Lawrence Lessig: What's really wrong with Goldman Sachs

A specific culture is not only the "Secret Sauce" of Goldman Sachs, but of our Western society at large, especially of the Northern European society (and its derivatives, all those formed by the ideas of the Enlightenment and with our Generalized Reciprocity, as R. Putnam [Book: "Bowling Alone"] calls it). Our current economic system, starting in the late senventies, is rapidly destroying that very basis of our societies' Secret Sauce. Sucks.

This is a fairly content-less piece. As near as he comes to naming a specific problem or proposing a specific solution is this quote:<p>&#62; Robert Reich, for example, has long argued that "professional companies should not be permitted to become publicly held corporations." As he puts it, "Such a step puts them into high-stakes competition for investors, pushing them to maximize profits over their responsibilities to the public."<p>And even that's pretty hand-wavy. What makes a "professional company" and why would such a thing have a "responsibility to the public" above and beyond any other company?<p>Goldman may be a bogeyman to a lot of folks, but at least they had the sense to get <i>out</i> of the crazy CDO world as fast as they could. If you're going to spend pages explaining how "toxic" the environment is there, some specific, verifiable examples would be nice. Neither Smith nor Lessig provide any. Goldman's clients aren't morons, and if they thought they could do better elsewhere, they were and are free to stop doing business with GS. Until you can really nail Goldman with black and white evidence of fraud, it's hard to take these generalized allegations seriously.

This is one of the few things I've read on CNN in a long time I like. Lessig doesn't go into details about regulations, but I would think most people are familiar with the repeal of Glass-Steagal and the de-regulation that began under Reagan in the 80's.<p>GS has a conflict of interest, because it trades on both ends. It sells products to a client, but is often on the opposing side of those trades. That's why GS is so profitable, at least in the short term. The funny thing is all the people trying to defend GS, as though having undisclosed interest in the deals they do with clients is just fine. Looking back on the wreckage, bank bailouts and other things that have nearly brought the economy to a halt the last few years, I don't really understand how average people who don't have a vested interest in wall street banking can support any of those firms.

The most recent Econ Talk (<a href="http://www.econtalk.org/" rel="nofollow">http://www.econtalk.org/</a>) is an interview with a former Goldman quant who said that Goldman's culture changed "markedly" for the worse when it went public. Before that, Goldman's partners had a huge incentive to make sure "psychopaths" weren't handling the money, and access to capital was quite limited. Capitalization was a constant problem, and they fought for it. After going public, that problem went away, and so did the fear of the psychopaths.

It is a world of buy and selling securities. There is always someone else on the other end. GS was one of the first to realize that the subprime mortgage market was about to blow up. To cover their asses they began selling everything they owned and at the same time bought CDS's.<p>So if a German bank that GS does business with still thinks its a good idea to buy some CDO packaged with "AAA" bonds without doing their diligence then GS should have every right to sell them some CDO's, and also short those same securities. They realized there was a problem before everyone else, and they exploited those people to profit from them.<p>Isn't that how the business world works? Especially with start-ups? You look for inefficiencies and try to capitlaize on them. You use the information that others dont have to create value.

While I am /in no way/ a fan of GS (or the entire sector), I find the sudden blitz on GS to be quite smelly. First NYTimes publishes a relatively random VP's resignation slam-bye. Matt T. from Rollingstones was also cheerleading. And of course, NYTimes had a front page story followup. And now, this.<p>What is going on? Have they found their scapegoat for the generally sociopathic (and well hated) sector?

Lessig does not make the case for why Goldman, in particular, was so harmed by the act of going public. The incentives he cites exist for all public companies, and many public companies have existed, and done good work, for decades.<p>Speaking of which, before we talk about the incentives that led to Goldman's cultural decline, how about some objective confirmation that their culture has in fact declined? The article is in response to a single executive's published opinion.

<i>Moral fiber is no doubt important. So, too, is culture. But it is a mistake to understand culture without also understanding incentives. The culture that Smith praises was the product of a firm with a particular legal form, in a particular financial environment. At just about the same time, both particularities changed. And given these changes, it is no wonder that the culture Mr. Smith celebrates soon disappeared.</i>

This is wonderful article written by a Harvard Law professor. Normally I don't agree with lawyers, but in this case Lawrence Lessig just tells it like it is without manipulating the facts in a well-respected journal.

Sachs pronounced sucks.