Moral Hazard

by digby

Dday's doing some writing for Crooks and Liars these days and (damn him!) gave Amato this gem of a post about Goldman Sachs. Read the whole thing, and be sure to watch the video of Bill Maher and Matt Taibbi sparring on the subject.

Dday points to this fascinating little tid-bit from the NY Times which flew under the radar of the generalist political blogs as we argued over arcane pieces of health care policy and racial profiling the past few days. But it's certainly something we should find more bandwidth to talk about. After all, it's a scandal of epic proportions and yet another piece of evidence that Goldman Sachs (along with others) in the last 25 years has become an extra-legal if not a fully criminal enterprise. (Much of what they do is not illegal, but it is immoral and it certainly is cheating.) Here's the NY Times article from Friday:

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets [...]

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

dday writes:

They literally place their super-fast computers physically close to the machines that govern NYSE trades, to get the jump on competitors and make enough pennies off of the brief ups and downs of stocks to rake in mounds of cash. And in some cases, investors can buy access to buy and sell order information on certain exchanges that can be used to make these quick orders. When Chuck Schumer is calling for an investigation of Wall Street, you know something has gone horribly wrong.

No, Goldman Sachs is not the only organization profiting from this scheme, or any of the numerous others. But their name keeps surfacing among those that are, in pretty much every case. I don't know how much evidence it takes to understand their role in all of this. Taibbi may not have gotten every single solitary thing right in his very long piece, but he got enough right to make some very powerful people nervous. And rightly so.

Something has gone terribly wrong on Wall Street, and at Goldman Sachs in particular. And I suspect that nobody wants to look too closely because they are afraid that a lack of "faith" in the markets will end up making the economy worse.(More faith based crapola ....) The powers that be in both government and business are scared witless right now that the whole house of cards is going to fall in at once, no matter how much they inanely babble about green shoots and recovery. After all, moving money around and skimming a tidy profit off the top is about the only area where America leads the world anymore. Besides arms and entertainment, it's our main contribution to the global economy. These firms pretty much own the government and they all agree that unless they have their way, the repercussions could be catastrophic. They are holding a metaphorical gun to the heads of every American and saying, let us make obscene profits no matter what or we'll take this fucker down. Of course, it's probably going to come down of its own accord at some point, but they are too big to fail, so no harm, no foul. For them.

But these people are greedheads even beyond the fever dreams of the most ardent disaster capitalist. The smart move is to be prudent and chagrined and keep their heads down and their profile low for a while. But instead they seem to think they need to return to bubbleland as quickly as possible and demonstrate to everyone that they don't take their recent near death experience seriously in the least.

But then, why should they. They crashed the world economy with their last little gambit but they have been determined to be too big to fail, nobody has gone to jail, the only punishment they suffered was getting their bonuses slashed for a year. You can see why they would assume all systems are go. And since they are Masters of the Universe, social disapprobation is something reserved for the rubes. They just don't give a damn. They don't have to.

And frankly, I don't see what will stop them. Americans care far more about Michael Jackson's final days than they do about these financial miscreants destroying the economy for their own personal profit. And the politicians are all their buddies from grad school or recipients of their social and financial largesse. I'm finding it hard to see a mechanism besides total social breakdown that would stop them.

Update: Matt Stoller, policy adviser to Representative Alan Grayson (D-FL-8) sent out an email on a related topic.

Next week, the Financial Services Committee is going to be marking up a bill on executive compensation, the so-called 'Say on Pay' bill. Among other things, this bill mandates a nonbinding shareholder vote on executive compensation. Now, the vote is nonbinding, so the board could theoretically just ignore a shareholder 'no' vote.

Let's say that the legislation were changed so that the shareholder vote were binding. What would happen if shareholders vote 'no'? Would the executives then be paid nothing? That seems unreasonable and unworkable.

How could this be structured so that the shareholder vote is binding, but there's some process to determine executive pay if management is voted down?

Leave your ideas in the comments or send me an email and I'll see that they get to Matt.

I'm partial to the idea of barricades and pitchforks myself, but maybe something along this lines could be tried first ...