Wall Street Reform won't come from within
by David Atkins
Matt Taibbi has some thoughts about Greg Smith's already legendary, bridge-burning op-ed on leaving Goldman Sachs. Taibbi writes:
Because you can stack all the exposés on Goldman you want by degenerates like me and the McClatchy group, and you can even have a Senate subcommittee call for your executives to be tried for perjury, but that doesn’t necessarily move the Street.
But when one of the firm’s own partners is saying out loud that his company liked to "rip the eyeballs out" of "muppets" like you, then you start to wonder if maybe this firm is the best choice for managing your money. Hence we see headlines this morning like this item from Forbes.com: "Greg Smith Quits, Should Clients Fire Goldman Sachs?"
This always had to be the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.
Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren't just arrogant sleazebags, they’re also not terribly good at managing your money.
If anyone should know, it should be Taibbi, who has been covering the slithering insides of Wall Street grotesquery for years now.
But the argument rings depressingly hollow to me. High level finance (the stuff that isn't long-term investments and basic loans) has always been a nasty, cut-throat business of little value to anyone beyond making rich people richer for moving pieces of paper around, while slitting the throats of greedy wide-eyed naifs who try to play with the big boys while foolishly entrusting them with their money. But it didn't use to be quite this bad.
The change in Wall Street culture really got off the ground when the old partnership model turned into a publicly traded model. Yes, the elimination of Glass-Steagall led to riskier investing strategies, but as Michael Lewis has noted, the culture change on Wall Street began much earlier, back in the late 1970s if not earlier.
It's important not to glorify the old days of private ownership and back-room dealing, but it did lead to a culture of greater respect of clients. In a publicly traded enterprise, one and only one thing matters: the quarterly bottom line. So there's increasing pressure from the shareholders to invent smoke and mirrors accounting to fatten the profit margin while screwing the clients.
"Changing the culture" isn't really going to work here. Goldman and Citibank could go bankrupt tomorrow, and the structural factors that gave rise to their behavioral practices will simply move to the next set of greedheads who get their business. That's because the greed isn't a collective moral failing of all the individuals on Wall Street. It's built into the system.
Taibbi may be right that regulation and hard-nosed reporting won't fix the mess on Wall Street. But clients leaving the big firms won't do it, either. The only thing that will is rethinking the entire publicly traded financial services company model.
True, that's an impossibly heavy lift right now. But especially in a world where financial services firms can trade global commodities anywhere if they find one country's regulations too restrictive, it's important to realize that the only real change will come from dramatically rethinking how business itself is structured, particularly in financial services.
As long as these companies are publicly traded and accountable only to investors looking at their quarterly returns, the culture of Goldman Sachs will be with us long after the company itself is nothing but a footnote in the history books.
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