“[I]t takes two to lie – one to lie and one to listen.” – Homer Simpson, “Colonel Homer” (1992)
Unless you’ve been in a coma, you’ve probably seen some snippet of the Senate grilling of Goldman Sachs’ executives. I won’t bother characterizing that embarrassment here. My earlier post on Twitter suffices:
The Goldman Senate Hearings. For the non-red light district crowd who’d otherwise never see a prostitute argue with a bookie.
But viewing that awful spectacle – watching a hopelessly out-of-her-depth lifetime government employee like Clare McCaskill attempt to cross examine a guy like Lloyd Blankfein on reconciliation of derivatives – an interesting question hit me.
Insider trading’s rampant, everyone knows that. A number of economists and policy wonks have suggested in the past the market might be more transparent if we admitted that fact and legalized the practice. In that same vein of thinking – in light of the obvious fact that humans will always commit frauds, more frequently the more money’s in play – I have to ask… Why not allow bankers to lie to one another?
Look at every disastrous policy or business decision creating the Great Recession and you’ll find a common element: lopsided informational asymmetries. The Goldman case is a perfect example. Paulson and Goldman knew something ACA probably didn’t. IKB apparently knew nothing, and took what it heard from the other side of the deal as fact. That or it thought it knew better than everyone else involved, and couldn’t have been more incorrect.
Either way, the reason IKB got taken was a simple lack of due diligence. The company was lazy with its research – assumed too much based on suspect sources, or simply didn’t analyze enough. But how do you cure that problem? We can’t regulate companies to competence, legislate their managers to shrewdness. Vigilance is only enhanced by a known, increased exposure to risk. And how better to reach that goal, keep every player on his toes, than allowing everyone to lie?
If every firm involved in the mortgage backed securities mess assumed every other firm was utterly, completely full of shit, the “marks” would have all been raging skeptics. No one would have accepted the surface valuations. Those Germans would have done their homework. Everyone would have done more homework. Paulson and Goldman wouldn’t have attempted to hoodwink a buyer the way they did. The chance of success would be too low.
I know what a lot of you are thinking… Madness! This has to be the stupidest goddamned thing you’ve ever written! (And you’ve written many stupid things!) We can’t allow dishonesty as a standard business practice – have our markets balanced on millions of people engaged in efforts to defraud one another!
Really? Are you sure that could never work? Because that’s exactly how our legal system operates.
I’ve sketched the various forms of “soft lying” lawyers engage in under the banner of “advocacy” numerous times in the past. This description, a mock obituary for a litigator from a piece called “Witness Preparation,” codifies them best:
[O]bituary writers can’t tell the truth. They can’t say that, among the many things [the litigator] might have been, he was undoubtedly a conniving, manipulative liar. If he wasn’t, he wouldn’t have been successful enough to warrant all that ink. “Lawyer” and “liar” aren’t mere sound-alikes – lying’s what we do. We just don’t call it that. We offer platitudes like “there are three sides to any story – plaintiff’s, defendant’s, and the facts… by fighting, we ferret out the truth.” That’s true, but it also means one side is lying all the time. Our lies, however, are never direct. Nobody counsels his client to bald-faced bullshit – that could cost you your license. We lie by omission, hide facts or hijack the focus, making the other side’s credibility the issue, obscuring the claims against our clients. We warp the language of an agreement into something its simple verbiage could never have intended. Most of us rationalize this by lying to ourselves – suspending disbelief and supporting our client’s most obscene prevarications. I’ve been dressed down several times by partners for merely joking in private that our client was lying.
“The Judge will decide what’s true. You aren’t the Judge. You have a duty to your client. You’re an advocate, and that is all.” Translation: “I know our client is lying. You know he’s lying. But we want his money.”
And those are just rationalizations for the neophytes and service partner shlubs. The big fish don’t need the justifications. They know that the trick to lying effectively is complete self-delusion. First, you have to make the facts your client gives you real in your mind, as though they actually happened exactly the way you’re going to tell them to the jury. Give them a history, some context, a back story. This sounds easy, but as the WMD debacle in Iraq eloquently illustrates, it’s actually hard as hell. The real facts have a pesky habit of surfacing at the worst times, and this causes serious problems. You might mix up your client’s story with the true facts during a hearing or trial. If one real fact sneaks in, the rest have a tendency to flood in through that hole in the dyke. If you start thinking about the truth, your conscience might kick in subconsciously, leaving you a less than zealous advocate.
But how do you bridge the holes in your client’s fantastic story and bury the guilt of abetting his lies? With the second half of that self-delusion – the victim complex. Your client’s been screwed by his opponent before, so even if he’s wrong on this claim, he deserves to hit the bastard for some money. Your client did something wrong, but something we all do from time to time… Why should he lose a fortune due to some bad timing? It’s not lying; you’re righting a wrong – getting even for the aggrieved. And there’s no justice if you lose. Once a lawyer’s made the leap to this pedestal, the actual bullshitting’s easy.
You might say that’s cynical. Most litigators with the capacity to honestly assess their trade would offer a different descriptive: Accurate. Call it whatever you like, “advocacy” is a form of spinning, misrepresentation by omission, and both are, well, lying. Unswayed? For context’s sake, consider some of our nation’s most illustrious litigators and trial lawyers, and a few stories about their work:
Bill Lerach: The dean of shareholder class action “strike” suits. Served two years in federal prison as part of a plea agreement arising from an investigation his firm for alleged payment of illegal kickbacks to ‘professional’ class action plaintiffs.
The Pinnacle Corp. Billing Fraud Investigation: Associate at multinational law firm took partner to state ethics board for fabricating 450 hours of work in a mere two month span.
Dick Scruggs: Mississippi trial lawyer famous for collecting billion dollar tobacco litigation fee. Serving seven year sentence in federal prison for wire fraud and bribery related to an attempt to bribe a Mississippi judge.
The Ross Survey on Billing Fraud: Barely more than half of attorneys responding believed bill padding was unethical; nearly one third have engaged in it.
The Texas Asbestos and Silica Disease “Expert” Controversy: Judge finds thousands of reports submitted by experts on behalf of plaintiffs to have been fraudulent, fabricated by doctors paid in excess of a million dollars by mass tort lawyers.
The Lehman Bankruptcy Billing Controversy: Pay Czar Kenneth Feinberg compelled to rein in counsel running up $730 million in fees in less than two years.
A comprehensive list of sleazy practices common in the industry, on both the plaintiff and defense sides, would go on for days. You get the picture.
But I haven’t come to bury Caesar. I’ve come to offer litigators and trial lawyers as examplars – to ask if what’s acceptable for them shouldn’t also be so among bankers. If an “adversarial system” where opponents spin and misrepresent facts to unsophisticated jurors is a credible enough structure through which to find truth in an architecture where our liberty and property can be forfeit, why can’t a couple of equally sophisticated finance professionals bullshit one another? If justice emerges from attorneys weaseling one another in the litigation process, wouldn’t the most informed trades result from two parties openly trying to deceive each other, suspicious as lawyers, vetting every element of the opponent’s proposition?
Why do we preclude that in finance? Is it because the money the bankers are dealing with is so much greater than what’s at issue in the legal business?
Wall Street compensation pool (2009): $130 billion
Amount Fed earned on repayment of loans made to big banks and mortgage backed securities purchases (2009): $46.1 billion
Economic costs of tort litigation (2008): $254.7 billion
Legal fees paid to 100 biggest U.S firms (2009): $74 billion
No. Can’t be that.
Is it possible the reason is emotional, or worse, political? Perhaps attorneys get a unique pass because, unlike bankers, who have to buy the government’s cooperation, lawyers directly control the legislative and regulatory processes? (Need I cite figures comparing the number of JDs and MBAs working in the federal government? Didn’t think so.)
Maybe it’s as simple as party. Democrats love lawyers. Can’t get enough of them. “We need to embrace complexity!” That was our law professor-cum-President’s charge. No problem in the world that can’t be solved with a new volume of rules. And no better source of campaign funding than the industry that makes its living navigating the effluent stream of them Washington widens every day. And Lord, do populists on the Left love their attorneys. Robin Hoods for the working man! The little guy’s only chance against the monstrous, heartless corporations! And we are in populist times, with the Left, as always, playing for emotional votes… demanding economic “fairness,” whatever that is.
Populists, however, are exceedingly simple creatures. They worship notions like consistency, howl at the suggestion of hypocrisy. If you let them run the asylum, some might soon start asking, “When we’re done fixing health care, and cleaning up all these banks, should we clean up the Court system, too? Reform the legal industry people have been complaining about for decades?” They might ask the Democratic Congress to kill its golden goose.
Of course, that’s never going to happen. Neither party would ever give up the contributions it gets from lawyers. But in a better world – an intellectually honest, logical one – that lawyers are allowed to deceive while finance workers may not should at least give the banks some leverage, an argument against absurd regulation. If the legal system decides matters involving our core, essential rights, and the process through which it finds truth is an admitted competition of lies, why hold something as amoral as finance – trades among the most sophisticated of institutional investors, no less – to a higher standard?
Why should Goldman be flayed for pulling the wool over a bank’s eyes the exact same way “Philadelphia Lawyers” pull it over juries’ every day? And if the answer’s something incoherent – “Because that’s just ‘the way it is,’ and lawyers are different than bankers” – then perhaps the Left-leaning populists backing Democrats should rethink their allegiance. In the sort of republic they favor, where fairness would be paramount, consistency the highest grace, how can a party, Congress, or Administration root out thieves and degenerates on Wall Street without first cleaning the rats out of its own basement?
That or just let the bankers lie, too. Either approach would be more credible.
Goldman Sachs. Other then their swaps with AIG (which they claim were fully hedged), they managed their risks very well and themselves were not the root of the crisis . I guess GS was picked to be the star/or villian because they made money…which the last time I looked ? wasn’t a crime. The real criminals or liars are the ones asking the questions, not answering them. I’d rather deal with Goldman Sachs any day.
PL: The question of whether we’re better off at the mercy of Wall Street or Govt isn’t a question at all. I think Obama’s shrewd enough to stop the populist witch hunts before they go too far, but he has to give Main Street some red meat, and Goldman’s the fastest scapegoat.
It amuses me to no end that the Left is cheering our SEC and DOJ investigating a US bank for defrauding a German entity. That’s the best they could muster for Main Street – an allegation a bunch of goofy Krauts were hoodwinked. Those knuckleheads bought the shit on the downturn – when every paper in the country was printing stories about how the US housing market would imminently collapse. The SEC intends to prove they’d have done differently if they knew Paulson was betting against the instruments where these people ignored hundreds of canaries dying all over the coal mine around them? Perhaps through jury nullification that argument would succeed. But if any thinking man examined the quantum of information that was available to the alleged victims at the time they took their position, he couldn’t help but reach the conclusion they were simply betting against the shorts. And the shorts won.
Lol, I think you’re right. Defense attorneys should just stand up and say “ladies and gentlemen, my client is guilty” and sit back down. That way they can serve as a philosophical model to the banking industry…
PL: …And Washington. And Main Street. The road to hell is paved with good intentions, and let’s not forget the root of this thing – what gave the bankers and mortgage brokers an environment tailor-made for fraud, greed and abject stupidity – was Washington’s belief you could “shine shit” by giving a guy with crap credit a home loan he didn’t deserve and hadn’t a prayer of handling. Give a man without the ability to reach modest financial success on his own what looks like a free lunch and, well, no shit he’s going to take it. And fuck it up.
“Social Engineering,” even as a pejorative, is an insult to the discipline. Were it actual engineering of any kind we’d have stopped engaging in it years ago after seeing every device in which it was used crash, crumble or implode.
But have no fear… Mastery of behavioral economics will rescue us. Tug McGraw style: “Ya just gotta believe” and recovery will accelerate! We’re too negative. Positive thoughts are contagious and the next boom is just around the corner. I know this is fact: CNBC says it every day!
It does always come down to laziness. Half the problem is the expectations: there’s no respect for the process. People invest their money in risky assets and expect to come out ahead, every time. It’s a near zero-sum game*, though: there’s only so much fundamental wealth in the world, and someone will be left holding the check. I’d like to think that a series of real losses would fix the opinion of people, but our propped up housing market and stock asset bubble seems to reinforce the view that “markets go up,” at least among an informal poll of friends and coworkers. A friend wanted to buy stock in Citigroup…I took one look at their balance sheet and I realized I had no fucking clue what stock in Citi actually entailed. It was like buying a mystery box. If you want to buy it, fine, but realize that it’s a crapshoot, nothing more, and don’t get pissed when it goes south. At very least, pulling down the veil of safety might help get valuations back to a more real level.
*On the whole, any return beyond real GDP growth is fake…it’s just a question of when the correction happens.
PL: Right now, we have the worst possible scenario: the myth of regulatory control creating for the uniformed an illusion of security. And for the preposterous, an expectation of near perpetual, predictable steady gains. To what underpinnings are these assumptions moored? Why should our economy be more secure than others over time? Because we’re organized? Have a strong system of safety switches?
You know a country that’s similarly advanced? Japan.
I’d like to see a figure on how much the Legal and Banking industry accounts for total GDP in the US. More importantly, should we count these numbers when no one actually is producing anything?
PL: Give both some due: Many bankers do lend money to businesses that create things. And criminal defense lawyers are unsung heros in my book (anyone seeing a man ground down by the justice system can’t help but develop a deep respect for the protection they provide to us).
But you’re right, generally speaking. We’ve 70% more than we need of both. Even Antonin Scalia recently commented that kids should be doing something “more productive” with their lives than going to law school.
Just to give a little more color to how bad the Lehman billing crap is:
I was doing doc review for Lehman when I was laid off. We had tens of thousands of documents each to go through. If I had spent a mere minute on each document, I’d have billed more than my salary just on the one matter. But, having little tolerance for obvious bullshit, I (and two other associates) figured out how to use the software to quickly sift out obvious crap. It wasn’t really technically complicated. Automated e-mails from third parties are pretty easy to tag as being not relevant. My highest rate was 7000 documents in 1 hour.
I was called into a partner’s office and berated for not billing enough hours. I reviewed enough documents that my work load was tripled (when my folder of documents ran low, I was given other people’s work). And yet, I know I overbilled, and probably could have reviewed documents twice or three times as fast, but still, compared to most of the other people doing doc review, I was damn efficient.
Two other people from the corp department worked at the same or similar pace. Each of our work loads was more than doubled. We each got read the riot act for not billing enough (but not for not reviewing enough documents; in the same meeting I was reamed, I was assured I was on pace to finish several weeks before scheduled). And, we each got laid off.
PL: Overlaying all of this is the absurdity of having associates do this busywork at multiples of the cost of paralegals or outside contractors in India. Is that kind of rote, mechanized factory toil what anyone should be paid $400 for performing?
I used to work for a firm that had to do its own due diligence investing in liens. Its intensive work. There is no way that government can make investments safe, especially when it comes to hedge funds. Its a liberal delusion. There are just too many transactions and too much subject matter.
And, for god’s sake, who is a more “sophisticated” investor than an entire EU country?
PL: Liberals fight fire with fire. The more complex the instrument, the more complex the Rube Goldberg slop of regulations they’ll create to control it.
Just look at the nonsense these asshats are offering with this “Consumer Protection Agency.” We need an agency to make credit card agreements less complex? Really? Because, like everyone else with an above 100 IQ, I’ve always worked on the assumption that one should avoid credit cards because they’re geared to hook and trap you. Unless you’re sure you can pay it off every month, or know how to manage the debt, they should be avoided at all costs. Is that a complex notion to grasp? People have only been offering that warning to consumers for what? Ten, twenty years?
Same goes for mortgages. Can’t read it? Don’t sign it. Think its strange you can get a $400k home on a $25k salary? It is. And you don’t belong at the closing table. You know that. It’s the obligation of Americans to save themselves from the suspension of disbelief that leads them into debtor’s prison, not the government’s. The only thing a nanny-agency will achieve is making more irresponsible people even lazier and less responsible.
I don’t think the work I was doing would really be classified as “practicing law” if it came down to an ethics violation charge for hiring paralegals, or simply computer science grads to do the work.
First stage doc review is essentially nothing more than glorified search engine work. Some search terms decided by the bankruptcy magistrate were entered into the computer, and everything that gets a hit falls into the pile. You only need a human to go through the stuff because they can read context. My billing rate was something like $290/hr, but if I was Lehman, I wouldn’t pay more than $15-20/hr for this stuff.
PL: Agreed. And that raises an interesting question I’ve previously written about here: http://philalawyer.net/2009/07/memo-to-corporate-america-its-time-to-put-the-legal-industry-on-the-canvas/
Why isn’t corporate America cost-cutting its lawyers more brutally? There’s still a huge margin to be shrunk, and numerous efficiencies to be forced on law firms. Is it because in-house counsels have balls the size of capers? Scared to rock the boat? Or is it perhaps fear of alienating the firms they might have to go back to if they get laid off?
People are mad at Goldman because the AIG bailout was basically a gift to them. When you consider the number of former Goldman employees in the government, the whole thing reeked of cronyism.
The people leading the hearings against Goldman probably know they’ll never make any charges stick, but now they’ll be able to claim that they stood up to this bank that people are justifiably angry with. Less sophisticated voters will believe those prosecuting Goldman did their honest best, and their political careers will flourish.
PL: I agree on the AIG 100% payout to Goldman stinking like a landfill in August. There was some filthy shit at work there, no doubt about it, and if Goldman were being investigated for conspiring with Geithner and Co. to effect that result, I’d instead be writing about how they should all be jailed for decades.
But this issue isn’t that one. That’s the “Kennedy Assassination” level scandal we should be having an independent counsel investigate. We won’t though, because I think everyone knows – if we look into that, what comes out will shake the pillars of the Republic at a time when we can’t afford such destabilization. It’s a shame, really, and it bothers me, because we’re entitled to know how something as obviously fraudulent and corrupt as that occurred. Problem is, I know, if that info got into the general public’s hands, the masses who’d view it less circumspectly than you and me would use it to destroy another $8 trillion in wealth through a campaign of endless regulations and punitive actions hobbling Wall Street. Like it or not, the market is the only source of retirement income for the baby boomers. Until they’re all dead and gone, we’re going to have to backstop and prop up Wall Street every time it swoons.
Your second point’s spot on. This is the trial in place of the trial we ought to be having. Even in that context, however, you’d think the DOJ and SEC could do a little better than this dog of a case.
In the Goldman / Paulson case, isn’t the biggest issue that Paulson walked into the GS / Deutch Bank / Bear Stearns and “suggested” which tranches of mortgages should be put into the CDOs? The losers on the other side of the Paulson trade may not have done solid research, but there is a sincere lack of ethical standard there that I believe even trumps lying lawyers. At least with lawyers there’s an “honor among thieves” mentality. On Wall Street, greed, deception and a lack of transparency rules the day and even if I assume you’re lying, it can only help me in hedging myself.
And call me a socialist, but capping the percent that these IBs can make on a deal and/or on trading seems like a reasonable thing to do. For IB deals, the effort involved on working on a $40MM, $400MM or $40B deal is not so significantly different as to warrant the payouts involved with those types of deals. And for trading, it isn’t even a question of lying, it is a question of what information do I not have that is knowable, but not being presented. These Wall Street firms just keep skimming off the top and reducing their take makes sense to me….
PL: We can agree to disagree. I’d say lawyers and bankers a dead even in terms of honesty and credibility. And there is no honor among thieves among thieving lawyers. I’ve dealt with some of the vilest creatures the Philadelphia Bar could offer. They’d fuck a friend as fast as a foe. Happily eat their own when the numbers make sense.
Bankers used to be allowed to lie. If the ordinary people start to see their lives adversely effected on a daily basis by the lies lawyers tell, expect them to be hammered down too.
Lies are fine as long as I don’t notice when I’m going about my life, lawyers are an extraordinary circumstance. So is high finance.
PL: The world runs on lies, of course… Could you have gotten through any day of your life without lying? Show me a man who’s word is bond – who can never utter anything but truth – and I’ll show you one lonely motherfucker.
As to the rest of this rant – where it could go – Gervais has my proxy: http://www.youtube.com/watch?v=yfUZND486Ik Brilliant, hysterical film. If the first twenty minutes don’t have you all but pissing yourself, nothing will.
I think the associate model of big firms, where partners can just pile on an extra 200 hours to some kid they’ve never talked to without a second thought, would mean that if a company wanted to pay less, many firms would take it.
The pay czar has already told Weil to take 5% off the top. It’s not much, but a high profile story of a firm being told to cut their prices could help get more clients on board. And, on a bit of a side note, I e-mailed him today with details of how my old firm was inflating bills. Yeah, I’m THAT ex-employee.
PL: Clients need to realize they are in an environment where a 35% discount is not an unrealistic demand. A good start in that direction would be putting a non-lawyer in direct charge of hiring counsel. It’s a service, and businessmen/beancounters are better purchasers of services than in-house lawyers. That would also help to break the revolving door system where firms feed in-house counsel to corporate American and in turn, corporate America knows nothing but to use those feeder firms. It’s a conflict of interest.
On your second point, there are a couple ways to react to what vexes you or has screwed you. Most people walk away from it or find a way to manipulate it to their bidding. But sometimes that isn’t possible, or you’re that rare individual interested in making things better for everyone else. In that instance, it’s best to attempt to damage the thing that irked you.
You don’t drag something large down quickly in one shot. It’s done in thousands of small injuries. Done best with humor, insult… But whatever works is fine.
In responding to one of the comments you stated that because Wall Street is the only source of retirement funds for the baby boomers we will have to keep propping it up until they’re gone. No arguments there.
But what happens next? I’m all on board with getting rid of these fiduciary duties not to try and sell another sophisticated investor a pile of shit (although I’d still like some sort of basic level of disclosure required for information theory reasons). Where should the next generation start putting its retirement money? Or should we all just resign ourselves to working until we are dead?
Or I might be reading you wrongly and you’re instead suggesting just that we hold off on trying to deal with the moral hazard problems of “too big to fail” until later?
PL: Social Security will move to 70 in 10 years. We’re living beyond the projections. Also, the contribution’s going to be extended well beyond the $106k or so where is phases out presently. This has to happen because the alternative – means testing – is too ugly a political debate for either party to engage. http://www.iousathemovie.com (If I sound like a broken record pimping that film, it’s not a reflection on my lack of sources, but a testament to the flick’s effectiveness).
The market’s diversified enough and risk spread enough that you won’t see too many extreme long term trends. It’ll deliver over the long haul and give the illusion of providing a gambler’s path to wealth for those who want to believe, and that’s about all we need it to do. The casino’s fine, and you’re right – you don;t have any options. Where else you going to invest? Real estate? If you can handle the carry on the shit that’ll return there (and it’s a long, painful carry, because the prices of that crap are still hugely inflated and stick as hell), you ought to have the money in a hedge fund.
This only works if all the parties are sophisticated enough. Your point about the legal profession is well taken. However, by enabling sophisticated deception/soft-lying (coupled with complex procedure and esoteric rules, of course) we’ve also made it impossible for ordinary people to represent themselves properly (for the most part).
If the same was to be said of our financial system, how on Earth would Joe-Six-Pack be able to perform the necessary due diligence to properly research and manage that risk? Perhaps that’s your point: only people with business degrees and a constant, vigilant eye on the market should invest; this is no place for the uninformed. But by saying that, you’re either locking a significant portion of the population out of the markets, or forcing them to go to these professionals who can manage the risk for them (who are equally capable of such deception). It sounds like you’ve created a class of “lawyers” for the banks, and we clearly don’t need any more of them around.
PL: The parties in the Goldman deal were as sophisticated as it gets.
The ordinary man shouldn’t bother representing himself. If you’re in business, you shouldn’t clip people and leave yourself open to litigation. You should be honest, quaint as that sounds.
If you’re in a situation where you might have exposure beyond your insurance, you should have all your assets held in tenancies by entireties, or in the spouse’s name. And barring that, be ready to suck the equity out of whatever you have with a loan. Bank primes negligence creditor. No better defense to a bottom feeder suit than empty pockets. I think a lot of people make the mistake of hiding their cards early. Many times, the best argument to the threat of a lawsuit is being open about the impossibility of collection even if the other party succeeds. Or be positioned to go bankrupt if necessary. As long as it isn’t fraud or intentional, most everything’s dischargeable. People need to learn the execution side of the law. There’s an odd perception out there that a judgment is automatic money to the holder. A judgment is a piece of paper.
The horror is when Uncle Sam comes after the little guy. That’s frightening. No way out of that stuff. Even when you win, you lose everything to legal fees.
To PL: I think you have finished off what several of the lawschoolscam blogs started. By that I mean that as a now underemployed professional, I’m pretty much over my notion of going to law school to prepare for life after this recession. You have reminded me of what a lawyer once told me and a number of engineers in a loss and liability prevention seminar. He said, “as a lawyer, I hate working with people like you. You have an unnatural attachment to the truth.” If, as you present it, there simply is no place within the legal profession wherein a lawyer is other than an advocate, a spin doctor, or some other animal with no attachment to the truth, then there is no place for people such as I.
To Squatch: I disagree with your contention that laziness leads to a system where “People invest their money in risky assets and expect to come out ahead, every time” or that this is the root of the problem. The system has been rigged by people dishonestly arguing that returns are guaranteed even when they are investing/betting against it themselves. It seems to me that GS’ great sin was selling folks the equivalent of lead poisoned toothpaste, knowing that it was lead poisoned, but not telling them that it was lead poisoned. All the while, they were betting on how soon people would start to die. It is perfectly reasonable to expect investing consumers to understand that there is risk involved with investment. But to allow someone to bundle and sell toxic assets while betting FOR failure of said assets while not telling the consumer that the assets are “shitty” and “I’m selling these to you, but my company bets that you’ll lose your ass” is unethical as hell and should be criminal. The responsibility herein lies with the seller, not the buyer.
PL: I’ve dealt with engineers in cases. He’s right. Your desire to find the least assailable, most empirically honest answer makes you incompatible with most litigators. But you all can be bent. I’ve yet to see a discipline where expert witnesses couldn’t be massaged into saying what the person paying their fee wanted. It’s just a matter of how much you’re willing to pay and how hard you’re willing to work the Thesaurus to find a way for the expert to say it while giving him/her plausible deniability or wiggle room to shift the opinion if cornered.
Goldman wasn’t hiding lead paint. The housing market was already being called a bubble at this point. IKB took the long position in a collapsing market and bought somebody’s junk. They should have known better. They didn’t. If this case were to see a jury, the best verdict would be, “IKB? Fail. Next.”
Allow bankers to lie? Wait, were you under the impression that they were incented to do something else? The compensation structure of the entire industry is rubbish, geared toward short-term rewards to reinforce the Randian delusions of the privileged, incessantly self-congratulating pricks who stampede into finance every year. Unfortunately – or fortunately, depending on who you are – the only senior people smart enough to properly manage the industry head into alternative investments, where they can do even better for themselves. Fuck, it’s not like you can motivate these people with anything but money, and I say this as one of them. Guilt? Doesn’t work. Shame? Doesn’t work. No one goes into finance searching for a calling, or even anything remotely tolerable; and I guarantee that no one compartmentalizes, rationalizes his life better than the guy sitting at the head of a big i-bank.
I look at this enormous clusterfuck, and think, this is all so stupid and trite. Mobs of deluded mediocrities ranting from both sides of the pulpit: about socialism and how Greece’s biggest problem is its social entitlements (Anyone ever been to Finland? And then look at their financials? OH SHIT, COGNITIVE DISSONANCE…) or some lefty postgrad whining about how the evil ratings agencies abdicated their responsibility to investors and 59683 other absurdities of the day. And I just think, “Seriously?” Michael Milken figured out decades ago that historically the ratings agencies were always awful at what they do. Milken was even able to pinpoint and predict their accuracy (or rather, lack thereof) by a multitude of different variables. Why should today’s underlying assumptions be any different? What happened is the result of a total suspension of disbelief on a mind-numbingly large scale and anyone looking for a grand conspiracy is wasting his/her time. Bankers simply don’t care; they have no incentive to. Ok, near the end some realized there was a problem and offloaded a few remaining structured products to investors reaching for yield – big deal.
Sorry for the rant. Pisses me off that I have to constantly listen to idiots assailing my choice of profession. Although the silver lining is that I’ve realized just how much I love my wife, no matter how many times she crashes her Alfa into concrete parking garage support beams, not that it ever really mattered. Great article, by the way. Have a nice evening.
PL: Hey, hey… Don’t go and fuck with the central conceit. Of course bankers have always lied. What’s the source of a margin in anything but the lack of information one side has about the value or price of something?
For the purposes of this Goldman suit, however, it appears the govt is asking us to suspend disbelief and assume bankers do not lie, or should not, and should be punished for doing so. God bless them on that. To get a jury alone would require scouring the hinterlands for hermits who have never borrowed money in any fashion. They couldn’t even grab a panel of hippies from some commune… They’d be too familiar with bartering, predisposing them to a defense verdict. To “deal” with someone successfully is to pull the wool over his eyes. And he knows it, and is trying to do the same thing to you. It goes on in millions of transactions every hour, at every level. Do you go back to the dealer when you overpay for a car by $5k and complain, “Hey, you bullshitted me”? This Goldman one just happened to be a whole lot more complex than 95% of the other “softly dishonest” negotiations we engage in every day.
The ratings hand-wringing is hysterical. Uh… they got paid to rate the shit by the people making the shit. WTF did you think they’d say about it? “It’s trash?” Henry Blodgett’s business model X1000 = Rating Agency. But give them credit… They’re all over Portugal and Spain right now, making up for lost time in the subprime mess by calling obvious disasters.
And give our press some credit. Ever seen shit shine like this “recovery”? You can see your reflection in this turd.
You know more than me, so tell me: In the Real Actual US Economy, it’s all about the handoff, no? The quarter or two where the Stimulus fades and private sector growth is supposed to pick up the slack? I say the handoff is going to be the stimulus dropping the baton on the track and the US private sector sitting on the sideline, staring. No double dip, but a definite sagging period, enough to start the discussion of us being The New Japan. Am I nuts?
Why do people let the lawyers lie, cheat and scam while bankers are held to the truth?
This is a political issue, and politics are all about visibility. The big corporate lawsuits that employ big sections of the legal industry are under the radar, and sleazeball tort lawyers make money by working with the non-voting class. The only television actor associated with the law that Americans can easily recognize is Sam Waterston, and he’s a criminal lawyer. Most of the money spent on lawyers is spent out of the public eye.
Bankers, in contrast, have multiple 24 hour news channels devoted to watching the market, and bankers’ pay is the subject of populist rage because it looks like bankers are taking huge chunks out of the center of the economy, when the reality is that Bankers pay is close to .01 percent of GDP. Bankers pay didn’t cause the economic crisis, but the high visibility of the finance sector means that people are going to make some very sloppy correlations, and Congress is happy to help imbed those correlations in the public consciousness if it will help them get re-elected.
In other words, the data that’s going into the new Wall Street regulations and hearings is not based on the national economy, but rather on how the average voter perceives the economy. After all, if Congressmen based their laws on reality rather than voter perceptions and polling they wouldn’t have gotten far enough in politics to be Congressmen.
PL: This is an excellent point. We could tax all the bankers at British ’60s rates and the revenue wouldn’t pay for a month of our entitlements.*
Wealth disparity’s the fixation of the smallest mind in any room for exactly the reasons you note. It’s a diversion from the real issue, which is that generally, in aggregate, we have unrealistic expectations about standards of living for people at all levels of a population our size in a global economy making the kinds of productivity strides technology has been allowing us to make. And from the tea partiers to the bleeding heart loons behind this well intentioned but horrible health care bill, we show time and time again a reluctance– No, scratch that… Not a “reluctance” but a refusal to sacrifice anything. “Obama’s a socialist” is coupled with “Don’t touch my Medicare!” at these right wing rallies. Shameless infantilism. And on the Left, it’s “We can’t pare down govt!” Really, why? Is it perhaps because govt is a sector the Left loves, filled with the segments of society that don’t want to compete in the private sector? Is it because economists wonder what would happen to unemployment if govt were run efficiently – removal of all fat in the system would spike unemployment to 30%?
We’re living in an absurdist joke, and I think everybody knows it. The only reason we won’t be utterly fucked like Greece is we have a printing press. Think the well off have taken more and more of the spoils over the last few years just because they’ve gotten more greedy? I don’t. I think they’ve been seeing the writing on the wall for some time and getting out ahead of what’s been a long oncoming train wreck. A lot of them are stockpiling.
*Carried interest, however, needs to be taxed at a real rate. That is a bad joke.
Two things:
First concerning Scalia’s comment that too many bright young minds are going into law. Here are the first two paragraphs of what Scalia said:
“Well, you know, two chiefs ago, Chief Justice Burger, used to complain about the low quality of counsel. I used to have just the opposite reaction. I used to be disappointed that so many of the best minds in the country were being devoted to this enterprise.
I mean there’d be a, you know, a defense or public defender from Podunk, you know, and this woman is really brilliant, you know. Why isn’t she out inventing the automobile or, you know, doing something productive for this society?” CITE: http://blogs.wsj.com/law/2009/10/01/scalia-we-are-devoting-too-many-of-our-best-minds-to-lawyering/
Note that the class of people that Scalia decides to single out as being overqualified for their job. Public defenders. Scalia (not surprisingly considering his criminal law/procedure decisions over the years) doesn’t complain that our best minds are fighting to save a corporation some money on a transaction when everyone knows damn well the corp should just pay up. No, he says that poor people in rural areas have their rights too well represented.
Second, how long until everything collapses? 50 years? 100? And when the final reckoning happens, how bad will it be?
PL: I don’t think the context you offered undoes my point. I still think Scalia is saying, “Why law? WTF would you waste a brilliant mind on insignificant, pedestrian horseshit?”
I don’t think everything will collapse. Many of us are going to slowly adjust to a new, less enhanced standard of living. Ultimately, I see more rigid class differences emerging in the country. Many say this will be a terrible thing. Perhaps. But perhaps not. Those who shouldn’t be buying Mercedes shouldn’t be have Mercedes marketed to them. Credit’s been making unrealistic expectations realistic for too many for too long. No better way to get people saying than to remove the “Keeping up with the Joneses” element that fed so much “Idiot leverage” (buying non-revenue producing goods and services). The leverage people who wants to jump from the low to the middle or the middle to the higher class should primarily take on is that which allows them to create more income for themselves (investments in their small businesses, education, etc.). As they succeed in that, then and only then should they reward themselves be taking on some “consumption” or “splurge” leverage (buying a fancy car on credit he can afford to service, Gucci handbags, etc…). Right now, people who aspire to the next rung in the social order buy its badges first, then figure out how to pay for their new status. This hampers their ability to take on revenue producing leverage. Where they should have used the home equity to build out their business or enhance their degree, they got a Lexus truck, or a home theatre.
People want to blame the easy credit environment of the past decades for our ills, and that does bear some responsibility, but it isn’t just the availability of money that was the problem. It was how we chose to use it. A lot of us bought “stuff” we wanted where in a lot of instances we could have been turning cheap money into future revenue streams.
The future’s going to be amusing. How we find a way to keep our consumption based economy chugging along in a long term period of wage stagnation and groaning entitlement burdens will be interesting as hell. I guess we’ll just have to consume faster and faster, to keep fewer available dollars circulating rapidly to maintain good quarterlies to satisfy the market. More high speed musical chairs with cash flow.
http://www.nytimes.com/2010/05/09/weekinreview/09aoscott.html
Interesting artile about Gen X and their apathy in youth resulting in midlife crisis. I think it relates to a lot of what you have written about / advised people to do when they seek job/career advice.
Solid points on the banking stuff – system now is chocked full of adverse incentives. In watching the Goldman stuff, was wishing the guys were more forthcoming: ie. “yeah we f-ing did it, yeah we made a ton of money, here’s why we did it, and if you want to prevent another collapse here’s what you should do . . .”
PL: Great article. The apathy is definitely the root of Gen X’s problems. The sentence in that piece where the author describes Gen X workers wearing maturity as a mask, mocking it underneath, describes almost all of us perfectly. But I can’t lay the blame on us entirely… We were born in a time of compartmentalization, homogenization, assembly line careerism. Doesn’t matter who you are, how much you earn – that’s not a fulfilling life. Maybe the kids graduating now, being tested by these adverse conditions, will get it right.
Unbearable… I refuse to read any of it. I just logged in to tell you how much you remind me of David Bowie. PIZZA! PIZZA!
PL: Coked out 70s Bowie? Bowie in his “fascists are cool” Nazi phase? Psychedelic space Bowie? Cross-dressing omnisexual Bowie? “Let’s Dance” Reagan Era Bowie? Damnit. You can’t just throw “Bowie” at somebody, you know that.
I come here for the first time in six months and it turns out Milton-freakin-Friedman has taken over. Your argument makes sense of course, wrap the market in bubble wrap and it’ll grow fat and complacent. Toss it in the shark pit and at least you’ll get fireworks.
PL: Volatility in a free market = Gains to the shrewd. Volatility created by fear of what intervention the govt might take = All the money moves offshore.
We can’t have the adversarial system that you describe because it’s not conducive to the efficient flow of capital. Everytime someone wanted to buy stock in GE, they’d be forced to either do the digging themselves into GE’s earnings (which probably wouldn’t be published or audited without the complex system of rules the SEC has in place, like quarterly earnings reviewed/audited by independent accountants) – so every investor has to do their own fact checking. GE would inflate their earnings, make everything look rosy, and it falls on poor little you to decide if maybe you can/should invest in them. Do you have a stock analyst on your payroll? Are you going to assume your stock analyst is honest? What fact-checking do you do on him? How much do you pay him to find this out?
Without the laws that force all parties to be honest, instead of just accepting lies, capital would never move, just like lawsuits and trials clog up the judicial system. Because of discovery, motions, witnesses, etc – which is exactly how lawyers got such a ridiculous piece of the pie in general.
Without honest information available to all, then only safe information is available to those who have the resources to obtain safe information.
PL: If you’re not doing that, you might be better off putting your money into a hyper-safe blend of investments. If you’re a German bank, backed by the state, no less, you should be performing the necessary due diligence.