Model this (the Goldman guy)

Everyone is talking about the Goldman guy who quit, he wrote this (reactions here):

I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival. It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.

This strikes me as economically naive.  Is it at least possible that the culture at Goldman has changed (I am not myself committing to any assessment here of GS) because profit maximization dictates such a shift?  What are a few possible models?

1. Income from trading has risen in importance, relative to income from clients, and if you can do well trading you will make money, whether or not you are a jerk.

2. Greater competitiveness lowers levels of service quality for efficiency wage-like reasons.  GS can no longer play the role of high mark-up, precommit to high-quality, monopolist.

3. We have moved to the “used car” equilibrium.  You know they are screwing you over, or trying to, but leaving for the guy next door simply replicates the same basic incentives so you stay put and fight back best you can.

4. The current interest rate spread means they don’t have to try too hard.

Anything else?  Those are possible mechanisms, not factual claims about the world.  In any case, I am suspicious of his impulse to blame it all on a sudden shift in the moral propensities of the people he was working with.


Why I am leaving the Empire, by Darth Vader

The problem with terrible knee jerk stuff like this is that it crowds out the opportunity for someone to write a reasonable funny parody of the article. I mean - this parody is remarkably poorly done.

I wonder if this applies to blog posts in general - as more people blog, low quality elucidations of ideas crowd out the possibility of more thoughtful clever pieces.

Sturgeon's Law probably applies. the perception though, is that with so many more blogs around it actually feels easier to find bad ideas; and with more idiots forwarding bad ideas through social media to each other, the replication of crap tends to drown out all the good ones

The letter is narcissistic. We've all quit jobs we couldn't stand, many of us after a long and honorable tenure. It is incredibly crass to make your professional grievances fodder for the national debate. I know we all like to think that what goes on at Goldman Sachs is what goes on in the White House, but that's only true from the standpoint of polemics.

I do think that people in general and managers in particular tend to underestimate the value of doing right by one's clients. I'm sure we've all worked for organizations that looked to short-run client solutions for "big bangs" that resulted in fewer clients in the long run. From firsthand experience, in my consulting days I had a number of colleagues who would make big commissions in Year X by up-selling the client on a bunch of superfluous work, only to discover their sales numbers plummeting in Year X+1 because the client got tired of being fleeced.

Maybe that's the kind of thing this guy is talking about...?

But in the context of the NY Times and the current political climate, I really think this letter was a bunch of sounds-plausible arguments aimed at zinging his former supervisors. Very poor taste.

I disagree. I think in order for the debate to have any real substance requires real testimony. The guy was quite high up and was there for many years and chose to leave. We know this much. I'm not sure why when you choose to leave a company because you don't like how it is being run, it makes the world a worse rather than better place. If something like this could have come out of Enron a few years before it went bankrupt, things may have been different.

ED at Goldman Sachs is not "high up". Anybody who thinks it is doesn't know anything about investment banking.

Head of EMEA equity derivates sales isn't peanuts. But why pass up the chance to make a condescending remark to someone who doesn't work in investment banking? Those peons should know their place.

EMEA ED sales supposedly has precisely one person in it: this guy (had, I suppose).

Saying that ED is not high up is a meaningless statement. Some banks don't even have an ED title; in fact of the three I have worked in, none have. MD yes, ED no. And there is no easy mapping from a title at one firm vs a title at another so it wouldn't even be fair to equate them (MD and ED).

Some banks hand out titles like candy while others limit them.

ED is below MD. Not a higher up in anybody's view besides his parents.

My point is that even if one has legitimate and noble reasons to leave, writing a screed in the NY Times isn't exactly what one would consider "professional behavior." If Goldman Sachs hires guys like this, it's small wonder they have an ethics problem.

I understand the point, I just think what he is doing is akin to whistleblowing (though obviously also different), and that is basically a good thing. It's in bad taste if it is sour grapes but since he was not obviously forced out, that does not seem to be the case.

what he is doing is akin to whistleblowing (though obviously also different)

Would it have anything to do with lower bonuses this year?

Maybe the fund raising for his hedge fund wasn't going well and he needed a bit of publicity.

My thoughts exactly. And has't he got the publicity !

#1; trading doesn't require clients.

Trading doesn't require anything, except a lot of cash that you can leverage.

Getting our commercial and investment bank out of that business is a first step.

Yeah, combination of #1 and #3.

meh. Used car analogy is actually stronger, but it isn't because you are being screwed by competition.

The markup on used cars isn't because the cars are junk or bad; it is the financing. Look at any "no credit check" place.

Commercial banks of course. But investment banks? That's what they are there for, trading and risk.

I think he means prop trading, not trading on behalf of clients.

But what does prop trading really mean other than certain desks have that name? A bank by its nature takes its funds and makes investments on its own behalf. That's what a commercial bank does when it makes a loan. Saying buying a mortgage loan inst trading but buying a gold security is, is a fine legal hair slitting argument.

There is the potential for a conflict of interest, Chinese Wall be damned. What Goldman has been accused of anecdotally - albeit not just with prop trading, but it's probably easiest to do this with equities - is talking up stocks to clients that its prop desk is selling, shorting, or both.

If I was Executive Director of Derivatives like he was, I'd also think now was a good time to jump ship.

Also, he only outlines the chicanery on the client side (betting against clients, etc).

Nothing about the cozy crony relationships with the government.
Nothing about enabling the Second world governments to over-leverage.

Those topics are probably a harder sell. Cheating little old ladies is more
understandable to the readers.

In his defence, levering up nations wasn't anywhere near what he did.

Nothing about the cozy crony relationships with the government ... Cheating little old ladies is more understandable to the readers.

And a far better story in an election year, especially from the NYT's perspective. Wouldn't want to upset any of the cronies after all. Heaven forfend!

Most GS counterparties aren't "little old ladies."

We have moved to the “used car” equilibrium.

A related version of this is that all the people that wanted a good relationship and/or expect decency have moved to discount online brokers and index funds.

Uh, then those people went to the wrong place. There's no relationship of any kind at those places. That's on purpose of course, to keep the costs way down. But no one goes discount/online for a relationship.

The point is, if you think most premium companies are crooks, and the cost of protecting yourself against bad advice is very high, index funds and discounterd can be the optimal strategy for someone that would pick a trustworthy, relationship building firm if that was available.

If you want a relationship, get a dog.

Ezactly. The rationale behind the existence of much of Wall street disappears.

The question becomes not whether these folks exist as efficient allocators of capital, but whether they have anyone entrust capital to them for allocation.

2008 was an opportunity for a rationalization of the financial industry short cicuited by the injection of taxpayer and Fed cash.

Again, he's dealing with much, much more sophisticated (you can add scare quotes if you like) counterparties than index fund buyers.

Amen. You can pay hefty fees to people who regard you as a muppet, or pay a fraction of that for Vanguard to put you in index funds. You won't get a friend either way.

So does anyone really believe that Goldman Sachs was really all that client-focused in 2000? From what little I've read, the big cultural change on Wall Street in general happened before then.

The op-ed read like an excerpt from Liar's Poker.

Actually, I was thinking more "Jerry Maguire".

Sort of, but Jerry wrote his polemic while still employed, to try to fix what he saw was wrong. This guy left first, then wrote his. But it's similar, agreed.

That's a bit of an insult to Michael Lewis, don't you think? The idea is similar, but the execution vastly different. I don't suspect we'll see this fellow making his living on his pen.

So let me try to defend his assertion, that Goldman has become greedier and more evil. (I have no idea if it's true. I'm just doing an exercise of how he might be right.)

I think Tyler is indisputably right that human nature doesn't change. People, as a whole, are not any greedier than this guy when he started at GS.

But human nature does not need to change for the writer to be right. The mix of people at Goldman needs to change, and the culture that rewards some behaviors and punishes others needs to change. Most people who have worked for a bunch of different employers have surely noticed that some companies seem to be stuffed with good folks who get along well and others are stuffed with bastards who create a toxic environment. Change your CEO and a few key people at the top and you might get this effect.

Of course, corporate culture does get ingrained, so it might be too fast.

The culture at most investment banks changed (IMO for the worse) when they went from smaller, private partnerships to public companies. But the marketplace kind of made that necessary, as globalization requires huge amounts of capital in the banks which can only be raised from the public.

How could anyone doubt that the culture of banking has changed over the past century?

Everything has changed over the past century. What the letter writer and other have noted is that there's been a fairly big and much more recent change in culture, probably tied to the private firms going public, starting 15-20 years ago.

Wasn't this the plot of Jerry Maguire?

congrats. you win! well done, sir

You are missing the big change.

Goldman and major I-banks were true partnerships in olden days. Your equity, your personal wealth, as well as your reputation were on the line. Goldman and others went public in the 1990s and got bigger and more profitable.

It is really about corporate governance. Public corporations will behave differently. The shareholders, who trade quickly, don't care about long term reputation the way that partners do. There may have always been ways to cheat clients in the short run at the expense of the long term, but partners had different incentives back then compared to shareholders currently. There have always been jerks in that world; the issue is the incentive of partners to screen the jerks out compared the incentive of shareholders.

By interesting coincidence, in Megan's blog at Atlantic, Pascal-Emmanuel Gobry has argued for bringing back the partnership model to finance in exchange for deregulation.

Goldman used to have a sterling reputation. That is long gone.

The resigning director may have timed his departure well. First, cash in while the going is good. Second, when Goldman's reputational capital is depleted, there are no more rents to be extracted, so it is time to leave. Third, make your departure public and angry in such a way that it boosts your personal reputational capital at the expense of the firm you are leaving. That allows you to collect a new set of clients. Also, if there are criminal investigations against Goldman, the public angry departure gives him some protection against indictment; maybe he will even be witness for the prosecution.

Agreed on the partner/shareholder distinction.

Me too, I said the same thing (less well) above before I got down to his comment.


This also sounds strangely familiar to a few of the themes in Mad Men.

Yes, exactly.

You have the shareholder/partner distinction mixed up with agent-principal relations. In the partnership model, there is no agent-principal distinction, meaning the same person (qua agent) also has to live with the long-term consequences (qua partner/equity holder). In the corporate model, the agent is distinct from the equity holder, and thus does not bear the risk of the long-term residual consequences of his or her actions, whereas equity holders (as a class, as opposed to any individual equity holders) always bear the long-term residual effects of operations.

Not exactly. The shareholders of a publicly traded corporation are fine with short term gains, because they can always cash out and leave the next shareholder holding the bag. So they will push the bank to short term profits.

Partners, as you note, know they will have to live with the long term effects of their actions and will act accordingly. The same is true of shareholders of a closely held corporation, where the shares aren't freely tradeable - there's nothing magical about the partner/shareholder distinctino per se.

Totally agree that this can be fully explained by the incentive structure.

During this period, there was a rapid growth in bonuses, which are based on short term revenue rather than long term value maximisation.

Once the culture has changed, it is difficult to revert, even if the incentive structure is changed to have a longer term focus

"So does anyone really believe that Goldman Sachs was really all that client-focused in 2000?"

Yes. The firm was widely acknowledged to have the highest ethical standards and the most obsessive client orientation on Wall Street until very recently. It was a source of competitive advantage for GS for a long time as it allowed the firm to win a dis-proportionate share of clients and recruits who cared about doing business in an above-board manner. This was a classic "long term greedy" culture (i.e. there was a strong belief among people at GS that if they did the right thing for the client that they would all get rich over the course of their career, explicitly passing upo short-term profit taking opportunities to build a franchise that would be more valuable long term).

That also answers the suspicion of Tyler and others that the culture didn't really change, that humans at GS aren't any more greedy than when Smith started his career. Smith says pretty explicitly that the firm has started promoting and rewarding people solely on short-term profits. It is very easy to see who brought in revenues in any given year; it is much harder to measure who is cultivating long-term client relationships and improving the firms reputation, or passing up risks that could endanger the firm's health in the future. "Merit" became synonymous with "this year's contribution to the bottom line" and the time horizon for people at all levels of the organization became much shorter.

Louis, how is that NOT a culture change?

Well, it could be that as a more junior employee he saw different aspects of the culture than he did on both being in it longer and rising higher. It is easier to think that promotion and compensation decisions are made for the right reasons when you aren't involved in the horse trading they involve.

Did he really say "secret sauce"? Maybe Goldman does a good job at making money but writing non-hackneyed English obviously isn't a strength. And did he list success in ping pong as one of his proudest achievements? I'd have left that off the list.

Bronze medal at the jewish olympics!! And he *almost* got a rhodes scholarship! how else would we know of his incorruptible character?

Da Greeks, dey no lika da sauce. Da sauce isa no good.

Too early for cheeseburger? Look - cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger, cheeseburger.

A principle source of profits for Goldman Sachs is money funneled in various way to them via the Federal Reserve and the US government.

A lack of ethics is at the core of this business model.

Right. But not just funneled steadily. The government has and will bail them out when they risk failing.

Screwing over your clients can be very rewarding, but in a free market very risky. In a market where you know you can't fail, there is no risk to screwing your clients, only reward. I think the promise of future bailouts should be added to the list.

"Is it at least possible that the culture at Goldman has changed (I am not myself committing to any assessment here of GS) because profit maximization dictates such a shift"

It sounds like you are supporting his argument. He believes that the culture of the firm has shifted from one that prides doing the right thing for the client under any circumstances to one that maximizes profit under any circumstances. Also, let's not pretend GS is a no-name bank trying to claw their way up in the world. They are by pretty much every account the #1 most powerful and prestigious bank in the world. They make the rules in many cases, and the argument that they need to drastically shift their culture to keep up seems naive to me.

The first two points that Tyler makes are particularly tenuous in my mind:

1. The article explicitly states numerous times where the author has seen a complete disregard and lack of attention to the client. If trading revenue has spiked, that doesn't change the fact that GS is still shifting its philosophy on client-facing activities.

2. There's always been competitiveness on Wall Street. GS established their brand in large part on their obsession with doing the right thing for the client. It seems like a thin argument to proclaim that they should jettison a strategy that has gotten them to the peak in the first place.

My recollection (correct me if I'm wrong) is that GS was one of the first Jewish-owned firms. Because it was often shut out of doing large deals with the goyim, it made a point of being extremely client-focused, eventually building a reputation that made it a selling point to the goyim when those biases started fading away.

Also, "profit maximization" is pretty ambiguous. Anyone in finance knows there are high quality profits (w/ little risk, high probability of being maintained or growing over the years) and low quality profits (your winnings in Russian roulette, or from picking the pockets of your clients). If all you care about is growing the total number regardless of quality, then you prioritize trading and exploiting your clients over treating them well. That may not be economically rational for the firm, but it might be for an underling who may not even stay at Goldman for more than a few years.

There is more to life than textbook introductory economics.

Some things you may have missed :

i) It isn't clear what different people are maximizing (and with what time horizons in mind),

ii) GS is no longer a "partnership". They claim that the old culture was retained, but they have every incentive to make that claim.

iii) Organizational culture takes time to form and erode. The partnership structure ended at end of the last century - just 12 years ago.

iv) The ultimate impact of Dodd-Frank is unclear and there may be more and tighter regulations. This will cut into the profitability of proprietary trades and other activities. Bonuses were down this year and there has been a widespread desire to start or move to hedge funds and other smaller organizations. People are scared that the money will dry up.

The author is a bit naive. His shock that banking puts profits first is a bit overwrought. However, my experience with finance over the last couple of decades would suggest that he has a point. Wall Street has become increasingly amoral. There was at least some hint of fair play and stakeholder balance in the old days. Its gone now.

One gets a kind of creepy feeling reading the last part of this essay, and I am one who tends to think the worst of a firm like Goldman Sachs. The entire piece feels like a narcissistic promotion, but the end clinches this feeling for me- who cares about his table tennis exploits, or how he got to Stanford? This addition by itself makes me question whether or not he is being truthful about the things he claims to have witnessed.

Gave me a good chuckle though.

I think this is a useful letter. The economic naivete of it is neither here nor there.
One of the reasons why people hate bankers so much is the total lack of self criticism coming out of that industry.
It's like everyone in banking is sworn to some omerta code or something.

You cant really regulate stuff like do you pass a law asking banks to treat their customers better? But this doesnt stop politicians from trying anyway.

The banking industry needs to learn to criticise itself more openly and freely otherwise the suspicion will never go away.
The way this letter has gone viral so quickly shows that the public believes the industry to be one where all sorts of dodgy stuff are tolerated for the sake of the brotherhood.

I think Greg is just an old fashioned nice guy. But what do I know.

Maybe I'm missing something here, but when I took economics I was taught the purpose of capitalism was to produce goods and services that improved our standard of living. Other economic systems have shown to do this less well over time than capitalism, which is why we've chosen it. The motive for firms to produce these goods and services is profit. Seems like GS has switched something around. If the purpose of the firm is just to generate profits instead of producing goods and services that raise our standard of living, then it risks becoming a predatory, rent-seeking institution focused on short-term gains at the expense long-term benefits. Conflicts of interest, trading ahead of your customers, etc become a means to profit instead of a threat to profit. For people who measure their personal and professional utility by something other than dollar signs, this is likely a disturbing culture that seems contrary to the long term best interest of themselves, the firm, and capitalism in general. If you don't really care about any of that, and just want to get rich and calculate risk only based on the threat of losing future business or going to jail, it's likely an easier path for you to travel. I don't think he is being naive. I think he is disappointed that whatever sales pitch he got during new employee orientation about integrity, helping customers, valuing clients, etc is no longer true. To me this reads like a guy who wants to be amply rewarded for providing products and services that improve people's standard of living, not a guy who wants to be amply rewarded by figuring out how to extract economic rents gullible clients.

It seems like those of you making ad hominem attacks against Greg Smith should have payed more attention to Tyler's previous writings about not attacking the person, but the argument.

As an ex Arthur Andersen consultant, I can relate to Greg's thoughts in this piece he wrote. Time will tell.

this is a blog about economics among other things and so I wonder why "moral hazard" isn't mentioned by anyone. WE bailed out GS and the other banks because their prop trading blew up on them. We need banks and they are a measure of our economic "might" in the global economy but at what price?

The bankers I know still blame everyone else when I ask "where were the prudent bankers"? They were all just chasing fees!

Tyler, legitimate concerns but none address the issues at stake in the original article.

1. Trading does depend on relationships. In fact, trading is very much about relationships. When you are big and move millions in every single trade, you need to have counterparties (read pension funds, mutual funds, etc.) that trust you enough to take the assets you are selling even if they don't have enough time to do complicated due diligence. You also need people who trust you enough to fund your trading in the repo markets (see what happened at Bear Stearns). Trust is essential in complex, high-speed transactions.

2. I am not sure what this point is all about. There is a huge difference between offering a lower quality product at a low price and deliberately trying to abuse customers. The former is called cost leadership, the latter is called fraud.

3. Is this not, in fact, the kind of decline in morals that the original author laments? Everyone treats everyone like garbage, so it's all good. The model may be right, the equilibrium may be efficient, but the author's claim is that it is unethical/immoral (or maybe amoral).

4. Things were like this before spreads narrowed so much.

Tyler, I think you need to be more sensitive to moral arguments. Just because a set of incentives yields an efficient outcome (i.e. used car equilibrium) doesn't mean that we as a society are justified in accepting it. If multiple equilibrums exist, I'd argue we've settled at the wrong one. And I mean "wrong" in a totally ethical context: conditional economic outcomes may be efficient but that doesn't mean they have been conditioned on the right set of circumstances.


Re: #1 - watch the movie Margin Call.

PS: I do not agree in my previous post that the outcome is actually efficient. I do not believe that GS traders necessarily optimize long-term outcomes with respect to the circumstances they face. I DO think it's possible for the same traders to benefit more in the long run by being good to clients and to act against their very own long-run interests if a social feedback loop exists wherein being a part of the "in-group" at GS requires you to have stories about ripping clients off, etc.

Before she dies, Alison Snowe wrote a lot about the intersection of ethics and commerce. She noted that small businesses thrive by offering a better product at a better price. What if the banks had offered innovative products that met those qualifications, rather than exploding ARMs and no-doc loans? I think Smith has hit a real nerve here. He has articulated what we suspected was wrong at the big banks. There is little regard for clients, or for the long term best interests of shareholders.


When I went through college recruiting a few years ago and in my few years in the corporate world, I've never gotten the impression that Goldman Sachs marketed itself as the upstanding, honest, longview firm that always looks out for it's clients. Instead the impression of Goldman has always been of intelligent, driven, cocky, social climbers who don't bother marketing themselves because they're the best and they know it.

Are their clients somewhat akin to the ones with Bernie Madoff who didn't want to know?

Over the past five-plus decades I've found the following rules useful in understanding situations as described here.

1. Decision makers will always be faced with the choice between optimizing for the short or the long term.
2. Decisions made today may be very different depending on which choice you make.
3. There is no long-term.

-- Chip

Is your point that "There is no long term," or that "Decision makers never choose the long term?"

The latter. There are exceptions. Jeff Bezos is a good one. And he's gotten flack from his stockholders for doing so.

Perhaps the culture shift led GS to start taking advantage of simple first degree price discrimination. Smith seems to be saying that GS staff are just up-selling clients to more expensive products, not actively defrauding them/betting against them. If clients don't understand GS's product line, it makes sense that GS hand-waving/arm-twisting might push them to purchase something fancier than they otherwise would, increasing the firm's profits. Ignorance about the product means that clients would not understand that they are being ripped off -- perhaps they still got an acceptable return on their purchase and just don't know that there was another product that would have served their needs better. Meanwhile, GS captures some extra surplus.

Whoops, didn't mean to make this a response to the previous post here. Posting fail.

This is easily disproven by the very existence of Silicon Valley. Many of the most successful companies there didn't focus on profit maximization until much later in their development cycle. So much so that there's a counter-movement led by the likes of 37 Signals arguing that companies in the Valley don't think nearly enough about profit.

I've been pondering this and I think your example actually supports my point. What happens, I think, is that venture capitalists push young companies to make profit early so that the VCs can cash out, instead of pushing young companies to achieve sustainable growth. It's yet another example of short-term versus long-term thinking. The VCs have no incentive for the company to succeed once they've sold it or it's gone public; by that time, they've made all their money. So their planning horizon is maybe two or three years.

The other possibility is that the shift in Goldman from a partnership to a corporation has shifted the incentive structure so they don't care about the effects and action will have 10 years out.

In the grey area of whether or not you are a fiduciary for your clients, perhaps they have made a conscious decision to steer away from a fiduciary role. At which point their responsibility is to make money for some very short-term focused shareholders.

For someone who worked there 12 years availing himself of the firm largesse, the timing, resignation and the sense of outrage all ring pretty hollow. Did Lloyd become CEO yesterday? In fact, if you want to assign the rise of this client indifference to particular leaders, those leaders were in positions of significant influence well before this guy started as an intern. What has changed recently? Well, the incentives: the large bonuses. Perhaps they were enough in the past to assuage the guilt, the countless hours spent building rube goldberg trades.

GS is no different than any other firm. If anyone is responsible for the customers getting ripped off, its is you and I, because it is you and I who are the victims. Because GS and the creators of such devices dont deal with most of us. The reality is that these salesmen deal with our agents -- pension funds, endowments, money managers, even our sovereign reps. And our agents interests' are not wholly aligned with our own and we allow them to continue making the same mistakes. GS and these firms will continue along the same path because "customers have short memories." Thats not quite right: we, the ultimate customers, dont know -- have any memory -- of what these deals were and our agents dont care very much.

People often blame large payouts for the ills in the financial world. In my career both in and out of Wall St (and GS), I rarely begrudged the superstars, the true innovators -- whether ultimately they created the nuclear bomb or invented penicillin -- the large payouts. The problem isnt the guy making $100M a year. That guy actually believes in his job. Its the $M payouts for relatively mediocre people were lucky to just get a ticket to board the train (as seems to be evident in the case with this guy) because they are the ones who nudge the system farther from stability and the money allows them to keep doing what they know to be wrong.

My question is why everyone seems to assume that "ethical" behavior is all that desirable for a firm that mainly deals with other Wall Street institutions.

Isn't one of the critiques of Wall Street that the big firms work together too much? Given that Goldman's clients are solidly 1 percenters, shouldn't OWS applaud GS for screwing over these top tier clients?

He's dead wrong. Under Obama, the trend toward rentseeking over profitseeking has markedly accelerated.

Laughably false. Link?

How many would you like?

I could go on, but there really aren't enough hours in the day. As the Reason article points out:

Problem No. 2: corruption. When government puts its massive thumb on the market scale, corporations have a huge incentive to try to win government's favor. Hence: campaign contributions and lobbyists galore. Progressives who want to keep money out of politics should help libertarians build a high wall between economy and state.

Yeah, and if McCain had won there'd be no rent seeking at all.

ODS is so boring. As was BDS before it, and CDS before that.

McCain would probably have been somewhat better.

This isn't like claiming Obama is a secret Muslim who was born in another country. In this case, the defense of Obama seems deranged. Of course a statist agenda encourages rentseeking, it would be a miracle if otherwise.

All unprovable partisan bullshit. Classic ODS.

Like McCain of the Keating Five is some kind of stranger to rent seeking.

Again, your ODS is tiresome and doesn't reflect well on you.

McCain would likely not have done even half the things I listed.

Again, are you seriously questioning whether statism encourages rentseeking? Really?

Your deranged defense of Obama is making you seem rather feebleminded.

Let's review: I said rentseeking has markedly increased under Obama, you scoffed and asked for a link, I gave a ton of them. You threw up a ridiculous strawman about "no rentseeking at all" under McCain, I said he would be "probably somewhat better." I noted this argument is grounded in something so obvious it is essentially a truism: more gov't power creates more rentseeking opportunities. You called this "unprovable partisan bullshit" but made no discernible counterargument.

Sorry, not your best showing.

Hmmm, well, maybe a little disappointed in you. But the angrier words seem to be more in your corner.

The Chicago Way.

Your retarded claims grow bolder and crazier by the day. There aren't enough links in the world to prove that bullshit statement.

Yes, I agree, no amount of evidence would convince you of the obvious.

I'm guessing a lot of people don't understand that gov't transfer payments are by definition economic rents (whether or not we agree they are good things is a separate question!). Obama was elected on a platform of rentseeking. It is the core value of his party. It would be fairly amazing if he had not delivered the promised rents to his constituents.

How is the Trillion dollar war, contract-after-contract in Iraq not a gigantic, multi-billion dollar rent seeking operation.

How do the Tall Dave's of the world start frothing at the mouth over this multimillion dollar scandal (Soylendra) and just ignore the trillion dollar? I'm guessing he lives in that same world people who froth at the mouth over "defunding" Planned parenthood and ACORN (EVIL! They are doing things that I don't like!). Do you think he's going to suggest defunding the military over their monthly scandals? Or taking away churches' tax breaks over their political activities?

How many Simple Simonass people like him are there on the right to get riled up over the small things while failing to use brain processing power to consider equally corrupt but on a much greater scale scandals?

Iraq arguably could be, but one could say the same of WWII (we did not have to invade Germany or Japan, a negotiated peace would have been much cheaper), Korea, WW I, etc. Defense is generally considered a public good -- and the Kurds and Koreans would certainly agree.

ACORN was committing massive vote fraud, that wasn't so much rentseeking as a criminal conspiracy to defraud the public.

In any case if you want to look at the big numbers, transfer payments dwarf Iraq and in fact all defense spending. And the system is broken!

...while another judge, in Kingsport, Tenn., awarded benefits in 99% of his decisions.

What? Is your point that because the war in Iraq is a public good, there is no rent seeking on the part of contractors and infrastructure specialists (a lot of which might even be justified) or that because its a public good, we should just ignore it? You don't believe many people think pursuing clean energy is a public good?

Now you want to talk about transfer payments, what is this, do you mean social security? Because Social Security has existed under ever President in the last 75 years and presiding over a time period where there are just more absoulte levels of elderly people does not constitute Obama creating rent-seeking. I mean, he literally cannot do anything to Social Security, it works on its own.

4 independent investigations have cleared ACORN of any wrong doing, nor was their voter fraud. There was voter registration fraud, of which ACORN was the VICTIM, but no "vote fraud" whatever that is. I could make the statement that the US Military has committed massive crimes through documented cases of murder and torture, but again, this would require you being intelligent enough to understand the significant of scope and size.

You seem very confused. Contracting is not rentseeking. Yes, there could be rentseeking, but this is true in all gov't programs (esp. the EPA, which actually encourages enviro groups to sue them, so that they then have to pay the enviro groups taxpayer funds). No, energy isn't a public good.

Again, whether or not we agree transfer payments are wonderful, they are economic rents. Obama campaigned on increasing transfer payments, and did so.

This ACORN line of reasoning is so dumb you couldn't possibly believe it. First off, voter registration fraud IS vote fraud. Nor is it likely massive registration fraud was unaccompanied by actual vote fraud, which is very hard to prove unless you actually tape someone voting in multiple precincts. Finally, ACORN was absolutely not "cleared of wrongdoing."

Wow, did you just call ACORN the victim? Really?

No, the victim is every person who is legally entitled to vote. The simultaneous push to commit voter registration fraud and prevent states from confirming voters with ID isn't fooling anyone -- the goal is to illegally elect Democrats.

What's really fun is to suggest to ACORN defenders that, if everyone getting to vote is so important that we can't ask for photo ID or pay much attention to registration fraud (and some guy who's lived in the woods his whole life and so never got a photo ID might want to vote), why not just sell each vote for $10? Then everyone can vote, and then people who have strong political views can vote as many times as they want as long as they're willing to pay for it.

"No!" they'd shriek, "That's totally wrong and immoral and undemocratic! It's very, VERY important people only be allowed to vote ONCE!"


A temper tantrum from a 6th year VP after a weak bonus season is not uncommon. Seeing a temper tantrum from a 6th year VP in the New York Times is uncommon.

First, people should understand one thing. He is not an "executive" or a "partner" or even a relatively senior person at Goldman. He is a guy who called on European institutional clients to sell them a particular type of finacial product. At most he had one or two recent college grads working under him; more likely he had none.

Tyler's intuition that this seems naive is correct. Most alums seem to agree that Goldman changed after the IPO, but it hasn't changed that dramatically (and his entire tenure has been post-IPO). Maybe this guy was so naive for 11.5 years that he didn't realize their goal was to make money and he coincidentally came to that conclusion right after bonuses were paid, but probably not. And I don't think anyone feels particularly sorry for their hedge fund clients, the ones who supposedly are so dumb they're getting their eyeballs ripped out, even though many of them were probably star traders themselves before becoming investment managers. That is typical narcissistic Goldman, and is more of a rebuke of their culture than anything he explicitly says in the letter.

He is just a bitter guy taking a cheap shot at his ex employer on the way out the door. He's on to bigger and better things, like maybe a silver medal in the Jewish ping pong Olympics.

Another point I'll make is that if an equity salesman never sells you anything that makes money, you will probably stop buying from him at some point... Goldman is not out of business yet, so apparently some clients are dong ok for themselves. Maybe this guy wasn't thinking of his clients, and maybe that's why he got a small bonus (though still larger than most Americans' salary) and decided to whine about it in the New York Times.

+1 to both comments

But I laugh that Wall St's inane title practices are biting them here. He's a Vice President! Actually, not just that, he's an Executive Vice President. That sure sounds important. If the truth is that he's a mid level manager, one of 12000 in the same company with a similar title, and in fact below expectation in where his career should have taken him by now, why the fancy title?

What theory of the world do you have that says it's a good idea to give everyone, and in many cases I literally mean everyone(*) with more than two years experience, a title that involves the phrase "Vice President". I've asked (a more tactful version of) this question many times back when I worked on Wall St, and the answer was that it is to impress outside clients and contacts. Ah, hello, how stupid do you take them to be? What does it say about you that you think you are this stupid?

(*) Back then I worked in a small office with a great office manager. Supplies and stationery were kept great, scheduling was fine, I never heard any complaints about her abilities on the receptionist front. Just a lot of very, very, good. So after a couple of years I was somewhat shocked to see the announcement of her promotion to some sort of vice president - she has been there several years and done a really great job in her role - how could it be that she was not already one?!?

We used to literally just make up titles for our pitchbooks when I was a banker. Every MD in my group was head of this or that. I'm sure it worked on plenty of people. It certainly worked on most NYT readers.

As I understand it, in U.S. corporate law, people holding the titles "President", "Vice-President", "Secretary", and "Treasurer" can bind the company - if they sign a contract, the company is bound by the contract. Making people vice-presidents makes it much easier for them to do business.

Well, its one thing to discuss whether or not Smith is all that, in one way or another.

But the fact is, his letter has struck a chord. It's gone viral. There's a lot of people who want to take it at face value and, if they bother to 'read between the lines,' are likely to think that Smith was pulling his punches rather than throwing head fakes.

How does THAT reception affect the world in which GS does business? GS is clearly worried about the PR this letter is giving them.

Meanwhile, Mat Tabbi has gone after Bank of America in Rolling Stone:

A very different institution, obviously. But we live in a world where lots of people are angry at BIG BANKS and they don't care--indeed, may not be able--to make critical and elementary distinctions among them. GS, BoA, AIG, WTF! They're big, let's get 'em.

Boo-hoo, first world complainer

Like Tyler, I don't think there was a sudden shift in the moral propensities of the people he was working with. I think a lot of them have been amoral from the age of 10.

1.) It wouldn't have to be a "sudden change" in Goldman ethics; it could be a gradual change through retirement. 40 years ago, no respectable law firm would lay associates off, even in down times. The partners simply sucked it up and muddled through with lower per-partner-profits. Now the whitest of white shoe firms lay off associates in downturns. What changed? The graybeards from a different generation all retired.
2.) I share social psychologists' belief that institutions/circumstances determine behavior, rather than "individual character." As multiple commenters have pointed out, GS went from a partnership to a public company. That institutional change accounts for a lot.

And related to the point that it's not that people's moral character changed; it's that people were replaced, what is the turnover at GS? A ton of people make their money and retire early, go to a hedge fund, etc. How many people from Lloyd Blankfein's class at GS are still hanging around there? My guess is no more than a handful. The old guard is replaced very quickly at a place like GS that has a really short half-life.

All else equal, those without scruples will make higher profits. It is simply competition at work.

I come from a family of Polish Jews, who faced the worst of World War II. Most of my family being complete assholes makes sense: if they hadn't been, they probably wouldn't have survived.

Similarly, the biggest jerk in my Ph.D. program got the best placement. By "biggest jerk", I do not mean in an "in-your-face" way. I mean he was the most profoundly unethical, scheming, self-centered kid, the kind who would be very pleasant to everyone while caring about no one.

here's something to work into a model:

incentives r very different in the partnerships vs public companies. it takes time to realize the bounds/limits of these changes, so while the partnership-to-public company change happens overnight, the exploration of the incentive changes do not happen overnight.

Not really, the incentive is to maximize the value of the company. Public company executives aren't as dumb as you think (most of them anyway). Especially not public company executives whose business is valuing companies.

Tyler is making this more complicated than it is. Mr. Smith is comparing Goldman as it is now to a time back when the company wasn't public and didn't have to be a slave to quarterly earnings. People who work for a publicly traded company have an easier time understanding the tenured economics professors. Barry Ritholtz understands.

Actually, while I also suspect that perverse incentives have operated for a long time, I wonder -- might the financial crisis have exacerbated the issue? He could have used that as an argument regarding the timing.

There has been a big change in the GS culture and it started around 1990 or so.

At that point in time, investment bankers would refuse J. Aron's phone calls to get them in front of clients for FX or commodity trades. J. Aron is where Blankfein and Cohn came from.

As trading profits rose relative to baking fees, the culture changed, and it changed a lot. Trading became more important then advisory. The IPO exacerbated that change by enabling risk taking with others money. Technology also played a part.

Investment Bankers don't tend to talk about ripping off their clients. Derivatives salesmen (as representatives of the various trading desks) do all the time - it's pretty much their job.

>Cheating little old ladies is more understandable to the readers.

Certainly to NYT readers.

I mean, that's all banks ever do, right?

The banking world always attracted sociopaths: it has money, prestige, and a path forward for those willing to tread on others. Plus, once you get that many sociopaths in a room competing with one another it starts to feed upon itself.

At one time, when the finance world was more structure in partnerships than public firms, you at least had the counter-weight of potential liability and losses. All the partners could put "me first" and help to keep each other in check.

Public companies, on the other hand, are designed to be even bigger sociopaths: create value for the shareholder (i.e., "me", from the company's point of view) at any cost. Those who do a better job of this will be rewarded. Those who don't will be left behind.

Granted, this all happened before this guy's tenure, but it's the type of cultural change that can take the better part of a generation to shake out. The old guard retires, super-sociopaths take over, and they hire people more and more like themselves. 10 - 15 years is about the right timeframe for the balance of power to really shift.

Plus, in terms of company offerings, trading became the name of the game due to rules changes, so those guys made more money for the firm, so they were put in charge. In addition, a partnership may have been more reluctant to embrace the heads-I-win-tails-you-lose philosophy on the off chance that there is no government backstop. However, they did embrace that and there WAS a backstop and so the traders became even MORE dominant.

Based on this guy's letter, it sounds like he is narcissistic, but not a sociopath. If he's in client services, that could explain the sudden break. He's not willing to go to the same lengths as the guys at GS that are "winning", he's probably being rewarded less because of it, and it's just gotten to him over time because he isn't #1, but he can't square the sociopathic circle. The final trigger could have been anything, really, such as a lower-than-expected bonus.

Tyler continues to attract the smartest and most articulate muppets.

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