In looking at the recent ProPublica and This American Life coverage of the capture of the Federal Reserve regulators by the Vampire Squid (Goldman Sachs) it’s important to note that they miss a basic point, which is that, as
Justin Fox so ably points out in the Harvard Business Review, Goldman Sachs has been using conflicts of interest as a mechanism to generate much, if not most of their profits.
I recommend that you read the ProPublica story, and then listen to the This American Life podcast, but Mr. Fox does make a legitimate complaint about the coverage.
Specifically one of the big reveals is that a Goldman executive said that consumer protection laws do not apply to rich clients.
This is in fact true under US law:
In the first, Carmen Segarra, the former Fed bank examiner who made the tapes, tells of a Goldman Sachs executive saying in a meeting that “once clients were wealthy enough, certain consumer laws didn’t apply to them.” Far from being a shocking admission, this is actually a pretty fair summary of American securities law. According to the Securities and Exchange Commission’s “accredited investor” guidelines, an individual with a net worth of more than $1 million or an income of more than $200,000 is exempt from many of the investor-protection rules that apply to people with less money. That’s why rich people can invest in hedge funds while, for the most part, regular folks can’t. Maybe there were some incriminating details behind the Goldman executive’s statement that alarmed Segarra and were left out of the story, but on the face of it there’s nothing to see here.
The theory here is that the very rich, by virtue of having a lot of money, are assumed to be knowledgeable investors, and so are more able to protect themselves.
Simply put, they are saying that they are not the general public, because they either have, or can hire, financial knowledge.
In highlighting this, they underplay the 2nd reveal of the story, and what is clearly the reason for Ms. Segarra’s unjustified termination, the fact that Goldman Sachs never had a meaningful conflict of interest policy:
The other smoking gun is that Segarra pushed for a tough Fed line on Goldman’s lack of a substantive conflict of interest policy, and was rebuffed by her boss. This is a big deal, and for much more than the legal/compliance reasons discussed in the piece. That’s because, for the past two decades or so, not having a substantive conflict of interest policy has been Goldman’s business model. Representing both sides in mergers, betting alongside and against clients, and exploiting its informational edge wherever possible is simply how the firm makes its money. Forcing it to sharply reduce these conflicts would be potentially devastating.
Mr. Fox makes another interesting point, that any organization that is responsible for the stability and the viability of the banks, such as the Federal Reserve, have an inherent interest in ensuring that those organizations are profitable, because profitable banks are more stable than unprofitable.
Carmen Segarra, in pushing for Goldman having a conflict of interest policy, was attacking the attacking the viability of a bank.
This raises a larger question, whether we really want to have an organization for which has unethical behavior at the core of both its culture and profits to remain viable.
This was the question that no one has asked about Wall Street in general, and Goldman Sachs in particular.
It needs to be asked.