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Friday, March 23, 2012

Folly of modern capitalism

Special to The Japan Times

HONG KONG — Greg Smith got more than his allotted 15 minutes of fame when he resigned from investment bank Goldman Sachs. In an op-ed article for The New York Times, he furiously blasted his employers as "toxic" and "morally bankrupt", accusing them of ripping off their clients and calling them "Muppets", British slang for stupid, besides referring to the television puppets.

It remains to be seen what impact the article will have on Goldman Sachs' behavior — or on Greg Smith's job prospects. It will surely be worth at least a footnote in the book about how to design your resignation letter.

Smith's charges are also worth looking at in the much wider context of the contribution of banking and finance to the modern capitalist world.

Goldman Sachs saw $2.15 billion wiped off the value of its shares in the immediate aftermath of publication of Smith's resignation. The article even added a few items of excitement to the infantile Twitter feed "GS elevator gossip." Samples include:

"I bet Greg Smith doesn't know s**t about 'guy code' either ...

"Know the difference between a buy-side and a sell-side guy? The buy-side guy says 'F**k you' before they hang up the phone ...

"Number one: I wish I invested in poverty. It's up 60 percent since 2001. Number two: We did."

The investment bank itself predictably denied Greg Smith's accusations. Many commentators yawned and said it had all been said before; one accused Smith of being "faux-naive".

Matt Taibbi, in his classic Rolling Stone article, had surely already damned Goldman to hell for all eternity, describing Goldman Sachs as "a great vampire squid wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Although other people had said similar things before, Smith was a Goldman insider and backed up his accusations by quitting his $500,000-a-year job. As an executive director in London, equivalent to a vice president in the United States, he was half way up the totem pole. He waited until after the bonus payouts had been made, and who knows what frustrations and arguments may have halted his journey up the greasy pole.

Nevertheless, Taibbi himself praised Smith as "a brave and courageous soul" for speaking out. He argued that having an insider blast the culture of Goldman is "the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor would the Occupy protests or even a monster wave of civil lawsuits hope to change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry."

The Naked Capitalism blog's Yves Smith, who in her incarnation of Susan Webber knows something about the slippery financial world, gently reminded Greg Smith that not everything was rosy and sweet-smelling in Goldman's garden of the 1990s, but there was a culture change when Lloyd Blankfein and his crew took over and put current profits above everything else.

Barry Ritholtz, head of Fusion IQ and author of the Big Picture blog, claimed that the move under which big financial firms changed from partnerships to publicly traded banks was a watershed: "Their priorities changed. Profits first: meeting quarterly profit estimates became job 1; everything else, including corporate culture, was secondary."

He added that Goldman is not alone and unlikely to suffer a massive defection of clients. Where and to whom should unhappy clients run — "to the choirboys at Morgan Stanley, or to the philanthropic organization known as Deutsche Bank?" he asked, tongue clearly in cheek.

Goldman's defenders included New York Mayor Michael Bloomberg, who said it was "beyond me" why the New York Times had published the article. Blankfein was "trying to lead this firm at a time when God couldn't lead it without being criticized." It was not clear whether this was a conscious or unconscious reference to Blankfein's claim, which he later withdrew, that he was "doing God's work".

Bloomberg echoed other defenders who claimed that the clients of Goldman and other investment banks are not little old ladies, but professionals who should be aware of the advice caveat emptor (let the buyer beware).

There are wider issues concerning the role of finance and financiers in the modern capitalist economy. In the blogosphere, a common term for the top bankers is now "banksters", a portmanteau word combining "bankers" and "gangsters".

Previously the financial system was regarded as the lifeblood of the capitalist system pumping blood — also known as money — through the system so the capitalist body could stay healthy and grow. Now finance has a life of its own.

The blogger Sell on News, writing on the Australian macrobusiness site, makes some interesting distinctions and claims that although global capital is seen as a homogeneous development, it has largely recently been an English-speaking phenomenon, as the huge transaction volumes from London and New York demonstrate.

Ronald Reagan and Margaret Thatcher promoted a logical absurdity, he asserts: "That money, which is rules, can be deregulated. Capital can 'flow freely' as if it is water. This liquid should not be impeded by barriers if it is to reach its equilibrium point of maximum efficiency. It is rubbish, of course, but metaphors are extremely powerful, especially bad metaphors."

Even more damagingly, Sell on News accuses, "The whole thing was scientized: the rules were manipulated by highly numerate rocket scientists (often literally out of NASA) who took the basic rules of money and created a massive edifice of meta-rules: rules based on rules based on rules. CDOs, CDSs, interest rate swaps, volatility indexes and now microsecond high-speed trading. It is this folly that is at the source of the recent crisis."

Such meta-money can only survive through massive leverage because the margins are so small, and those margins can be killed by small taxes, which is why Britain is so opposed to them.

Sell on News sees three different approaches to money, each based on a powerful currency, each with flaws:

• There is the dollar-based "English-speaking method of making returns from returns from returns."

• There is the European approach, based on conventional banking and conventional bonds, meeting the cost of capital by making returns from debt, which now risks being mired in low growth because the demographics are poor.

• There is the Asian approach, seen in Japan and more recently in China, which doesn't believe in costs of capital or the discipline of capitalism, with massive investment and risks of cycles of excess and correction.

Sell on News concludes that the Asian way "is not much of a prospect, but perhaps preferable to letting meta-money purveyors run rampant playing Russian roulette with the world financial system as has been the case of the last decade and a half."

Kevin Rafferty is editor in chief of PlainWords Media.

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