Business (Parts II, III, IV)

I finished the book on the Goldman Sachs partnership and am greatly impressed with the company. The tone of the book is a little over the top, gilding the lily as it were, but the point is that it is an extremely tightly run business. More power to them. If I have concerns about anything, it is about their understanding of toxic assets such as derivative credit swaps which undermined many of their competitors. Would it not be prudent for the banks to prevent such assets from reaching the market in the first place? In a turn around, I noticed in an article in the NY Times today that homeowners are walking away from houses that are valued at less than what they paid. The banks are crying foul. Don’t they do the same thing with bad assets or is the public supposed to step in and pick up the tab?

The South Sea Bubble was Britain’s first major business scandal. Set up in 1711 with an exclusive charter to develop trade with the South Seas (South America), the company actually made very little in its first years of business. However, to promote the company, shares were given to politicians and people who could “talk up” the riches of the South Seas. These people sold their shares back to the company for huge profits at no risk. It was a pre-Ponzi scheme. By late 1720 when the bubble had burst and the shares were selling for one tenth their value from the high, there was a major scandal and Robert Walpole was enlisted as England’s first prime minister to re-establish confidence in the  government.

Clearly, the removal of restrictions on banks such as the Glass-Steagall Act, has created the term “too big to fail”. Goldman Sachs clearly saw the dangers in the market and acted to protect themselves. I applaud their savvy, but why were these derivative credit swaps allowed to exist in the first place. Aren’t there economic models that will show just how dangerous they can be? How did Goldman Sachs know and no one else? I have to say that the antiques market has a fair number of items in it that are passed off as real which are either fakes, re-makes, improvements, etc., basically not kosher original antiques. When I wrote for “Art & Auction”, I used to point out anomalies in descriptions and attributions, in essence trying to warn people that the market was more complicated than the auction houses were making it seem. Little good it did. I guess Goldman Sachs understands that as well.

The banks have been raked over the coals this week by Congress, a pointless exercise from my point of view. When the proscriptions to prevent economic catastrophe are eviscerated, why should anyone be surprised when those people that know how to take advantage of the situation take that advantage? If you want to get angry, get angry that they want to prevent reform, not that they knew how to take advantage of a wide open situation. That is their job.

Essentially, there is an ethical problem in a great many service businesses. Who are the businesses serving? In the auction world, they say they serve both the buyer and the seller. Who is kidding whom? What about insurance companies who are allegedly, fearful of huge settlements against doctors, who are actually controlling the costs of health care through their policies serving doctors and hospitals? Clear conflicts of interest. There are endless examples in endless industries of such conflicts.

This is the nature of the capitalist system and it can and will survive if there is a strong moral core to those people who understand the conflict of interest and because there are laws to prevent people from taking advantage of the system. Those laws are, unfortunately, necessary because the single most difficult challenge to the moral core is called short term profit. This is the dangerous side to our system and it needs to be addressed. Those bankers could be quite useful people after all.

The NY Times had an article yesterday where the author said the photo of the bankers in front of the Congressional Committee reminded him of the tobacco executives in front of their Congressional Committee fifteen or so years ago. The similarity was in that their right hands were raised and they were wearing suits, but that is where it stopped. This rage against the bankers is absurd. The rage should be pointed at the politicians who so blithely eviscerated government regulations that might have prevented the financial debacle in the first place.The tobacco executives, furthermore, were lying about their product. They said that they did not believe that it was unsafe. Hmmmm…..,

These bankers are extremely smart. I could think of a whole bunch of ways to use their intelligence. For example, I might suggest that anyone earning a bonus of over ten million dollars be enrolled in a program that aid our public schools, not necessarily from a teaching perspective (although good teachers should get bonuses) but from buses to playgrounds to buildings to lunch and health programs. Our educational system is our life blood and if it fails, and it seems to be as very few people seem incapable of naming our first president, this country doesn’t have a chance. These bankers and businessmen would be given generous tax credits for both time and money they lavished on a school system, but I would make it hard on them and give them the worst performing schools in the nation. It might just make a big difference.

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