Tuesday, February 16, 2010

Greece and Ethics***

Although I like Felix Salmon, I often suspect he's being contrarian for the sake of being contrarian. Recently, this has led him to defend Goldman Sachs on a number of fronts, including its role in the Greece debt crisis:

So while it’s entirely fair to blame Greece for trying to hide its debt, and to blame Eurostat for letting it do so, I think that blaming Goldman is harder. It was surely not the only bank involved in these transactions, and the swaps were simple enough to be shopped around a few different banks to see which one could provide the best deal. Structuring swaps transactions is one of those things which investment banks do. If countries like Greece buy swaps in order to hide their true fiscal status, then that’s the country’s fault, not the banks’. No self-respecting bank would decline such a transaction because they felt it was unfair to Eurostat.
Yes, I’m sure that Goldman put a team of people onto the Eurostat rules and made that team available to the Greeks. But let’s not blame the advisers here, for structuring something entirely legal and which the Greeks and Italians clearly wanted to be able to do all along. This is a failure of European transparency and coordination; Goldman is a scapegoat.

Sure, what Goldman did was technically legal, but does that make it right? Investment banking ethics is a bit of an oxymoron, so I'd expect to hear that reasoning from Goldman, but it's unfortunate that Salmon chooses to rationalize it this way, too. Would he also approve the work of people like Maurice Levy*?

* Obligatory watch-the-Wire-if-you-haven't-seen-it aside. Not going to waste much effort on it, though, because if you haven't seen it yet, I'm not sure how I'm going to persuade you.

Excuses such as this further entrench the inappropriate business practices of  investment banks into the financial system. They encourage the development of a system where the way to make money isn't developing deals that benefit all stakeholders, but rather tricking regulators and investors by bending the technical definitions of the law**. With the prominence of this sort of behavior on Wall Street, I'm unsure how much increased regulation and new laws can help--banks and lawyers will only make more money figuring out new ways to evade them. And bloggers for major financial publications, apparently, will continue to support their right to do it.

** Again, I must turn to my familiar rallying cry and ask if we would allow this sort of behavior in any other industry. I'm pretty sure we hold even used-car salesman to a higher standard.

*** I'm sure someone with a background in philosophy (Shaun) could write an entire book on the actual "ethics" of this, but I think you understand the point I'm trying to get it and the definition of ethics I'm using.

Tuesday, February 2, 2010

Tactics vs. Strategy

In one call, [Larry] Summers said, “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.” -- Credit Crisis Cassandra
The quote above -- which occurred during a call in which Summers was fighting against regulating derivatives -- is one of the most illuminating of the financial crisis (so illuminating, in fact, it's the title of a new book by James Kwak and Simon Johnson). Viewed in the best light, it represents the extent to which regulators simply deferred to Wall Street for their cues on complex financial issues, while viewed more cynically...well...let's just say it looks a lot worse. At the very least, it's another example of why we should be wary about trusting the so-called "experts".

I highlight this quote today because the talk of naming a new Treasury Secretary had me thinking about one of the arguments made by those in support of retaining Tim Geithner*: who else would you get to replace him? I imagine many of his proponents believe that you need someone else with intimate knowledge of Wall Street in the position, but that anyone with the sort of ties to obtain that knowledge will not be confirmed**. 

* And also, in a broader sense, of why we defer to "experts"
**I seem to recall the argument for hiring Geithner and Summers in the first place--despite their involvement in supporting many of the practices that got us into this quagmire--was that they were the "only people" that knew had enough knowledge of these areas to fix it.

The fact that I'm skeptical about this argument will not surprise you. But my reason why might--it relates to the way I analyze sports.

As I allude to in the title of this post, I view the ability of fans to criticize coaches through a prism of tactics vs. strategy. When it comes to tactics--which I consider smaller-scale things, such as how a guard actually blocks or a how a quarterback actually throws--I will openly admit that every coach in the NFL (the "expert") knows way more than I do. But when it comes to strategy--bigger picture things such as play-calling and time management--I don't think that's the case (and I assume most of you would agree the same holds true for you). From awful time management to the refusal to question conventional wisdom, coaches make strategic decisions that are far from optimal all the time.

I think it's useful to consider this analogy when thinking about finance (or any other industry*, really). Certainly, all of the attendees at the Asset Securitization Forum know more than almost all the critics of the financial industry about how to structure a CDO^2 of ABS. But far fewer of these attendees have actually thought much about how the products they create and sell fit into the bigger picture.

*** If you're a television fan, think of it this way: Jeff Zucker knows way more than you do about how to actually produce a show. Still, most of you could have done a way better job than he did of running his network.

The implications of this for picking a new Treasury Secretary (and how he should perform the job once chosen) are clear. Contrary to the belief of those who believe Geithner/Summers/etc. are the "only people that could do their jobs," we don't need to someone that knows a great deal about the tactics of Wall Street. Instead, we should chose someone that has actually analyzed (and is, of course, willing to question) the big-picture strategy. I don't know enough about specific candidates to know who would be interested, by I can't imagine someone like this would be too difficult to find****.

And, on a broader note, it means that none of such feel bad about questioning what the "experts" tell us about finance. Just like our thoughts on a foolishly used time-out in a game last week, it's quite possible we know better.

**** Yes, I realize there a political constraints because this person needs to be confirmable. This suggestion, though, should, in theory, make that task much easier.*****

***** I feel like I owe a h/t to JoePos for once again stealing his technique.