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Under the Dodd-Frank financial reform law of 2010, Goldman Sachs had to break up its principal strategies group, the trading unit that had been very profitable. Goldman was considering several options, including moving the traders to another division or shutting the unit altogether. Morgan Stanley was considering ceding control of its $7 billion hedge fund firm, FrontPoint Partners. At Citigroup, executives had sold hedge fund and private equity businesses and were discussing reducing proprietary trading, which relies on a bank’s own capital to make bets in the financial markets. JPMorgan Chase had already begun dismantling its stand-alone proprietary trading desk and was modifying the structure of some investments of One Equity Partners, its internal private equity business. “This is the real stuff,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company. “It shows that if you squeeze Wall Street, like a balloon it will come out somewhere else, and we really are squeezing Wall Street. Their business models are changing.”

However, loopholes in the legislation may enable the banks to continue to trade on their own books, even apart from serving as a counterparty for client transactions. Citigroup and others, for instance, are considering moving proprietary traders to desks that handle trades for clients, although the traders would still be able to make their own bets in the markets. The Volcker Rule’s definition of proprietary trading is open to interpretation. At first blush, it looks watertight: the rule forbids banks from buying and selling financial products for their “trading account.” That, in turn, is defined as an account meant to profit in the “near term” from “short term” movements in prices. Besides not covering such long term bets as shorting in anticipation of a fall in the housing market, the rule states that banks can still trade government and agency securities for their own account. Some of the problems at the hedge fund Long-Term Capital Management stemmed from trying to arbitrage prices between Treasuries of different terms. And the Carlyle Capital Corporation, a heavily leveraged debt fund, crashed in 2008 when prices of Fannie Mae and Freddie Mac mortgage bonds dropped. So in allowing for continued proprietary trading apart from serving as a short-term counterparty for a client’s transaction, the Dodd-Frank Financial Reform law may not change Wall Street’s landskip all that much. This is hardly surprising, as members of Congress allowed the banking lobby to participate in the writing of the legislation in spite of the industry’s culpability in the financial crisis of 2008.

Click to add a question or comment on proprietary trading and financial reform.

Sources:
http://www.nytimes.com/2010/08/06/business/06wall.html?_r=1&scp=2&sq=wall%20st%20faces%20specter%20of%20lost&st=cse
http://www.nytimes.com/2010/08/06/business/06views.html?scp=1&sq=anthony%20currie%20christopher%20swann&st=Search

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

Given the strength of the financial sector’s lobby in Washington, this case involving Goldman suggests that we, the American electorate, were unwittingly putting our financial system and our republics in danger by enabling the lobby to have such effect in watering down the regulatory reform in the wake of the financial crisis of 2008.

In the election cycle in which the US Senate’s agricultural committee took up legislation that would regulate all derivatives (2010), people and organizations affiliated with financial, insurance and real estate companies gave members of the committee $22.8 million. Wall Street firms raised $60,000 at two fund-raisers for the committee’s chair’s re-election campaign in the cycle before the committee took up the legislation. Many of the chairs constituents want a crackdown on the speculation. This put Blanche Lincoln in a difficult situation, ethically speaking. At the very least, accepting money from the firms that would be subject to the legislation involves the appearance of a conflict of interest. I contend that given human nature, even such an appearance ought to be avoided or even outlawed. At the very least, it is unseemly in a republic, and I would argue dangerous to its viability.

Furthermore, as if the banks’ culpibility in the crisis was not sufficient to cancel their reservations at the regulatory table, the Goldman case strongly suggests that the banks ought not to be trusted as contributors to regulatory reform. And yet they push ahead to reduce the regulatation, in spite of it all. A child who drops his milkshake doesn’t turn around and tell his mother that she better not clean it up and that she had better not get involved if it happens again. Rather, such a child stands back. As if there is not enough of a natural feeling of shame at having made a mess, there is, or ought naturally to be, an even greater sense of shame in presuming to be in a position to direct the clean-up according to one’s self-interest over objections that the person who caused the problem is not the one best suited to fix it. Even if corporations can enjoy the legal fiction of personhood, there are actual human beings running them, and it is telling when those people dismiss their innate shame in their presumption–even pretending that it is not presumption! We are to blame in not calling them on it, and relegating them. We must relegate them if they won’t do it for themselves, as would be natural for them to do. In other words, we ought to call the artiface for what it is and relegate it as a parent would naturally tell a spoiled and misbehaving yet dogmatic child to go to his room. We, the American people, are enablers; bad parents. We ought to look toward solving the bigger problem, which the case of the Goldman children intimates.

The theory of regulatory capture points to the government’s need for information that the industry being regulated can provide. This theory ignores the broader power-base that an industry is apt to have in lobbying the government (and supporting candidates). In other words, information is just small change from the standpoint of an industry’s ability to influence a government. A better theory would have its primary focus on the macro level, asking the question, in effect, whether (and how) a republic is compromised by its moneyed corporations and banks. Besides looking at campaign finance law and uncovering actual lobbying practices, we ought to look at how much the society in question values money, commerical gain, wealth and economic freedom. We ought not be limited to the managerial or technocrat perspective in ascertaining whether our financial system and indeed our very republics are in danger from being used by unscrupulous firms or industies according to that which fits their peoples’ desires. Once we have uncovered the real problem, we really won’t have any excuse for not fixing it, and we would be bad parents indeed if we let the children fix it.

Sources:
http://washingtonindependent.com/82571/sec-charges-goldman-sachs-over-subprime-tied-product  http://opinionator.blogs.nytimes.com/2010/04/16/goldmans-stacked-bet/?ref=opinion
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?postversion=2010041616 ; http://money.cnn.com/2010/04/16/news/companies/goldman_sachs_questions.fortune/index.htm?postversion=2010041615 ; http://www.nytimes.com/2010/04/20/business/20derivatives.html?hp
http://www.nytimes.com/2010/04/25/business/25goldman.html?ref=us

In 2010, Eric Jackson, an activist investor and hedge fund manager, averred that Goldman’s board was too cozy and too lacking in financial know-how to diligently oversee top management. He claimed the board was packed with honchos who led companies that had paid large fees to Goldman. Jackson pointed to Indian steel magnate Lakshmi Mittal and former Fannie Mae chief James Johnson as cases in point. The problem with these choices, Jackson said, is that “these people seem to be favorably disposed to senior management’s way of thinking,” and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team. Colin Barr of Fortune argued that the bank’s system of corporate governance was behind the times. He pointed out that Lloyd Blankfein continued to serve as chairman and CEO, even as the trend in recent years had been toward independent board leadership.

After all, one of a board's main functions is to oversee and evaluate the CEO as well as the other top executives. The duality of chairman/CEO is the epitome of a structural or institutional conflict of interest; a CEO who is also chair of the group whose job it is to evaluate the CEO is presuming to evaluate him or herself, in effect. The sheer existence of such an obvious conflict of interest can be viewed as presumptuous. Furthermore, the arrangement itself is an incentive to engage in duplicitous subterfuge. A board of directors is by definition independent of the management because the board’s function is to oversee it.  Overseeing and being cozy are like oil and water.  A “trend” away from conflating the two minimizes the decadence in the problem.  Instead, corporate governance ought to require independence.

When Armstrong was chair/CEO of ATT, I asked him whether giving up the chairmanship wouldn't enable his board to better evaluate him as there would not be the suspicion of a conflict of interest. He replied as though he were president of the United States, saying "the buck stops here."  He went on to say that he had to have complete control or he could not rightly be blamed if his strategy (which was broadband at the time) didn't work.  If his board said no to part of his strategy, it would not be fair to blame him for the failure of his entire strategy. Of course, he could have presented his strategy to his board and if it objected to part of it, the resultant strategy, it could be agreed, would not be considered to be his; he would be evaluated on how well he implimented it. The notion that any sort of check on power renders the power compromised or impotent ignores the basic difference between a board and a management. Managers work within broad strategic guidelines that are set as a matter of policy by a board, and managerial implimentation can indeed be evaluated without compromising it.  In effect, Armstrong wanted to go beyond managing to the property-rights goal-level of owning.  That he was overreaching is all the more reason why an independent board would have been a valuble commodity for ATT.

To be sure, it is difficult to counter the influence that a management has on account of its position vis a vis the company and its board. As a starting point, people having former ties to the management, or even hand picked by the CEO, ought to be barred from serving as directors. It should go without saying that a CEO ought to be barred from serving as the chair of the board.  Conflating these two roles is tantamount to suggesting that a CEO can (and should) oversee himself, which is nonsensical. For there simply to be a mere trend away from this duality essentially “normalizes” that which ought to be approached as an oxymoron--a contradiction in terms. That such a phenomenon would be allowed to exist at all points to the power that CEO's have to define social reality for society. Such power is very dangerous, especially if left unchecked even in the name of "the buck stops here."

Source: http://money.cnn.com/2010/04/20/news/companies/goldman.board.fortune/index.htm

For years, banks and other issuers have paid rating agencies to rate their securities. This is a bit like restaurants paying food critics to write on their food.  In the wake of the SEC’s charge that  people at Goldman Sachs built the Abacus investment to fall apart so a hedge fund manager, John A. Paulson, could bet against it, the Senate’s Permanent Subcommittee on Investigations questioned representatives from Moody’s and Standard & Poor’s about how they rate risky securities. Carl M. Levin, the Michigan Democrat who heads the Senate panel, said in a statement: “A conveyor belt of high-risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on.” Throughout the testimony, the institutional conflict of interest was salient whereby credit-rating agencies put market-share considerations foremost in rating securities presented by the banks that are paying the agencies. Someone at one bank, J. P. Morgan, went so far as to communicate to one of the agencies that the agency’s ratings should reflect market-share considerations.  Essentially, the bank was reminding the agency that the bank was a client. To be fair, the agency replied that such considerations are not part of the ratings process.  However, the testimony before the committee suggested that the reality has often been quite otherwise. The upper managements of the agencies in particular regularly pressure their ratings analysts to rate in such a way that the agency’s market share does not suffer.  In other words, the message is: “Rate so we don’t lose any clients.”

In fact, the agencies even shared their models with the banks.  As a result, the banks could game the models so the securities would get high ratings.  To be sure, there was also fraud involved, such as making it seem like the mortgages in a CDO came from different servicers or different regions of the US.  Some bankers relabeled parts of collateralized debt obligations in two ways so they would not be recognized by the computer models as being the same. Others were also able to get more favorable ratings by adding a small amount of commercial real estate loans to a mix of home loans, thus making the entire pool appear safer. “If you dug into it, if you had the time, you would see errors that magically favored the banker,” said one former ratings executive.  The assymetry was no accident, for there is an underlying structural conflict of interest at the core of the ratings system. The actual clients–the general public that relies on the ratings–are not the parties paying the agencies.  Also, the agencies get more when their ratings are higher because more of the underlying securities are sold.   To demand that an agency be independent of the “client” paying it is to place the agency in a structural or institutional conflict of interest that cannot be effectively remedied by simplying subjecting the agency to higher regulatory standards. Worse still, often times the underlying structure is ignored.

Although not made transparent in the Senate hearing, I want to point to the assumption that the agencies would be able to handle their conflict of interest, even in the face of rising pressure for profits as increasing attention was directed to their stock prices. There seems to be a belief in American society that businesses can rise to the occasion when a structural conflict of interest is involved.  In other words, we tend to mitigate the force of such ethical dilemmas, essentially assuming that human nature can be relied upon to surmount them.  Even in the committee testimony, former employees from the rating agencies suggested that common regulatory standards for rating, similar to the FASB standards in accounting, would suffice. This is actually a rather poor choice of comparison, for the public accounting profession is rife with its own conflict of interest that has thus far been shoved under the rug.  One need only look to Arthur Andersen in giving the go-ahead to Enron’s use of “unrelated” partnerships to hide debt or to Arthur Young knowing of the Repo 105s at Goldman Sachs to question whether using regulatory standards goes far enough.

Institutional conflicts of interest are not solved by common regulatory standards because they too can be gamed. The incentives have not been changed, so we can expect the pent-up water to eventually make its way through the muddy dams we construct.  In both public accounting and securities rating, the “independent” assessors cannot be paid by the institutions whose books or products are being assessed.  The unwarranted assumption that turning these functions over the government is the only alternative adds to the easy decision that simply creating or tweeking regulatory standards must suffice.

As an alternative to having the government rate securities, the financial industry as a whole could be required to contribute to a pool that would fund the rating agencies. The SEC would assess the agencies periodically and decide how much each would receive.  Essentially, the government would be the umpire rather than perform the rating function itself.  As long as the banks do not capture the SEC (which is another problem in need of a solution), they would not be able to pressure the rating agencies.  It might be suggested that industry self-regulation could work. That is, the banks altogether would assess the rating agencies.  However, this alternative would simply allow the banks to collude to pressure the agencies.  We ought not replace the government with one of the teams in performing the role of umpire.

It is unlikely that Congress will go beyond mandating stricter disclosure statements and allowing plaintiffs to sue the agencies. Within the fecklessness of Congress in extracting the structural conflicts of interest from the rating function is a fear that tampering with it might risk the salubrity of the credit markets.   Under this logic, riding the ratings function of a structural bias would somehow compromise the function because the public might get a true look at the lack of credit-worthiness of some of the securities currently deemed credit-worthy. An illusion is thought better, or more expedient, than a solid economy. Besides the dubiousness of such reasoning, there is the argument more generally that we can’t afford to tamper with our financial system as long as it is still at risk.  However, before assuming power, Barak Obama argued that the only time when real change can happen is during a crisis–while the forces of the status quo are temporarily marginalized.   So it would seem that we are in a catch 22–or, more accurately, we have put ourselves in one.   In actuality, riding our financial system of institutional conflicts of interest would strengthen rather than risk our economy.
I suspect that the true reason why neither the ratings nor the public accounting structural conflicts of interest have been removed goes beyond our collective ignorance of the nature of an institutional conflict of interest.  As Dick Durbin said after the  banking industry scuttled foreclosure reform, “the banking industry owns Congress.”  Apparently it owns the credit-rating agencies too, as well as the public accounting firms. The wolves are paying the guards of the chicken coop.  Regulating the pay does not go far enough; we need to address the question of the payor.  Until we do so, we are bound to keep scratching our heads as chickens continue to come up missing.

Sources:
http://www.nytimes.com/2010/04/24/business/24rating.html?hp=&adxnnl=1&adxnnlx=1272117625-MtgpixNdFNobkGOTVoD0NA ; http://www.nytimes.com/2009/12/08/business/08ratings.html?_r=1&ref=business

After watching hours of the US House Government Affairs committee on Investigations’ hearing on Goldman Sachs,  I concluded--totally contrary to the disavowals by the Goldman managers who testified--that there was indeed a conflict of interest between Goldman’s proprietary and market-making functions.  By proprietary, I mean a bank trading on its own books beyond simply being the counter-party in its market-making transactions. In their testimony, Goldman managers presumed that all of the bank’s proprietary transactions are part of its market-making role. However, I contend that the bank has been both a market-maker and a player in those markets, and furthermore that the latter function has affected the former in ways that are intended to benefit the bank. That is to say, Goldman Sachs’ financial interest has been put before that of its customers. In some cases, Goldman’s employees refused clients’ requests for shorts related to the housing market so Goldman’s own profits in shorting the market  could be preserved. Sen. Susan Collins (R-ME) said, “There is something unseemly about Goldman betting against the housing market as it is selling housing-related products to its customers.” Sen. Conrad, a more conservative Republican, echoed this sentiment.  The fact that Republicans on the subcommittee joined with Democrats rather than joined in Goldman’s paradigm points to a major disconnect between Wall Street “speak” and the discourse of the general public.  In other words, the financial managers and the politicians were largely talking past each other.  Even so, the two “worlds” can be translated into a common language that nonetheless finds Goldman culpable, while acknowledging some of the managers’ points.  In what follows, I discuss a number of the points raised in the hearing to bear out my contentions here.

Broker dealers do not have a legal fiduciary obligation to their clients in the US. This, Sen. Collins argued, is the root cause of the conflict of interest at Goldman (i.e., pitching toxic investments to its clients while betting against them).  Goldman bankers view their obligation being to be market makers.  A duty to serve the clients or act in their best interest?   Goldman’s managers tended to affirm the former because where the bank is making markets, similarly to an exchange, it is not in an advising capacity. According to one of the managers, market-makers do not have an obligation to tell clients of the market-maker’s position in the market.  The manager contended that how Goldman is positioned may not affect how the instrument performs.  So long as clients understand what they are investing it, the position of the market-maker is not relevant to the client.

Paulson (of the hedge fund, Paulson & Co) had a role in picking the securities in the Abacus CDO. The rating agency said that if the rating analyst had known this, the rating would have been far different.  Torre, the manager at Goldman who oversaw the deal, claimed in testimony that he had told ACA (the major long buyer) that Paulson was going short, but in a memo from ACA afterward refers to Paulson going long. Paulson was involved in the selection of the securities, according to Torre, though ACA left off more than half of the securities that Paulson had recommended. Even so, Paulson was in the room as the securities were being selected, and he had selected the criteria of their removal. Goldman employees did not indicate in the Abacus CDO that Paulson, whose intent it was to short, had been involved in the selection of the securities (which were subprime mortgages from 2006—presumably the stated-income-only variety).

In replying to Sen. Levin’s questions regarding whether it is correct that Goldman made money on its net short position in 2007, two of the Goldman managers replied, “I didn’t write that.” A third replied, “I can only comment on what I did.” Although such non-answers could have been directed by lawyers or the answers could be due to the difference in general paradigms between Wall Street and the general public, I submit that the managers’ underlying attitude is particularly troubling because it involves some cognitive warping.  Because Chairman Levin (D-MI) was not asking  whether they wrote the Goldman document he was referring to, the reply “I didn’t write it” simply doesn’t apply.  At the very least, the managers were adding assumptions into Levin’s question that simply were not there. My question is this: what, cognitively or affectively speaking, would prompt such “value-added addendums”? After a similar answer to one of his questions, Sen. Colburn (R-OK) replied, “Mr Burnbaum, you didn’t hear what I said.”  Similarly frustrated after a question, Sen. Levin gave up with the witness, saying, “I think you’ve not answered the question as best you can.” At one point, Sen. Colburn asked Mr. Burnbaum whether he had any knowledge of whether his firm had a short position on an issue, he replied that he didn’t take the position.  “I don’t speak for the firm; I speak only for my position.” But Sen. Colburn didn’t ask him to speak for his firm; rather, he asked him whether he knew anything about something regarding the firm.  What could prompt such mistaken assumptions?  I don’t think it is entirely a subterfuge; rather, I suspect that the managers’ cognitive processes had been distorted by a particular organizational or industry culture. Such cognitive warping could be part of the reason why Goldman’s managers have blind-spots concerning the institutional conflicts of interest.

To potential customers who asked how Goldman got comfortable with Anderson securities, which were put together by New Century (a mortgage servicer), the sales people at Goldman did not say that the bank was comfortable because it was betting against them by buying 51% of the shorts.  Did Goldman have an obligation to disclose the fact that the bank had bought shorts (i.e., that Goldman had an adverse interest to the client)?   Goldman’s bankers point to the potential buyers’ ability to investigate the securities themselves. The Anderson was downgraded from AAA to junk in seven months.

“Boy, that Timberwolf was one shitty deal.”  This is from an internal Goldman email from the head of a division prior to the bank selling hundreds of millions from that deal to customers. Sales people were told that that deal was their top priority. “Should Goldman be trying to sell a shitty deal?”, Sen. Levin repeatedly asked throughout the hearing.  Seventeen of the people at Graywolf’s research group were Golden alums. Was that why the sales people were told to make the deal a priority?

In general terms, some of the managers at Goldman liked the risk involved in securitizing stated-income mortgages because clients wanted to buy them.  As a market-maker, Goldman’s managers believe that there is a price for any risk, so they would sell a deal they believed to be bad because some clients would like the price. In one case, 90% of the mortgages from an originator were stated-income.  In spite of the high number of stated-income mortgages, the rating agency involved gave some of the securities the AAA rating. Did the Goldman sales people tell their clients of the extent of the stated-income mortgages in the securities? Or did the sales people assume that the clients could investigate the securities in spite of there being the AAA rating on at least some of them?  Goldman claims that it investigated the due diligence of originators, like Long Beach.   So why did the investment bank not cut off that originator?

When asked about the bonuses paid out even as the clients lost money, the Goldman managers said that the compensation incentives were or are in line with ethical behavior.  Even if Goldman lost money, its executives didn’t. So it is reasonable to ask whether the incentives are in line with “performing.”

Goldman magnified the rise and fall of the housing market. Lloyd Blankfein, Goldman’s Chairman and CEO (which is itself a conflict of interest) admitted that the bank had played a role, as did the other investment banks, in the system that included too loose lending criteria. The managers at Goldman said the bank was a market-maker for instruments that reflected those low standards. Sparks, who headed the mortgage securities unit at Goldman, said he didn’t think Goldman did anything wrong; rather, some of the deals it put together did not “perform”—meaning that they were downgraded to junk.  “Goldman made some bad business decisions.”  In a business sense, “bad” does not mean “wrong” in the sense of “ought not” (i.e., unethical).  Rather, “bad” refers to making an error in business calculations.   Similarly, David Vinair, Goldman’s executive VP, said he didn’t think there is a conflict of interest in Goldman selling a security long while shorting it on its own books.  The client buying the security long may have a different stance toward risk as well as a different time horizon than the bank.  Also, the bank may change its short to a long depending on factors that are different from those impacting a given client.  Sen. Levin countered that the conflict of interest is at the moment of sale (hence the bank’s changing preferences are irrelevant). The customer, Levin said, has a right to expect that the bank selling the security wants it to do well.  “In what sense do you mean well?”, Vinair countered.  More semantics ensued. In spite of using vague terms like “perform” (which is actually relevant to acting), Vinair wanted a definition of “doing well” from the chairman. Blankfein also said that there is no conflict of interest; he likened Goldman’s market-making function to that of a stock exchange. Investors don’t ask what positions the exchange has in given stock.  But unlike the NYSE, Goldman Sachs is not limited to its market-making function; the bank takes proprietary in the markets, or instruments, that it “creates” not only to protect its positions in the market-making transactions, but to make a profit by trading on its own books. Hence Goldman, unlike the NYSE, has financial interests other than simply making a market and such interests can warp its market-making function in ways that are not transparent to Goldman’s clients.

It seems to me that the major conflict of interest at Goldman manifests when Goldman managers suspect that a security won’t “perform” (hence the desire to short it) without telling the potential buyers of this belief.  The Goldman managers want to make money not only off its shorts, but also off the client, whom the Goldman sales staff have given a misconception of the security’s soundness either by omission or lying).  The conflict of interest deepens if Goldman managers actually know that a derivative has been put together to fail, and because the bank (or a favored client) will profit from its failure (having bought shorts), the relevant manager does not disclose what he or she knows to the client so the latter will purchase the security.  Goldman would profit both from trading the security (shorting it) on its own books aside from being a counter-party to clients taking long positions, and from being such a counter-party.  That is, profiting from Goldman’s books entails transactions beyond the counter-party transactions prompted by a client wanting to buy or sell. Not recognizing this as a conflict of interest, Sparks limited conflicts of interest at Goldman to picking between two customers, or between one of its customers and Goldman’s proprietary bank. The problem with such a narrow reading of the bank’s conflicts of interest is that it omits the impact of Goldman’s proprietary transactions based on profiting on its own capital. I wonder if this narrowness of perception isn’t related to the “cognitive warping” that was evinced in many of the non-answers of the managers testifying before Congress. “I didn’t write that” is irrelevant; so too are the bank’s proprietary transactions geared to profiting from the bank’s own books aside from being a counter-party to a client in the bank’s market-making function.

I believe that even Lloyd Blankfein viewed all of Goldman’s transactions as market-making.  But he was correct, then every single economic transaction by any party constitutes market-making; every business is making a market.  At Goldman, there was still the conflict of interest regarding the bank’s profiting on its own books not from being a counter-party to a client as part of serving the client versus from serving a buyer or seller client by being the counter-party if necessary.  Goldman can be understood to profit as a broker (a fee in putting a buyer and seller together), as well as from how it does as a counter-party in such a transaction. In addition, Goldman can profit from trading on its own books irrespective of being such a counter-party. I contend that if Goldman is to do the first function, then either of the latter two—and especially the third—constitutes a structural or institutional conflict of interest.  The second function would not be a conflict of interest were Goldman’s counter-party profits (and losses) passed on to the client.  Perhaps even the third function would not constitute a structural conflict of interest were the profits distributed to the bank’s clients.  However, to the extent that there could be an interest in currying favor with particular clients who would benefit differentially in either the second or third function, there could still be a conflict of interest for Goldman.

In general terms, a conflict of interest can be seen as involving lying (or duplicity) in order to benefit “both ways” from having two conflicting interests.  The solution is to reduce the number of interests that a party has such that he or she has no interests that could or do conflict.  This is a different question than asking what legislation is needed, for the field of business ethics ought not be conflated with the field of business & government (i.e., institutional political economy) or even with that of business & society.

Societal norms are not justifying regarding whether a given practice is or is not a conflict of interest.  Theoretically, a firm could deviate from the norms of a society in order to avoid structural conflicts of interest, or a society could simply be blind to such conflicts and a firm act to avoid them anyway.  In other words, business ethics need not involve “social responsibility”  (and the latter need not involve the former).   In the case of Goldman, the social norms regarding such conflicts of interest (i.e., structural) are in their infancy, at least in the US.  Hence, this discussion of business ethics is a distinct project.  Business & Society would investigate the disjointedness of the paradigms of the bankers and the general public–that is, how and why they differ. Business & Government would investigate legislative and/or regulatory matters concerning the conflicts of interest as evinced by Goldman.

While the three fields are related, so too are medical ethics, sociology and biology. You don’t find schools putting these three in one class because it would be cheaper.  So part of the problem concerning business ethics might be how it is treated by business schools; it (as well as CSR and business & goverment) is essentially relegated to one third of a course in most undergraduate and MBA curriculi.  Among the lessons that we ought to have learned from the financial crisis of 2008 is that of the value, or importance, of the fields of business ethics, business & society, and business & government in business schools.  Sadly, even in educating their respective scholars, these fields are conflated–hence the scholars are not apt to study sufficiently in the basic discipline of their particular field.  That is, they tend to skim along the surface in order to cover three rather than one field. Perhaps business schools have a conflict of interest of their own whereby they have an interest in cost-saving expediency and in covering all of the fields of business. The three fields being discussed here have been willingly mitigated (or enervated) into “one” such that business schools could appear to have it both ways.  The problem is when something happens like the financial crisis of 2008, which shows just how vital each of the three fields are–meaning worthy of courses of their own.

If the American financial houses on Wall Street are among the most powerful forces in American politics-- powers, as it were, behind the throne--does it make sense that the strongest bank would be politically impotent?  In other words, can a public blemish nullify the power of all that capital?

According to The New York Times, Goldman Sachs employs perhaps the country’s most well-connected stable of Washington lobbyists, and it spent $2.8 million [in 2009] to bend the ear of federal officials and lawmakers. Goldman executives and its political action committee gavve more than $24 million to federal candidates in the first decade of the twenty-first century, including nearly $1 million to Obama’s 2008 presidential campaign. Even so, the pounding in the media that Goldman Sachs took in April, 2010 left it sidelined — at least in public — as Congress moved toward a decision that could reshape the very industry it rules.  In particular, the SEC filing of charges and eleven hours of grueling testimony before Sen. Levin’s Investigations Committee left the bank a lobbyist persona non grata, if only for a day.  However, even then, the reality behind the scenes was doubtlessly very different.  Even as politicians publicly vilified the bank, they were picking up lucrative campaign contributions sourced in the bank, even if through intermediaries; any large scale electorate is notoriously bad at tracing links.  To be sure, The New York Times was reporting that Goldman Sachs was trying to find a way to influence the debate, even if it could not play as visible a role as it otherwise could have.

Goldman Sachs managers declined to comment the day after the hearing before Carl Levin's committee at the U.S. Senate. The question that the bankers were refusing to answer was on the impact that the bank's legal and public relations troubles were having on its Washington lobbying operations. Even so, one person briefed on its plans spoke on condition of anonymity because of the firm’s continuing legal and political troubles. He or she said it was still trying to push its agenda. The New York Times reported that according to industry officials, the bank had been “largely relying on trade groups, like the Securities Industry and Financial Markets Association. However, this could have been a smoke screen. The real deals could have been made behind closed doors, even by industry standards.  According to the paper, “More often, the firm — whose lobbyists and outside lawyers include such Washington luminaries as Richard A. Gephardt, the former House majority leader, and Ken Duberstein, the former Reagan administration official — has relied largely on intermediaries because politicians are worried about being associated with it, government and industry officials said.”  Members of Congress were worried about public association, but willing to be influenced through intermediaries. Therefore, even though Sen. Blanche Lincoln, who was in a tight race at the time, canceled a fund-raiser at the bank’s New York offices after the SEC filed its lawsuit, I would not be surprised that she accepted contributions by an intermediary.

Most voters are too far away from Washington to get the real scoop, and journalists who want to continue with their career are not apt to dig too deep. We are left with the surface, and can only guess as to the subterranean dynamics.  It seems to me that traces of the underground rumblings can be discerned in lines such as “at least in public.”  We are left wondering how deep the wells of gold run.  Perhaps only the goldman knows.  The actuality can be far different than appearances.  If possible, a study on the real influence of Wall Street in Washington would be very helpful. For this reason, it is apt to be a difficult task with many self-interested obstacles.  In any case, we ought not be so incredulous as to rest on the public appearances. Even as Lloyd Blankfein was testifying, senators turned increasingly friendly to him–with the exception of Carl Levin and perhaps John McCain.  The Democratic side in particular almost made excuses for the CEO, saying that any number of firms should be there with him. Those senators had given their soundbites to be picked up at home; it was time to make sure they were not cutting off one of the ruddy fat hands that feeds them. This expression comes from Nietzsche’s description of businessmen and their propensity to overreach. 

To be sure, Nietzsche is no advocate of modern morality; he viewed it as a defense of weakness.  Weakness cannot be other than weakness, he writes. So too, strength, he writes, cannot be other than strong.  So I contend that we ought to take reports of the political impotence of Goldman Sachs with a rather large grain of salt (or gold, in this case).  He or she who has the gold makes the rules. There is no natural law stating that this process must be transparent.  My question is: can we, the American public, get to it, or does the well of gold run too deep for our patience and perseverance?

Source: http://www.nytimes.com/2010/04/29/business/29lobby.html

Structural, or institutional, conflicts of interest are of great significance in applied ethics, even though they are often disregarded or ignored. Far more salient are personal conflicts of interest, such as when an employee pockets money meant rather than declares it as revenue for his or her company. Structural conflicts of interest are institutional in the sense that organizational arrangements inherently evince a conflict of interest such that people in them are necessarily subject to a conflict in their interests simply by participating in one of the organizations in the arrangement. An organizational or institutional conflict of interest, whether within one organization or involving relations between organizations, is not any less unethical than a personal conflict of interest because in both cases people are subject to a conflict of interest--only one being valid.  I present two cases and an argument that “firewalls” in an organization to prevent it from a conflict of interest are insufficient.

In the EU, the European Commission (the executive branch of the EU Government) sued four elevator companies that were part of a cartel in Belgium and Luxemburg.  Essentially, the Commission was seeking anti-trust damages—a first in EU jurisprudence.  Benoit Allemeersch, attorney for one of the companies, argued that the jurisdiction of the the commercial court of Brussells, the Tribunal of Commerce, violated the jurisdictional clauses in the contracts between the companies and the Commission.  He argued that the Commission acted as “police officer, prosecutor, jury and sentencing judge” in finding the existence of a cartel, and then used its own decision to make a private claim for itself before the commercial court. He argued that “the mere statement by the Commission that they respected their own ‘Chinese walls’ in making their decision and bringing the claim is not a sufficient guarantee to the defendants nor to any other citizen.” He maintained that in the case being argued, there was no “equality of arms” between the two sides, given the commission’s privileged position. According to Allemeersch, “the European Court of Human Rights requires that justice is not only done, but is also seen to be done.”  In other words, even the appearance of a conflict of interest, which can be in an institutional arrangement even if not acted upon, is enough to dismiss claims. The existence of “firewalls” within an organization does not sufficiently mitigate either the dismissal or, more generally, the institutional conflict of interest.

Even though the commission had previously argued that its own “Chinese walls” ensured the independence of the claim, Allemeersch correctly maintained that these safeguards could not be proven, tested or substantiated. I contend that the counsel is correct. Even if the Commission could show policies and procedures that act as its safeguards, such internal guidelines do not have the force of law and thus are insufficient to be relied upon—especially by external parties.  It can not be assumed, moreover, that an organization’s policies and procedures outweigh whatever internal interest happens to be dominant in the organization, given the nature of power to overflow its boundaries.

To say that the most powerful person a room is constrained by parchment alone is to be woefully ignorant of the reality of human nature.  Even if there are two equally-powerful people in the room with antipodal objectives, institutional checks and balances can only work as long as too great of a power imbalance does not exist.  If a US President is intent on invading a country, for example, and the Congress does not have sufficient power over his, the separation of powers institutionally could not be counted upon to keep Congress from rubber-stamping the President’s declaration of war.  For the President to be able to effectively declare war while being the commander in chief of the US military and the armies of the union’s republics is itself a structural conflict of interest.

Essentially, I am making a Nietzschean and Hobbesian argument that the most powerful person in the room is not apt to be constrained by invisible ”firewalls” in the room that are intended to level the powers of that person and a weaker person.  As Nietzsche writes, the strong must be strong and the weak cannot be other than weak.  To ask the strong to be weak or treat the weak as though it were strong goes against the nature of power.  In my analogy of the room, the two persons can represent heads of departments whose respective goals are at odds with each other. A “firewall” of policies and procedures is not sufficient to inhibit the more powerful head from pressuring the other.  Furthermore, the existence of a person whose authority includes both departments relativizes the firewall.  To bring in this element, I turn to the roles of rating agencies and Goldman Sachs in the American financial crisis of 2008. In the case of Goldman, the bank sold what its salespeople referred to as “crap” because the bank’s own proprietary position profited by the sales. In the case of the rating agencies, they were paid by the issuers of the securities that they were rating.  That either of these conflicts of interest were allowed to exist at all points to a proclivity among the general public to ignore institutional conflicts of interest—focusing instead on personal ones involving someone’s compensation and job.

In listening to and reading about the banks and rating agencies culpable in the American financial crisis, I doubted the “firewalls” argument given by the rating agencies.  The CEO of Moody’s for example, stated in Congressional testamony that he placed an equal emphasis on market-share and the quality of the ratings.  However, several of his former employees testified that they had been pressured not to lose a client to a competitor.  They stated that when ratings were changed, it was typically to protect the firm’s market-share (i.e., out of fear of losing the issuer).  The CEO’s faith in his own equipose as well as his firm’s “firewalls” was mistaken, even if he didn’t realize it.  To be sure, he may not have been aware of a more-powerful department putting such pressure on a less-powerful one.  It is possible, however, that the CEO was actively pushing his subordinates behind the scenes for more market-share, essentially profiting from the conflict of interest in the issuer-pays system.

In general, because an organization has an official above its firewalls, it is possible, even legitimate in terms of that position’s authority, for that official to put pressure on one side of the wall to capitulate in the interest of the whole (i.e., the entire organization).   Consider, for example, Lloyd Blankfein, who was CEO of Goldman Sachs at the time of the financial crisis.  He was over both the market-making and proprietary-trading units.  He could therefore have put pressure on the units selling securities to do so in a way that complements the bank’s own proprietary holdings.  For example, he (or his VP’s) could have pushed shorting sub-prime mortgage-backed derivatives in market-making (the clients taking long positions) because the proprietary interests of the bank would benefit from a fall in the housing market.  The bank’s sales people did indeed clients to go long even as the bank itself was going short in the belief that the housing market bubble was headed for a hard landing.  Before a US Senate committee, Blankfein claimed that the market-making and bank’s trading on its own books were unrelated unless the bank took out a position on its books as a counter-party needed by a client.  However, the bank sold clients on taking long rather than short positions on the housing-based securities even as the bank was taking a net short position on its own books above and beyond what was necessary to be a counter-party to its clients’ transactions.  This conflict of interest manifested in the duplicity involved in selling clients on what the sales people knew privately was “crap.”  As one of them wrote, if the clients knew the bank’s reason for going short, that would interfer with the bank’s ability to profit from the shorts.  Structural conflicts of interest are designed such that there is an incentive in favor of duplicity. Given a company’s overall interest and the fact that senior managers have authority over the entire firm, firewalls should not be relied upon by outside parties (or by those inside).
In the end, given the nature of human beings and power, we ought not be blindsided by claims of the efficacy of paper “firewalls.”  We ought not assume that the most powerful person or coalition in an organization will necessarily be voluntarily restrained by a weaker party in the same organization.  Moreover, we ought to take more seriously institutional or structural conflicts of interest in how we design and reform arrangements between institutions.  Where the status quo contains a structural conflict of interest, that condition ought to be put on a limited lifeline, with a deadline set for changing the arrangements.  Even if the alternative is not as efficient (it would doubtlessly not be flawless), it would be better than the status quo.  Charges of an institutional conflict of interest can be treated as red flags that instantly move to the front burner on people’s agendas.  We need not be hoodwinked by the duplicitous and self-interested into believing their asseverations concerning their own paper “firewalls.”

Goldman Sachs’ settlement with the SEC in July, 2010 amounts to just two weeks of profits for the bank—hardly even a slap on the wrist.  However, the bankers had to concede that they had not had “full and complete disclosure in their marketing materials.”  Even so, few if any clients left the bank in the wake of the settlement. To be sure, since the impropriety had come to light in Sen. Karl Levin’s investigations subcommittee, Goldman had slipped in the pecking order of top underwriters of stocks and bonds to eighth. There is reason to think this was the extent of the damage.  Oklahoma’s Teachers Retirement System, for example, was unlikely to terminate Goldman even though the system’s general director said he was disappointed in the admission.

In general terms, the US Government was having trouble holding bankers accountable for the financial crisis of 2008. Wall Street’s defense that the bankers had simply made mistakes does not explain the liars’ loans or Goldman’s knowingly misleading clients who went long on subprime derivative securities. The government’s difficulty could itself give Wall Street an incentive to keep up the deceit.  That the market mechanism does not reflect the fraud by removing the offenders suggests a second major drawback—the first being internal volitility from irrational exuberance.  On the government side, even with regulations on the books and a willingness to enforce them, it may simply be too difficult for anyone to prove fraud when Wall Street is hanging together rather than turning each other in. That is to say, both the market mechanism and regulation may not be able to correct for the risk involved in the existence of banks too big to fail. In a way, we all enable the presumptiveness of fraud by refusing to break up the big banks both organizationally and in terms of ownership.  A lesson available from the financial crisis of 2008 might be that we can ill-afford to continue to enable giants who could fall on us any day.

Sources: Thomas Catan and Kara Scannell, “Convictions From Crisis Hard,” Wall Street Journal (July 17-18, 2010), B2; Susanne Craig and Randall Smithy, “For Goldman, Reputation Reclamation Project,” Wall Street Journal (July 17-18, 2010), B1-2.

A year after the financial crisis of 2008, Lloyd Blankfein, the CEO of Goldman Sachs,  found himself vilified for his firm’s quick return to risky trading in spite of its new bank holding company status. Populist resentment at the time was especially pitted against the hefty bonuses from the trades. Also, people were upset about the benefits that the bank had obtained from the decisions of its alums in the U.S. Government—specifically, in the U.S. Department of the Treatury. For instance, Goldman Sachs and other AIG counterparties got a the dollar-for-dollar payout from AIG thanks to an infusion of funds for that specific purpose by Treasury. Regardless, in an interview with the London Times, the highest-paid CEO (at least in the financial sector) dismissed such talk and defended his money-making machine and its compensation.  In addition to being the engine of economic recovery, according to Blankfein, Goldman Sachs provides a social function in making capital available to companies so they can expand. Stunningly, he adds, “I’m doing God’s work.”[i]  Such a claim is a far cry indeed from Thomas Jefferson’s warning that banking institutions are more dangerous to our liberties than standing armies.[ii]  Perhaps God intends to undo our liberties by bailing out the banks.

Besides these rather obvious problems with Blankfein's religious claim is his presumption to know what God's work is, and, furthermore, that he is doing it.   Even though a feckless system of corporate governance can enable a CEO to essentially function as his or her own boss, including doing the board's job of evaluating his or her own performance, it is a tall order for a human being to be able to evaluate his performance as God's work.   To be sure, it is possible that God is an intelligent being that bestows favor on his golden stewards for doing His work.

Lloyd Blankfein may have been involved in two conflicts of interest: 1) that of having excessive power over the board whose principal task it is to oversee him, 2) having communicated with GS alums in high posts in the U.S. Government (e.g., Hank Paulson) and perhaps having them enact policies on GS's behalf.   It may be that institutional and personal conflicts of interests can become so ubiquitous that they are simply not seen by the culprits. Furthermore, it could be that the denial enabled by a tacit presumptuousness is like a white movie screen on which even doing God's work can be projected. How ironic it is, that sordid proprietary interest could operate not merely under the subterfuge of being a neutral "market-maker," but also as God's work. Such work is two degrees of freedom away from squalid greed. So it is remarkable that the two could become conflated in a mind.

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[i] John Arlidge, I’m doing ‘God’s work. Meet Mr. Goldman Sachs, The Sunday Times, 11/9/09.
[ii] Thomas Jefferson to John Taylor, Monticello, May 28, 1816, in Paul L. Ford, ed., The Writings of Thomas Jefferson (New York: G.P. Putnam’s Sons, 1892-99),  XI, 533.

Our galaxy, the Milky Way, has a black hole. If this is news to you, there is no need to go hide under a rock. It turns out our black hole is not the biggest by far, and it doesn't spew out a lot of excess energy that falls into it. Even so, it is ours, and we can be glad that we have one of our very own even if it isn't the biggest one on the block. In case you are interested in seeing it’s baleful look in a picture, I’ve got bad news for you; it is invisible. No light can bounce off it.  You are probably wondering how the scientists found it.  Well, they knew that black holes are in the center of galaxies, so the crafty lab coats used ultraviolate light to find our center because there is too much gas there for much there to be visible to us.  The scientists noticed that the speed of stars speeds up around a certain point and posited the existence of a highly-dense black hole.

Using the phenomenon of black holes as an analogy, political "scientists" might investigate whether power, whethere in business, government or society, tends by its very nature to consolidate. In the Micheal Moore documentary on capitalism, two members of congress point to the immense power of an anti-democratic corporate banking elite that was able to turn around the House vote on the bank bailout (TARP) using the democratic leadership as runners. If so, such power was invisible to the public. Likewise a black hole is of course invisible. In the case of the banking elite, we couldn't point our fingers at who exactly gave the marching orders that turned around the no-questions-asked government loans to the banks too big to fail.  Nor do we, or will we, know who told the U.S. Senators: hands off meddling in foreclosures.  Indeed, we shall have no idea whether a power behind the throne told Congress not to even debate the alternative of giving the TARP money directly to home borrowers in trouble.  That this was not seriously debated for foreclosures involving mortgages that banks and mortgage companies should not have given in the first place hints of the existence of a massive albeit hidden political black hole. Finally, such a black hole may have been behind the administration's decision not to push for banks too big to fail to be carved up while extant rather than simply "orderly liquidated" once they have fallen under their own weight.

Neither the American people nor the American media companies go far enough in investigating even the existence of invisible black holes in the American political universe, let alone what damage they do from the standpoint of the public or common good.  Micheal Moore suggests that Citibank and Goldman don’t fear popular election much because they expect the 1 person, 1 vote thing won’t turn on them because most people think they could be in the elite too. The financial elite is 1% of the vote; 1% of the population holds 90% of the wealth, so if the other 99% happen to wake up and notice, they might take back the reins. The big business would be worried, but, alas, Wall Street is not shaking in its golden boots. As to why, I would add to Moore’s explanation by pointing to the extent to which Americans are manipulated without even knowing it.  Lest it be missed, the gaint media companies are corporate too.

Is it an accident, for example, that so many stories on Afganistan pop up when it is in the interest of the defence contractors? Are they simply using the people to urge Congress to support a surge?  I would call this “direct manipulation” because we are being summoned to debate what has been put on the table for us.   The other kind is “indirect,” which involves a political black hole keeping an issue or policy-option off our radar screens.  President Obama’s suggestion, for example, that the banks too big to fail be reduced in size (and money) so they would not be so dangerous in failing, quietly went away. In looking for indirect manipulation, the important thing to notice is the absence of  any visible event or change that could explain the removal of a proposal by some new issue being covered by the media. We ought to be examining what political black holes do not want us to talk about because of private interests. For instance, we now know that health insurance companies gave their surrogates "death panel scare stories" to fan out discussion of a public alternative in health insurance.  Scaring a proposal off the radar screen is among the silent weapons used by political black holes.  Again, the source of such weapons is invisible.

So like sheep, the American people is led to debate or focus on something or to forget something else, In the process, we are unwittingly giving up, or failing to grasp, our democratic power, which can be used for the public good. To be sure, there are excesses and drawbacks in democracy and these too should be discussed, but there are hidden dangers to political black holes, and we miss these if we do not even know that such things exist.  That is to say, the democracy we do have may be rather wan in comparison to the gravity of the political black hole at the center of our political society.

Perhaps the question on your mind is:  So how do we get it back?   It might involve nothing short of waking up out of the Matrix.  So many of us don’t realize how much we are being manipulated.  Realizing it, and not tailoring our thoughts and discussions along its lines will wake others.   Once people start waking, we can start to look for candidates who do not, like Obama, take a $1 million from Goldman after promising real change.  We need candidates willing to forego being bought out by the elites who sense that democracy might possibly get the upper hand in an election.  Pay particular attention to the matter of teeth in such candidates’ proposals with respect to big business…and ask at their speeches whether they are taking money from the establish that has a vested interest in the status quo.  Don’t buy the “I’m not influenced by money.”  …which should be treated as a laugh line.   If you find genuine candidates willing to effect systemic change even where it is at the expense of the big corporate players, know that the elite will offer such candidates so much if the elite view the candidates as viable and  not under their control.  Control, by the way, can be more subtle than using a leash.  This is perhaps my major point here…political black holes are invisible and yet their anti-democratic gravity is HUGE…even as it is in a tiny space, or office.

In the Roman Empire, the games in the arena (which means “sand” in Latin) were a devise to distract as well as mollify and entertain the masses.  Today, we have American Idol and the Super Bowl, as well as the World Series.  Besides their entertainment value made possible by the talent involved, these idols are effective in gravitating popular attention…and this can be useful to the extent that the US is a plutocracy (i.e. ruled in the interest of the top 1% of the wealth) and vested powers fear the 1 person, 1 vote power of democracy.  But as Micheal Moore points out, Citibank and Goldman Sachs can rest easier knowing that many of us don’t use the power of the vote to take from the banks because many of us believe we might be among the plutacracy one day. 

I would add that we tend to be easily manipulated into following the media’s current (which, kein Zufall, tends to move around the interests of the major houses so as not to disturb the islands of capital).   We stop wondering about the distant promises to do something about the banks too big to fail because the media has conveniently stopped reminding us.  We forget that an option is to break up the banks too big to fail (which, by the way, have gotten bigger since September, 2008 and are still active at the casino).  We unthinkingly join the media in debating Obama’s banking consumer protection proposal, as though that were primary.  In other words, Goldman Sachs, which was Obama’s largest campaign contributor according to Micheal Moore (over $1 million), is content to have us debate a potentially pain so we will be appeased by Obama’s pledge of “real change” and not ask, demand, or VOTE to apply anti-trust law to financial houses.   In short, we allow ourselves to be dupped and we don’t even know it.  We don’t even realize we are taking our eyes off the eight ball.  Goldman lets Obama have four more years and 1 person, 1 vote is once again not a threat to either Goldman or the change agent that the bank bought.  Don’t expect Obama to rock the boat in bringing any real change that is not in the interests of the most powerful of the corporations.  Obama’s challenge is to show us just enough that looks like real change while not acting outside the interests of his corporate backers.  However, aren’t real change and status quo vested intersts mutually exclusive?  If so, how does Barak Obama get around this?  He gives us just enough to appear…   Meanwhile, the systemic change that is needed on the players at fault in September, 2008, goes by the wayside and we remain vulnerable even though We the People are convinced that a new consumer protection agency will do the trick.  The trick, ladies and gentlemen, is on us–and we don’t even know it.  We don’t know what we don’t know…while we presume we know it.

In 2009, Moammar Gadhafi of Libya gave a speech  at the annual opening of the General Assembly at the UN in New York City.  Substantively, he pointed to the drawbacks in having the UN remain in New York.  He also advocated a permanent seat for the African Union in the Security Council.   Fifty-three states are represented in that Union.  In an interesting twist, he remarked that the US contains fifty countries, so Africa too deserved a permanent seat.  I was utterly surprised that the man who was disorganized and sporatic in his delivery (and whose government would kill hundreds of unarmed protesters in 2011) could grasp the nature of the US in terms commensurate to the AU. He added that the EU should have a seat.   This makes a lot of sense because it is not fair for three of the EU’s states to have seats while all of the 50 United States have one. It occurred to me in listening to his speech that he understood the nature of the US as an empire-scale polity better, actually, than most contemporary Americans do. This is a bad commentary on the condition of civics classes in American high schools.  So I was surprised to find the mainstream media report the speech simply as “disorganized" without reporting any of the substance, as though there had been no serious content whatsoever.   Someone must have wanted to discredit Qaddafi for political or economic reasons.   The summary verdict was so immedate and total that none of Qaddafi’s content was covered.   The media’s treatment had all the footprints of a hidden strategy--that is, of a black hole's pull.  If I am correct, I’m left surprised that the subterfuge itself could be so blatant.  For a journalistic standpoint, the reporting was really bad.   Alternatively, the journalists could have reported what the man had said (as well as on his style and approach) and have left it to the readers to decide whether the content should be dismissed due to the style.   Something else was going on.  I’m just not sure what. I contend that something else typically goes on in terms of what is debated in the public discourse via the media. The invisible source steering and pruning what travels across our public radar screen is none other than a political black hole: a very dense concentration of private power functioning akin to an invisible elephant in a small living room. One person senses a trunk--another a leg--but we as a people miss the very existence of the elephant.  We are too distracted, and this is no accident, as it manifests by the very black hole that we do not suspect exists.

In short, both the content and frequency of topics reported by the media bear traces of the black whole that they are orbiting. As long as the source of the gravity is invisible, the black hole will continue to be quite useful.  Put another way, as long as Americans take the press reports as simply journalism, we will miss what is going on behind the scenes and therefore continue to be subject to being manipulated.  Micheal Moore asks: when will democracy ascend over the power of big business?  It is possible, but not probable.   This, by the way, is the expression that Immanual Kant uses in discussing his Kingdom of Ends (treating rational beings as ends and not just as means). Beyond the latent or actual subterranean power of corporate America over our public airwaves and legislative chambers, we ought to reflect on the threat to a republic in there simply being political black holes.
  
See: Nova on Black Holes (http://www.pbs.org/wgbh/nova/blackhole/)

Goldman Sachs’ (GS) board considered buying AIG in late June, 2008, so GS could use AIG’s premium float for capital (rather than becoming a bank holding company and using deposits to fund trades or as collatoral for leveraged trading).  Strangely, GS’s board didn’t realize that another part of GS was questioning the “mark to market” valuations that AIG was making on its swaps.  Also, AIG had revised its Nov and Dec 07 losses from $1b to $5b.  GS and AIG had the same public accountant (Price), which GS was using to get AIG to down-value the value of its assets. On that week in Sept, 2008, when Lehman went under, JP Morgan and GS were working to put together a loan of $50 billion to cover AIG’s deepening hole  At the same time, the two banks were demanding new collateral payments from AIG, pushing the insurance giant deeper into its hole.  The Fed and AIG wondered if the fees and interest rate being set by the two banks for themselves and other contributing banks wasn’t essentially stealing the company.

As it turned out, AIG received funding from the Federal Reserve in exchange for the government taking warrants on a 79.9% ownership of the company.  Goldman had bought $20 billion of insurance from AIG and received as much as $13 billion from AIG when the Fed funded AIG with $90 billion.  The counterparties were paid in full, rather than the sixty cents on the dollar that AIG negotiators had been pressing. Even though GS was hedged because it had purchased credit default swaps in case AIG were to default, one has to ask whether Blankfein at GS used Paulson to have the government pay GS through AIG.  Blankfein claims that his bank would not have gone under had AIG imploded, but surely GS relies on there being a financial market. Also, when the Fed essentially took over AIG, Paulson wanted to appoint a new CEO.  Paulson was of course an ex-CEO of GS.  Paulson had one of his advisors, also a GS alum, look at candidates.  The aid favored Ed Liddy, who was on GS’s board.   GS would be running AIG.  Hence, the insurance giant would not run interferance on the $13 billion going to GS.

Besides these conflicts of interest, Goldman trades securities for big firms and pension funds. It also acts as adviser to many of the companies whose securities it trades.   In other words, the problem is in its core business. So a person could be excused for wincing at Lloyd Blankfein’s statement that his bank is performing not only a social function in providing capital to firms so they can expand, but is “doing God’s work” as well.   John D. Rockefeller used the same expression in regard to his Standard Oil monopoly that offered its remaining competitors the choice to be bought up or drowned.  According to Rockefeller, Standard Oil was Noah’s Ark, saving the oil refining industry from destructive competition.   So what if the uncooperative were put under?  They deserved it. Besides, the industry would be saved.  In this regard, the monopolist viewed himself as a Christ figure.   Are the golden boys the incarnation of this figure?   It goes without saying, but I will anyway, that Blankfein has no misgivings in paying (and being paid) record bonuses in 2009.    The presumptuousness of those bankers aside, Jefferson’s dictum that a national bank would be more dangerous than a standing army to democracy seems apt.  We, the American citizens, have an amazing ability not to see things, and then to tacitly enable that which is in actuality hardly a savior.

Source: http://www.timesonline.co.uk/tol/news/world/us_and_americas/article6907681.ece?token=null&offset=0&page=1

“I hope we shall crush in its birth the aristocracy of our moneyed corporations.” 
       Thomas Jefferson

In Citizens United v. FEC on January 21, 2010, the US Supreme Court held by 5 to 4 that because US corporations are legal persons, they can contribute to political campaigns.   The assumption here is that corporations are more than the sum of an aggregate of persons—that is, more than citizens associating.  The corporate entity has rights in itself.  Ginsberg and Sotomeyer questioned in oral arguments whether free speech applies to spending money, and, moreover, whether corporations should be considered legal persons, much less citizens.  After all, they can’t be drafted, or vote.

A corporate is essentially privately owned wealth.  To say that wealth counts as speech seems spurious to me.  In fact, the whole legal person designation seems contrived.  Whereas the Roman republic fell to dictatorship, our republic may well have already fallen to oligarchy or corporatism.   So I agree with Barak Obama that the decision is worrisome.   Already, Dick Durbin of the US Senate said that the banking lobby owns Congress after that lobby sank Durbin’s amendment to allow bankrupcy judges to modify mortgages in foreclosure (the banks want a veto, even if they contributed to the sub-prime mess).  If Goldman Sachs can spend virtually unlimited amounts of money on political campaigns, we can expect to see that bank’s influence over the government expand even beyond what influence it has over its own alums who occupy high policy-making positions in the US Government (e.g., Hank Paulson and Neil Kashkari at Treasury under Bush II).  If our republic is already compromised under the weight of huge concentrations of private capital, the US Supreme Court’s decision may well be enough to sink the republic…ironically in the name of liberty.  But liberty for whom?  Or does “whom” even apply here…  It seems to me that corporations are not citizens associating for political purposes.  There are indeed non-profit political organizations whose function it is to influence policy.  This is not a business corporation’s function.  Nor is spending money itself political speech.  Any CEO can stand outside his or her building and give a political speech for free.  But which citizens does the CEO represent in his or her association of citizens?  Stockholders?  They don’t approve corporate public affairs spending.  Employees?  They don’t either.  Customers?   We don’t approve what a CEO says just because we have purchased a bar of soap.  The US Supreme Court’s majority might well say that the CEO represents the legal person that is the corporation, but then it is not an association of citizens because associations are not said to be persons (rather, they consist of persons).  Is this too logical?  Too reasoned?  Maybe so. But maybe it shows the duplicity involved in referring to an account of private wealth as a person.  It seems to me that it is rather blatant case of anthropomorphism.  …humans treating our artifacts as having our characteristics.  We must really think we are something.

He who has the gold makes the rules.  I suspect this is the operating mantra at Goldman Sachs even after the bank’s near-death experience (when Solomon Bros stock was taking a hit, Blankfein knew his bank could be next).  As it turns out, the bank was involved in enabling Greece to stealthily spend beyond its means. According to The New York Times, in 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. Additionally, in late November, 2009— three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

Lest it be forgotten, half of Goldman Sach’s 2009 revenues came from trades on its own books—even as the bank had become a bank holding company and thus supposedly more not less risk averse.  In general terms, my concern is that the bankers at Goldman might be overly in love with leverage and thus be blind to the risks.  Were this contagion limited to Goldman Sachs, it would be a question of whether the bank is too big to fail; that the bank has actively enabled one of the EU’s states to secretly take on more debt suggests that the systemic risk that is involved is political as well as economic.

According to The New York Times, “bankers enabled Greece and other governments to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.”  This is a condition that American and European citizens have allowed to happen; the market for sovereign debt (and the enabling banks) could be better regulated. Indeed, the government of Iceland floundered economically and politically due to its holdings in valueless subprime mortgage derivative securities; its perilous fiscal condition prompted it to apply to the EU to become a state. Enlargement itself was flagged in the EU as entailing risks for the union. So Wall Street banks whose managers believe in debt and minimizing or avoiding market regulation present the world with not just economic systemic risk, but added political risk as well. That is to say, Wall Street can reach across the Atlantic, with European governments hanging in the balance. To push for banking deregulation in the U.S. can entail political risks abroad. In other words, banking regulation can be viewed as a social responsibility and a matter of good foreign policy.

Even though they had contributed to political instability in Europe, Goldman Sachs managers received near record bonuses in 2010. The payouts were more than a sufficient incentive for the economic alcoholism to carry on in abject denial.  "We're not at fault! We're just market makers." The problem here is that the alcoholic has the gold, and thus can make (or at the very least dance around) the rules.  As Richard Durbin of the U.S. Senate said in 2010 after he tried to allow bankruptcy judges to be able to modify home mortgages, the banking lobby owns Congress. The amazing point here is: the lobby could still call the shots in Congress even in the wake of the industry's sordid role in the financial crisis of 2008. This ought to be a red flag for anyone who values the republic as a form of government in the U.S.

Ultimately, it is the American people who are to blame—that's right, you and me—because too many of us are sufficiently credulous to elect and re-elect representatives who cave in to the banking lobby’s pressure.  There are too many “professional” pols seeking to perpetuate themselves; there is hardly a citizen statesman left serving as a matter of duty rather than power and vocation.  We have stood by and let the banks too big to fail get even bigger (and thus more powerful over our governments). We have not put sufficient pressure on our representatives in Congress to remove the too big to fail problem.  It is all too easy to point our fingers at the managers of Goldman Sachs, especially on the bank’s role in the Greek debt problem, but it is ultimately ourselves who are responsible for enabling the elephant in our living room.  Now that that elephant is breaking furnature in other houses, perhaps we might find the time to get our own house in order.  As the Germans would say, alles ist nicht in Ordlung.  We continue to think and act otherwise. Crucially, this is to our own peril.  In other words, denial is not a viable survival mechanism, even if it is more comfortable.

Source: http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp

Goldman Sachs, which played a role in enabling Greece to hide its public debt, urged investors in March, 2010 to buy shares in two big health insurance companies, UnitedHealth Group and Cigna because their rates were sharply up and competition was down. According to the NYT, the White House claimed, “ the Goldman Sachs analysis shows that while insurers can be aggressive in raising prices, they also walk away from clients because competition in the industry is so weak.”  Rate increases ran as high as 50 percent, with most in “the low- to mid-teens” — far higher than overall inflation.  Kathleen Sebelius, the secretary of health and human services, stated on March 10, 2010, that she was left unconvinced after meeting with health insurance company execs at the White House the previous week because medical cost increases could not justify the rate increases. Furthermore, she pointed to the profit increases, some as high as 50%, in 2009 over 2008, and large executive salaries as evidence that the firms could have absorbed more of their cost increases than they did.  Cutting off customers when it is time for a firm to pay up while recording higher salaries and profits indicates that something is structurally wrong with the industry (and with the firms, ethically speaking).  If the execs lied at the White House, citing costs that “had to be passed on,” we ought not be so gullable at the managers’ claims in the future.  Also, if they were lying, we might recall Senator Rockefeller’s description of the insurance companies as sharks…feeding machines that are often not seen until their fins break the water-surface and their teeth are coming down on you.  Otherwise, the water is calm.

In February, 2010, the US House of Representatives passed a bill that would repeal the anti-trust exemption for the industry.  Armed with fresh retained earnings, the oligarchic industry was in a good place to fight that bill in the Senate.  In other words, the bill abruptly stalled. That the repeal was so difficult, if not impossible, to achieve is itself telling.  Once an industry has such clout and power that it can effectively veto legislation it doesn’t want—even as the firms cut customers off when they get sick (not to mention pre-existing condition abuses)—our republic itself is in danger.  In the regulatory literature, this is called “capture theory.”  The pubic good is captured by concentrated (and vested) business interests. The plight of financial sector regulatory reform in the wake of the financial crisis of 2008 is another case in point.   In short, cleaning up these messes should be easier, even given the encumbering checks and balances in the US Government.  The fact that it is not should give us great pause.

Source: http://www.nytimes.com/2010/03/07/health/policy/07health.html?ref=politics

In January, 2011, the Financial Crisis Commission announced its findings. The usual suspects are not much of a surprise; what is particularly notable is how little had changed on Wall Street since the crisis in September of 2008. According to the New York Times, "The report examined the risky mortgage loans that helped build the housing bubble; the packaging of those loans into exotic securities that were sold to investors; and the heedless placement of giant bets on those investments." In spite of the Financial Reform Act of 2010 and the panel's report, the New York Times reports that "little on Wall Street has changed." One commissioner, Byron S. Georgiou, a Nevada lawyer, said the financial system was “not really very different” today from before the crisis. “In fact, the concentration of financial assets in the largest commercial and investment banks is really significantly higher today than it was in the run-up to the crisis, as a result of the evisceration of some of the institutions, and the consolidation and merger of others into larger institutions,” he said. Richard Baker, the president of the Managed Funds Association, told the <i>Financial Times</i>, "The most recent financial crisis was caused by institutions that didn't know how to adequately manage risk and were over-leveraged. And I worry that if there is another crisis, it will be because the same institutions have failed to learn from the mistakes of the past." From the testimonies of managers of some of those institutions, one might surmise that the lack of learning has been due to a refusal to admit to even a partial role in the 2008 crisis.  In other words, there appears to be a crisis of mentality, which is not easily fixed.

To comprehend the danger in the continuance of the status quo, it is helpful to digest the panel's findings. The crisis commission found "a bias toward deregulation by government officials, and mismanagement by financiers who failed to perceive the risks." This ought to raise a red flag when we hear politicians urge more deregulation.  "Don't they get it?" one might reasonably conclude. Lest it be thought that the panel proffered a pro-government verdict, however, the commission also concluded that "Fannie and Freddie had loosened underwriting standards, bought and guaranteed riskier loans and increased their purchases of mortgage-backed securities because they were fearful of losing more market share to Wall Street competitors." These two organizations were not really market participants, however, as they were guaranteed by the U.S. Government. That government-backed corporations would act so much like private competitive firms undercuts the assumed civic mission that premises government-underwriting. In other words, the government-backed entities were neither civic as from government nor effective as private companies. In other words, government-established "firms" can behave like the private companies they were intended to check, yet this does not mean that more de-regulation is the solution.

In terms of the private sector, The New York Times reports that the panel "offered new evidence that officials at Citigroup and Merrill Lynch had portrayed mortgage-related investments to investors as being safer than they really were. It noted — Goldman’s denials to the contrary — that 'Goldman has been criticized — and sued — for selling its subprime mortgage securities to clients while simultaneously betting against those securities.'”  The bank's proprietary net short position can not be justified by simply market-making as a counter-party to its clients, Blankfein's congressional testimony notwithstanding. Relatedly, the panel also pointed to problems in executive compensation at the banks. For example, Stanley O’Neal, chief executive of Merrill Lynch, a bank which failed in the crisis, told the commission about a “dawning awareness” through September 2007 that mortgage securities had been causing disastrous losses at the firm; in spite of his incompetence, he walked away weeks later with a severance package worth $161.5 million. The panel might have gone on to point to the historically relatively huge difference between CEO and lower-level manager compensation and questioned the relative merit, but such a conclusion would go beyond the commission's mission to explain the financial crisis.

In terms of the government, The New York Times reports that the panel "showed that the Fed and the Treasury Department had been plunged into uncertainty and hesitation after Bear Stearns was sold to JPMorgan Chase in March 2008, which contributed to a series of “inconsistent” bailout-related decisions later that year." The Federal Reserve was clearly the steward of lending standards in this country,” said one commissioner, John W. Thompson, a technology executive. “They chose not to act.” Furthermore, Sabeth Siddique, a top Fed regulator, described how his 2005 warnings about the surge in “irresponsible loans” had prompted an “ideological turf war” within the Fed — and resistance from bankers who had accused him of “denying the American dream” to potential home borrowers. That is to say, the Federal Reserve, a corporation wholly owned by the U.S. Government, is too beholden to bankers instead of the common good. So we are back to the issue of a government-guaranteed corporation acting like or on behalf of private companies (and badly at that).

Sources: http://www.nytimes.com/2011/01/28/business/economy/28inquiry.html?_r=1&ref=business
Sam Jones, "Hedge Funds Rebuke Goldman," <i>Financial Times</i>, January 28, 2011, p. 18.

On greed as a culprit potentially restrained normatively (i.e, by religious ethics, for example), see: http://wordenreport.tumblr.com/post/2734313770/godliness-greed-how-effective-is-christian-ethics-in

In the wake of the financial crisis that came to a head in September of 2008, people might have been wondering if sufficient normative constraints on Wall Street greed are available, even possible. The ability of traders to create complex derivative securities that are difficult for regulators to regulate, much less understand, may have people looking for ethical or even religious constraints. It would be only natural to ask if such “soft” restraint mechanisms really do have the puissance to do the trick. Here’s the rub: the tricksters are typically the last to avail themselves of ethical or religious systems, and they the wrongdoers are the ones in need of the restraint. Blankfein said of his bank, Goldman Sachs, that it had been doing God’s work. About a week after saying that, he had to walk his statement back and admit that the bankers had does some things that were morally wrong. Although divine omnipotence is by definition not limited by human ethical systems, it is hard to imagine a divine decree telling bankers to tell their clients one thing (buy subprime mortgage derivatives) while taking the opposite position on the bank’s proprietary position (shorting the derivatives, beyond being a counterparty to clients). Divine duplicity seems to represent an oxymoron on a megascale rather than a justification for greed.

As the crisis erupted and was subsequently managed by public offiicals in government and new managers brought in to salvage AIG, I was researching the history of Christian thought on profit-seeking and wealth. I had found evidence of a gradual shift in the thought between Aquinas and the fifteenth-century Christian Humanists (mainly in what is now Italy). Whereas early Christian thought had tended to stress the negative attitude toward riches—the camel being in extreme pain in getting through the eye of the needle—in the Renaissance Christian theologians tended to argue that being wealth is necessary for a Christian to exercise the godly practical virtues of liberality and magnificance (particularly the latter, which alone permits gifts reflective of God’s majesty). Something had happened in the dominant Christian attitude on wealth that made the religion less of a buttress against greed because it had become possible for a Christian to be both rich and to go to heaven. Cosimo de Medici is a perfect example of a banker who was assured by the pope that a career based on urury would not necessarily bar a banker from entering heaven (assuming he gave financially to the Church). The various Reformers can be read as efforts to pull Christianity back from being so close to incorporating love of gain, or greed. I looked at the (Standard Oil) monopolist and devout Baptist, John D. Rockefeller, to get a sense of how efficacious the Reformation was in attempting to arrest and reverse the momentum of the pro-wealth Christian paradigm.

Having sketched the shift and subsequent reactions of the Reformers, I turned my attention to trying to explain both the shift itself and the efficacy of the Reformation. I believe the increasingly commercialized environment since the Commercial Revolution does not provide enough of an explanation; I contend that one must look at the religion itself to find the roots of the shift and the results of the Reformation as concerns the religion's theological attitudes toward wealth. In other words, Christianity itself must be examined. As you read through the book, you could do worse than ask yourself: is there something deeper in Christianity at work in the historical shift in thought on wealth and profit-seeking?  You will find my theory in the conclusion. Undoubtedly, you will develop your own as you reflect as you read.

The main question I want to pose through the treatise is whether religion itself, as a phenomenon touching the human domain of existence, can hold us back from ourselves even when we least want it to do so. If so, then a religion operating in the human domain can operate as a wholly-other mechanism by which sins such as greed can be reduced in force or perhaps even finally exterpated. To expunge the sordid stuff from our banks and corporations, human nature itself would have to be radically changed. Perhaps the question is whether it is possible even if not probable for religion operating through human beings to accomplish this task, given that religion cannot but interact with the world.

Click to add a comment or question (and to view them) on Christianity on greed, profit and wealth.

Source: http://www.amazon.com/Godliness-Greed-Shifting-Christian-Thought/dp/0739139835/ref=sr_1_1?ie=UTF8&s=books&qid=1294957599&sr=8-1