Posts Tagged ‘Markets’

Market maker should indeed be the catchphrase of the day in the Goldman testimony. Is it an adequate defense?  Does being a market maker for a financial product absolve one of all responsibility for the quality of that product?

Goldman was doing business as market maker for CDOs while its proprietary trading took positions against some of the products it was working with on the other side. Are the evident conflicts of interest in this situation outside the norm for an investment bank? These kinds of conflicts must be commonplace, and the ability to work with capital in these ways are part of the attraction to risk that is a hallmark of investment banking. Fees alone are not enough to support outsize bonuses and average salaries that push into the high six-figures.  The line between investment banks and hedge funds is very blurred with one frequently doing the other’s bidding, as was evident in Abacus.

The unfortunate problem of investment banks offering highly complex investment vehicles as institutional investments is that nearly everyone—including those averse even to the risk of fixed income—ends up becoming an unwitting investor.  Yes, IKB is a large and sophisticated investor, but they are investing with the money of many small and unsophisticated (and probably risk-averse) investors.  While Goldman’s legal responsibility is solely with IKB, its moral responsibility extends to the millions who invested in leveraged subprime debt because of the market that Goldman made.

They say: “We make the market.”  Investors at all levels should demand: “Make our market grow.”  When these markets are for products so abstract that even “sophisticated” investors (not to mention the people packaging them) are baffled, one must ignore the prestige of the market maker and turn to investments that are truly analyzable.  That’s the recipe for making the markets grow.


Read Full Post »

Social responsibility has nothing to do with it.  It’s about making money, as it should be. Michael Hirsch for Newsweek casts Lloyd Blankfein in the role of contemporary successor to J. P. Morgan and bemoans the general loss of conscience in finance. Banking and trading have always been about making money.  Social responsibility is a corollary that doesn’t reflect the reality of today’s hyper-efficient and hyper-connected markets. Finance at the highest levels today is in a place where morals and business simply cannot coexist.

I agree with Blankfein’s assessment.  Can regulation change this crisis in the culture of finance, a culture that clearly thrives on asymmetric information and the ironic poetry of selling someone a bad deal?

There is only one kind of regulation that could begin to modulate this behavior in America.  It would be a broad-based consumption tax that extends to online commerce of all kinds.  The greed of global finance reflects in concentrated form the obsessive consumption of the contemporary developed world.  The world economy is not driven by firms like Goldman; it is driven by the hard work and hard spending of people in the developed world.  As long as there is stiff competition for the output and consumption of these people, firms will do all they can to court them by working towards access to capital that only firms like Goldman can deliver in sufficient quantities.

People want and expect more, and the current system is the best yet devised for achieving that goal for the fortunate few—who already have significant earning power. But are people really getting their money’s worth?

As long as the calculus in the minds of the movers of the economy (remember, it’s the people) is that more consumption equals greater happiness, the path followed by international captains of finance will not waver.  More consumption has been proven not to increase happiness, but it is difficult to “settle” for less after having had more, even if one is happier with less.

Social responsibility begins on Main Street.  Maybe it should be called trickle-up economics.

Read Full Post »