Just give me the Humbug

We’ve all had fun hating Goldman Sachs again after one of their own sold them out . Mr Smith says that ‘culture was the secret sauce that made [Goldman] great and allowed us to earn our clients’ trust for 143 years’ whereas now Goldman pursues its own interest rather than its clients’ due to a ‘decline in the firm’s moral fibre’…. Hold on. Yes, I know its hard not to burst out laughing.

…. Good. Yes, OK, so, where was I?

Mr Smith is apparently shocked to have discovered himself surrounded by the less tender hearted of our species in, would you believe it, Wall Street of all places! He now recommends that Goldman ‘weed out the morally bankrupt people’ in order to return to the Goldman of old, the Goldman of his youth.

I know essentially nothing about investment banks. But I know nothing about Sainsbury’s either and I’m quite sure they don’t give a damn about me. Nor do I want them to. I just want the Cadbury’s chocolate fingers they sell me to really be Cadbury’s chocolate fingers. I don’t care if they are calling me a muppet behind my back so long as they deal honestly. I wasn’t quite sure whether, in addition to saying that Goldman’s primary motivation was the money they could make out of clients,  Mr Smith was saying that he and his previous colleagues dealt dishonestly with their clients.

As somebody or other famous once said ‘If all men were angels blah blah blah’ (OK, it was Madison ). But of course, they’re not —which is why we don’t want a system that only works if they are,  we want a system that works despite the fact that they’re not. The only one we’ve ever found that even approaches this is the competitive marketplace protected from force and fraud, in which substantial benefits are available from impersonal arms length free trade between even the purely self interested. Indeed, in this system these benefits are the floor on what good can be brought about rather than the ceiling and  for those of us who are (as most of us are)  tolerably generous and sympathetic rather than purely self interested, further substantial gains that depend on well placed trust and mutual concern in narrower and more personal markets are also widely available. So it’s not clear that the goods obtainable from the financial intermediation of Goldman depends on its moral fibre.

Furthermore, the clients and counterparties of Goldman Sachs are not Little Red Riding Hoods clutching in anxious hands a few pounds that they want the wolf to save safely. They are big businesses, pension funds, professional investors and professional traders. They may not know how much Goldman makes on a deal but their concern is with whether the deal as offered is good for them. If it is, they do it, if not, they don’t. And if they don’t know whether the deal is good for them you have to wonder what they are doing there in the first place. So the hand wringing moralising, appealing as it is to our economic biases, doesn’t ring true to me.

  William Cohan in his history of the collapse of Bear Stearns, quotes a source speaking of the early 2000s  It seems to me to throw some light on what is going on:

 “The difference between Bear people and Goldman Sachs people was one of vocabulary” explained one person who know both firms well. “….At Bears they might say, ‘I just ripped that fucker’s head off. I’m going to make a lot of money on this trade. That’s fucking crazy.’ But at Goldman Sachs a salesman and a trader would talk about, ‘That’s a great opportunity. That was a very attractice and commercial price you purchased those secuirites at and I think we’ll have a  very interesting econominc opportunity in the near future.’  ” Cohan p. 316

So in the period whose passing at Goldman Mr Smith mourns, Bears and Goldman were doing the same thing… but Goldman did it with nicer words. I suspect that Mr Smith is just mourning the humbug. (I expect he’d like me to find a nicer word for that too. I can think of a ruder one.)