- July 22nd, 2009
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who doesn’t love a good rant once in a while? My position in this was that all of the individual iBankers were complicit as individuals, and the solution was to change the way they are compensated. for a little background you should probably read
my thesis here was that it is the individual psychology that is to blame at a *macro* level for the opportunistic thievery and ultimately theegregious failure and loss of wealth for millions of people. I see *zero* difference between Bernard Madoff’s ponzi scheme and Goldman rigging the game at a government level, and perpetrating the innumerable frauds they have on the market. Here’s why I think that:
First and foremost, people don’t go work at Goldman or any other iBank unless they are in the game to make money on a personal level. Now you can argue that Goldman has plenty of guys like me (support staff) who are there to do IT work and make money, but we don’t get bonused on how much money we bring in, we get bonused (and its rare that we do) based on the performance of the infrastructure we maintain, how many help desk calls we resolve, etc. So I will grant you it is not *everyone* at goldman. We’re talking about the people who are modeling these business, making transactions, and deciding how to structure debt, fees, loans, capitalizations, securities, etc. The difference between the 2 is the goal that they are aligned to.
When you are in sales your goals are to maximize margins and do as much volume as possible. Your personal gain depends on it, because the lions share of your personal income is commission based on those 2 things. In a traditional market, selling widgets, this is perfectly fine, and in fact is a cornerstone of capitalism. The market is completely governmed by supply, and demand, and pricing happens naturally as a resulting balance of the 2. The quid pro quo is easily understood by both the buyer and the seller, and no specialized or insider knowledge is required to make the transaction. The line starts to get a bit blurry when you start selling money, because you aren’t really selling anything aside from the ability to use someone else’s wealth. Banks are limited (or at least they used to be before recent credit card action) into how much interest they can charge. Indeed, I believe it is called usury if they go too far. This is because there is no traditional check and balance of supply and demand in that market (unless, of course, you are talking about the Federal reserve bank) The question is, should these iBankers really be “in sales”, i.e pushing a product in a marketplace where supply, demand, and, even value, are somewhat arbitrary.
The line becomes even blurrier when you start selling capital ownership and money as a product, completely abstracted in a million different ways by derivative securities. Is money a product? Or a tool for building products and companies? I think this is one of the fundamental things that is wrong with the investment banking system. The idea that they are selling a service to their clients and those clients include *both* the individual investor and the large corporations who’s financials they manipulate. Often those interests are at odds, and the large institutions needs are serviced at the expense of the individual investor often due to back room deals and nepotistic ideals harkening back to the boarding schools and ivy league fraternities that the perpetrators are the progeny of. Coupled with comeuppance in an industry which rewards greed to such an extent that scenes like the “greed speech” from the movie Wall Street are oft quoted and idolized has led to a culture of criminal irresponsibility. These arepeople with a lot of advantages already, born with a silver spoon in their mouth and a sense of entitlement to keep it that way.
This conflict of interest has come up before in the markets, most notably in 1929, when speculation and heavily leveraged trading lead to an enormous loss of value.Post the 1929 crash, the government put a safeguard in place to silo these two interestscalledtheGlass-Steagalact.Which Goldman lobbied Clinton to repeal, and succeeded. If you work(ed) in the iBanking sector in any direct capacity and claim you did not know the implications of that action,you are either lying or stupid, and i somewhat doubt the latter, seeing as you’ve been educated to be an iBanker. Ignorantia juris non excusat!
As I stated at the beginning people don’t enter this industry except to facilitate massive personal gains.You can argue that people are going there to write themselves a golden ticket to working somewhere else. A means to an end, which is the same idea expressed a different way. There is nothing at all wrong with wanting to make lots of money, and working hard to do so. (which I believe would be the excuse that iBankers would make for their existence) Getting compensated on sales and volume and margin works 99% of the time. But when a bonus-driven culture drives the market, and that market happens to be one that is manipulated by the company you work for, and there are several constituencies being represented inside the same company, there is a serious conflict of interest. And they *all* knew it, and they *all* took advantage of it, in one way or another. And they are *still* taking the bonuses for their actions !!!! This is just insane!
I have two question that sort of sums it up:
1) Is being an informed individual investor even possible in this environment?
2) when you give these guys your money to invest, are you paying them to commit fraud on your behalf? Are you complicit as well? Do you even have a choice about it?
With the level of collusion that is happening inside these organizations, perpetrated and cosigned by each and every individual iBanker, how is anyone outside the fold supposed to compete fairly? The answer is, they aren’t, and if it were any market aside from this one, they would be in court for being anti-competitive, extortion, coercing, price fixing, or any number of other of the felonies they commit on a daily basis. You can blame the culture, but these are individuals choosing to do the wrong thing, day after day, with the full knowledge of it being wrong, and getting paid *our money* to do it (from tax driven bailout funded bonuses, to fees, to lost net-worth, etc)
The only solution I see, given the amorality of the people who work in this sector, is to restructure their compensation to de-couple it from the value they generate for one client at the expense of another. If they are compensated more like the support staff are, and the company is less driven to pay bonuses and charge massive fees, the more that will go back to the individual investors, be them companies or actual individuals. And the licentious kleptomaniacs who are making the transactions will be more inclined to make good decisions about what they do with other people’s money.
* Granted, blaming this on *every* iBanker at Goldman is a straw man argument. But I think it’s far less of one than anyone in that industry would have you believe.
* note that i single Goldman-Sachs out here because they are the most flagrant of players, and the one with the most influence. The other iBanks and their employees are just as complicit but perhaps just not as successful in their morally dubious dealings.