time there would be no CDOs.

    Now, if investment banks are two-timing their clients and playing both sides illegally, they should pay the piper.

    I don’t think we need regulation to aver “No more bailouts.” We just need policymakers who actually understand financial markets and stick to their guns. We have longstanding bankruptcy laws to allow for orderly distribution of claims and assets when things go wrong. I’m not sure codifying the “no bailouts” mentality will do anything if there’s another economic pinch–lawmakers and regulators will always rely on judgment given current circumstances, which is why the quality and knowledge of the people in these roles is so crucial.

    My additional two cents…thank you, Dr. Mungovan, for your thoughtful retort.

    1. The Goldman specifics aside…

      Matt, it is not the asymmetrical information that is the problem. it is the fraudulent dissemination of this asymmetrical information by bankers and financial institutions for their and their clients’ purposes.

      I do not agree with your broad assertion that CDOs would not exist if people and companies simply paid back their loans on time. The most toxic CDOs of 05-07 were created as a way for investment banks to generate more investment (i.e. more profit) from already shitty subprime bonds. and the way to do that was to employ some criminal hocus pocus (hocus-pocus that was derived from greed, not necessity due to defaults): Without actually changing anything about the initial, underlying loans, these CDOs were miraculously transforming b-grade bonds into triple-a grade bonds!. presto! “hey investor — who is legally bound to invest in only investment-grade bonds — i know you can’t invest in these B bonds, but what about if we took a sliver of those bonds and, through the manipulation of rating agencies and bad logic, made them, oh i don’t know, triple-a? would that make you feel better about investing? it would? great!” sure, cdo investors were “sophisticated” and should not have relied solely on rating agencies or the word of their angelic salesperson. but just because they are sophisticated doesn’t mean that they should have disregarded these sources out of hand. simply requiring that a fund manager not invest in anything but investment grade bonds automatically implies at least some sort meaning attached to the ratings.

      of course then you have jackasses like AIG who come in and blindly sell enormous amounts of insurance — using investor money — on these wildly mis-rated packages. why did they sell so much insurance? was it because they didn’t think house values would ever drop or that the vehicles were too diversified to make total failure likely? sure, to some extent. but it also had to do with just not caring enough what was down the line. why spend so much time analyzing this shit when it won’t even matter in a few years (when it all goes to shit)? i will sell this, this and this today, make a fat bonus and hell, if all goes to hell in a couple years, what do i care? i’ll be in new zealand by then, banging some girl half my age and oiling up my bald, fat head.

  3. I like your point about needing policymakers who actually follow the well-established and longstanding bankruptcy laws. The problem as I understand it is some bond holders have influence over certain politicians and successfully lobby to get paid back first, rather than not get paid at all (or get paid less) if the lawmaker actually followed the bankruptcy laws when a financial institution fails.

    Maybe we should make a law that says lawmakers have to actually follow the law when an institution fails. And that, my friend, is how I define irony.

    Good talk.

  4. and btw, why do all bankers and rich people care about getting so much richer when they are already richer than 99% of all humans?

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