“It is not what a lawyer tells me I may do, but what humanity, reason and justice tell me I ought to do.”
– Edmund Burke, statesman, philosopher
I invoked these words of statesman and philosopher Edmund Burke to close my December 31, 2009 letter to Lloyd Blankfein. Today they have particular resonance. I don’t know if, as the SEC has charged, Goldman committed fraud. However, to focus on the legal technicalities of the case is to miss the larger point. At its core, Wall Street’s failure, and Goldman’s, is a failure of moral leadership that no laws or regulations can ever fully address. Goldman v. United States is the tipping point that provides society with an opportunity to fundamentally rethink the purpose of finance. That reexamination will extend far beyond round one of financial reform and will be far more transformative.
Goldman faced a critical turning point in early 2009 and senior management sensed it. Lloyd Blankfein made gestures toward taking the high road, reflected in an Op-Ed that appeared in the Financial Times on February 8, 2009. That Op-Ed was the catalyst for an earlier letter, in which I stated:
We are in extraordinary times, which call for unprecedented statesmanship from our financial leaders. As a trader by training, you grasp our predicament better than many leaders on Wall Street. But as a trader, you’ve not had the responsibility of global financial statesman. Until now.
Blankfein’s polite but defensive response was telling. A friend, who now runs a major division of a “too big to fail” bank, summed it up as “a complete vacuum of leadership in our industry.” Blankfein’s later “God’s work” quip only highlighted this point.
The brush is dry; the gasoline is everywhere. “Goldman v. United States” is simply the match. Resolution will come only through genuine reform around four core issues that are at the heart of society’s disgust with Goldman and Wall Street—its excessive greed, the injustices it has perpetrated, the conflicts of interest it exploits, and its overwhelming hubris.
As a civilized society, we reject extreme greed. The irony in Gordon Gekkos’ “greed is good” may have been lost on some people; we’ll see if the sequel is less subtle. Philosophers and religions going back to Aristotelian times have warned us to resist greed’s temptations. Interestingly, there is no word in the modern lexicon for “chrematistics,” an ancient Greek term which, roughly translated, means “the use of money for the acquisition of wealth as an end in itself.” As Aristotle understood it, instruments of finance were to be employed not in chrematistics, but as means to an end, that end being “Oikonomike” the root of our word “economics.” Oikonomike did not imply unlimited wealth, but rather, the wealth necessary to live a good life.
Others have noted the difference between the “long-term greedy” culture that characterized Goldman under the leadership of Gus Levy and later John Whitehead—signifying a drive for success that always ensured client interests come first—and the unbridled, win-at-all costs greed that characterizes the firm today. Restoring that culture will be difficult, necessitating a new management team and a transformation of the business model.
Society also understands Wall Street’s failure to deliver on its public purpose: to channel savings into productive investment, to provide credit for legitimate consumer and business needs, and to maintain a financial system built on trust. Society will bear the extraordinary burden of those failures for generations to come while the perpetrators of the related frauds and stupidities will not. The management bonuses are insulting. But it’s their personal stock holdings, which should have suffered material or complete dilution as part of the bailouts, that now represent illegitimate wealth and a profound injustice. Historically, such injustice breeds serious social unrest. Wall Street does not appear to get this, or care.
Conflicts of interest are not new to Wall Street, but are now shamelessly exploited with dangerous scale and complexity while firms claim to “manage” such conflicts. Indeed, Goldman states that it “embraces” conflicts as a central feature of its business model!
If we have learned anything from this financial crisis, it is that allowing Wall Street to continue to “manage” its own conflicts is antithetical to fairness and a recipe for disaster. Wall Street’s ability to generate excess profits is significantly linked to its ability to exploit blatant conflicts of interest and their related information and power asymmetries. The structural elimination of these conflicts will significantly reduce the profitability of certain activities and will therefore be fiercely resisted. Some stock prices will suffer. But it is the only way to restore trust.
I am not as cynical as some who suggest that Goldman intended to blow up AIG. But how can it be construed that purchasing credit insurance on AIG after privately loading it up with tens of billions of credit default swaps on toxic (and fraudulent) sub prime risk is not trading on inside information? And did Goldman keep buying protection from unsuspecting counterparties (clients?) while their billion dollar collateral dispute with AIG remained out of the public’s eye? Did they also buy puts on the stock? Furthermore, did Goldman purchase CDS protection on Greece after it aided and abetted misleading national accounts by structuring off the books debt financing? Even if legal, the irreconcilable conflicts between predatory proprietary activity and client service are clear to the ethically grounded. Taxpayer subsidy of this activity is an outrage.
Finally there is the issue of hubris. Wall Street attracts many smart people, most of them ethical and professional. But for those at the top, success has often bred arrogance too. And arrogance that presides over “too big to fail”, or manage, and obviously too big to govern financial firms is, as we have seen, dangerous to society. Wall Street was arrogant and ignorant. It remains arrogant and unrepentant. Society sees this; its disgust is righteous and justified.
Our government is faced with a conundrum and must choose between two bad options. A weak response will virtually guarantee debacles of even greater magnitude in the future, an unacceptable choice. The necessary aggressive response may entail unintended consequences and bureaucratic inefficiencies. Wall Street’s failure to exercise leadership informed by the dictates of “humanity, reason and justice” has consequences as well.
Rebuilding a resilient and trustworthy financial system that serves the needs of the real economy, “oikonomike”, rather than the self-interest of a few will be hard work. Evolving the practice of finance to productively fuel the transition of the economy to serve the needs of real people, while respecting the finite boundaries of the planet, is the great work of our age. Goldman v. United States is the wakeup call we desperately needed. Let’s roll.
