Wednesday, May 19, 2010

Wall Street Culture

As financial reform makes its way through Congress, the media and political observers have justifiably concentrated on the policy proposals and specifics that have been under debate – from the bank tax to the scope of resolution authority. While this debate continues it is important not to miss the forest for the specific trees. In testimony before the financial crisis commission, Goldman Sachs CEO Lloyd Blankfein explained Goldman Sachs business model, in particular in the context of market maker: “We represent the other side of what people want to do. Because we had this risk, because we were accumulating positions which, by the way, we acquired from clients who want to sell them to us, we have to go out ourselves and provide and source the other side of the transactions so that we can manage our risk.” In testimony before Congress, days after Goldman Sachs was charged with fraud by the SEC, it was clear that Blankfein’s defense of Goldman’s business model was falling flat to members of Congress. As Goldman representatives defended themselves from potential criminal charges, Congress seemed to be putting Goldman’s entire business model on trial. While Goldman was talking about their role as “market makers,” many Senators pushed back on the idea that Goldman could engage short positions in a market product at the same time that their clients had long positions and still consider themselves to be providing a service to their clients, on both sides of the deal. In successfully defraying allegations that these deals were illegal Goldman had a much harder time explaining to any member of Congress why these deals are actually needed or even beneficial to their clients or society. The hearings tended to show that Wall Street culture has become to simply profit as much as possible at whatever cost rather than providing valuable service to clients and ultimately service to the national and global economy.

The question then is whether financial sector reform will play any role in transforming the culture of Wall Street to better align its interests with the interests of the country and "Main Street." As the financial crisis and its aftermath have shown, financial institutions will go to great lengths to avoid regulation and will fight tooth and nail against even modest, common sense regulatory efforts. One former Lehman executive explained after the revelation of Repo 105, “firms clearly shop jurisdictions all the time for the most favorable rule set, and there’s nothing wrong with that.” A managing director in London further explained: “Yeah, yeah, yeah. In London, people just generically talk about it. It’s funny, for nonprofessionals, you can try to make it a smoking gun. I’m like, whatever.” Regulatory arbitrage is a common business strategy and while not illegal, it must be recognized as common. Further, financial innovation will always flow to the least regulated causeway as a business matter. These realities should be addressed and debated in current financial sector reform. Whatever watered down and diluted bill that emerges from the Senate, I am not confident that Wall Street culture or effectively regulating financial innovation will be addressed. This I fear will be a mistake.

1 comment:

  1. wall street culture is completely disconnected. check out the documentary "american casino" to plug in.