William Wan has a story in the Washington Post that made me burst out laughing just one paragraph in. Wan is tackling an important story -- how much we can trust China's economic statistics. But here's the lede:
When China announced better-than-expected trade numbers last month, the statistics were met with outright suspicion from international powerhouses such as Goldman Sachs, Swiss financial firm UBS and Australian bank ANZ. The disbelieving scoffing only mounted days later, when the government unveiled numbers showing yet another positive trend — a narrowing income gap between China’s rich and poor.
Numbers in China have long faced suspicion, from optimistic recordings of visibly hazy air to the age of its Olympic gymnasts. But the credibility of its economic data is now coming under particular scrutiny, at a time when China’s growing global role weighs on investors, analysts and governments worldwide, even as the country’s economy is slowing after years of unbridled growth.
Now, on the one hand, there is no doubting the suspect nature of Chinese data (see the IMF staff discussion here). As Wan demonstrates well in the story, this is partly due to political machinations. There is scholarly evidence that political incentives shape the data reporting at times. To be fair, it might be due to the difficulty of data-gathering in a still-developing country, a fact that Chinese officials are willing to acknowledge.
No, what made me start laughing is that it was Goldman Sachs and UBS that are accusing China of data manipulation. This is like Lance Armstrong blasting the NFL for not having a more rigorous drug-testing regime. Goldman Sachs played a supporting but crucial role in cooking Greece's books well enough to get it into the eurozone. Meanwhile, UBS traders had great fun manipulating the key LIBOR interest rate -- when they weren't busy laundering money for corrupt politicians.
So, really, props to Goldman and UBS for expressing justified skepticism about the veracity of Chinese economic statistics. I'd just feel better if they couched it as follows:
As organizations that have developed expertise in cooking the books to evade national regulators as well as our investors, we know when numbers look fishy -- and China's numbers look fishy.
I think it's safe to say that the
vampire squid Goldman Sachs brand has taken a few hits in recent years. To add to the calumny, Greg Smith, an executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa, is leaving Goldman today after publishing an op-ed in the New York Times explaining why he's leaving. It's not pretty:
Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
Man, that best-of-luck office party is going to be awkward.
The fact that this op-ed has already spawned its own satire suggests that it's not going to have much of an effect on the larger debate on Goldman Sachs. Which is a shame, because such a debate would be pretty useful when thinking about Big Finance (though see Gabriel Sherman's excellent New York essay on this topic from a few weeks back). Indeed, this is a teachable moment for how to compose a memo, or a mission statement, or an op-ed that will provoke a deep debate over corporate culture. Let's see where Smith went wrong:
1) He made it all about himself. The ostensible point of this exercise is to shine a light on a shady corporate culture that values sins over virtues. In these instances, the following paragraph should never appear:
My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
See how that was ostensibly about Goldman Sachs but was really about the author? Not a good sign.
2) His job apparently required him to burrow out and reside in a large soundproof hole in the ground. Let's take a look at what Smith said about the halcyon, early days of his Goldman Sachs tenure -- i.e., when he started in 2000:
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients....
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
Excuse me for a sec, I need to do this for a spell.
Look, Smith should know the Goldman Sachs culture better than I do, but as an outsider, I am fairly certain of two things: A) Before Smith's op-ed, the terms "humility" and "Goldman Sachs" never appeared in the same sentence.... ever; and B) Making money was always how people got promoted at Goldman Sachs.
There's been enough written about Goldman Sachs to know that by 2006, the firm had recognized that it was badly overexposed in the subprime market and decided to dump their holdings onto their clients. We know that in 2007, the firm went so far out of bounds that the SEC actually brought a civil suit against them, securing a $550 million settlement more than 18 months ago. And now Smith notices something is amiss??!! While the Wall Street Journal suggests Smith's role at Goldman wasn't pivotal, this kind of naivite requires a special kind of willful blindness.
If you're going to be a whistle-blower, you need to acknowledge upfront your complicity in any malfeasance, be it legal or ethical. Smith's op-ed doesn't come close to doing this.
*A hat tip to @laurenist for the very clever title to this less-than-clever post)
One of the complaints I commonly hear about the study of global political economy is that it's sooooooo boring. Security studies has guns and bombs!! IPE/GPE has.... capital adequacy standards.
Well, I think it's safe to say that events over the weekend have made both global political economy and global governance more interesting:
Talks on the Greek sovereign debt crisis and French presidential politics were both thrown into disarray after Dominique Strauss-Kahn, managing director of the International Monetary Fund, was escorted off an aircraft in New York over the weekend to face sex charges.
Mr Strauss-Kahn was expected on Sunday to appear before a New York court and plead not guilty to charges of committing a criminal sexual act, attempted rape and unlawful imprisonment, according to his lawyers.
The charges resulted from an alleged incident at the Sofitel Hotel in Manhattan on Saturday afternoon involving a 32-year-old maid who said that she had been sexually assaulted in a $3,000 per night suite in which police found the IMF managing director’s mobile phone. Police said on Sunday night that the maid had picked Mr Strauss-Kahn out of a line-up. Sofitel said the maid had worked for them for three years.
Both the Financial Times and The New Yorker have been all over this since the arrest on Saturday night, and I won't try to replicate their coverage here. Let's try to parse out a few of the implications:
1) The IMF issued a terse statement that boils down to "The IMF remains fully functioning and operational." This has the whiff of this scene from Animal House -- except that I suspect acting Managing Director John Lipsky and his awesome moustache will do a much better job of keeping everyone calm than Kevin Bacon ever did. The real tangle would come is Strauss-Kahn -- or "DSK" as he's known in France -- fights this in court and refuses to step aside gracefully. It already appears, however, that the IMF won't invoke diplomatic immunity -- and based on past behavior, DSK would likely resign first.
2) One does wonder if this scandal will finally upend a decades-long convention that dictates the head of the IMF being a European and the head of the World Bank being an American. On the one hand, this same kind of talk occurred after Paul Wolfowitz had to resign as World Bank president in 2007, and Robert Zoellick replaced him. On the other hand, that was a whole financial crisis ago.
3) So, in the past five years, two heads of international financial institutions have been implicated in scandal. I'd recommend Swiss authorities take a good, hard look at Bank of International Settlements General Manager Jaime Caruana. These jobs clearly seem to attract bad seeds. At this rate, these institutions will make the IOC or FIFA start to look ethical.
4) The French reaction to DSK's arrest might cure many Westeners of the schadenfreude they felt in response to Pakistani conspiracy theories surrounding the death of bin Laden. As Philip Gourevitch blogs:
This being France, within minutes of the first news of D.S.K.’s arrest, there were rumors that he was the victim of a plot. Christine Boutin, the leader of the Christian Democrats in France, declared that D.S.K. had been entrapped, although she did not specify by whom, or how—but there was no shortage of possibilities floating in the French ether today: Sarkozy, of course, or Socialist rivals, or else, I heard someone say, the Russians who are unhappy with how he has dealt with them at the I.M.F., or maybe the Greeks, whose economy has self-destructed almost as thoroughly as he now has. You could even find D.S.K. being called the new Dreyfus. In conversations with writers, and reporters, and intellectuals around Paris today, I found that nobody quite believed these fancies, but nobody could resist speculating about them either. D.S.K.’s behavior, in and of itself, was just too suicidal to make sense entirely by itself.
See also Adam Gopnik on these points.
The real problem with the arrest is that it appears that the only French politician to offer the right response is ultranationalist Marine Le Pen, who correctly observed that given DSK's past indiscretions with women, this was a long time coming. This will onky boost Le Pen's chances of advancing to the second round of the presidential election. Richard Brody explains why that's a problem:
The world of French politics is haunted by the 2002 elections: then, backers of the eliminated moderate-left candidate, Lionel Jospin, a Socialist, joined forces with the moderate right to give Chirac an overwhelming victory in the runoff, in a repudiation of the F.N. One of the leading factors in Jospin’s first-round elimination was the fragmentation of the left among candidates from a variety of parties. Now, it’s the unpopular Sarkozy whose party is falling apart, and who is doing his best not to offend the F.N. (as in recent regional elections, in which he expressed no second-round preference between that party and the Socialists), in the hope of siphoning away enough of its voters to slip into the second round instead of Marine Le Pen.
In effect, Marine Le Pen is the spoiler: any candidate she faces in the second round is sure to win (because voters and parties will unify to keep the far-right out of power); she will either eliminate the moderate right or the moderate left.
Elections in which one of the two choices is simply unelectable are unhealthy for democracy -- they lead to malaise and alienation from the democratic process. Unfortunately, it looks like France is headed in that direction.
5) I hereby issue a challenge to the readers to come up with their best joke about IMF conditionality and DSK in the comments.
One of the paradoxes I tried to highlight in my recent review of finance books was that it was paradoxical to claim simultaneously that capital markets were becoming more efficient even as the financial sector hoovered up an ever greater share of profits and skilled human capital. So I'm pretty sympathetic to the argument that market incentives in the United States are too heavily skewed towards a career of high finance.
Skewed incentives, however, are not the same thing as skewed values. Unfortunately, the New York Times stable of columnists is blurring the distinction. For Exhibit A, let's look at this segment of Tom Friedman's column from the weekend:
We had a values breakdown — a national epidemic of get-rich-quickism and something-for-nothingism. Wall Street may have been dealing the dope, but our lawmakers encouraged it. And far too many of us were happy to buy the dot-com and subprime crack for quick prosperity highs.
Ask yourself: What made our Greatest Generation great? First, the problems they faced were huge, merciless and inescapable: the Depression, Nazism and Soviet Communism. Second, the Greatest Generation’s leaders were never afraid to ask Americans to sacrifice. Third, that generation was ready to sacrifice, and pull together, for the good of the country. And fourth, because they were ready to do hard things, they earned global leadership the only way you can, by saying: “Follow me.”
Contrast that with the Baby Boomer Generation. Our big problems are unfolding incrementally — the decline in U.S. education, competitiveness and infrastructure, as well as oil addiction and climate change. Our generation’s leaders never dare utter the word “sacrifice.” All solutions must be painless. Which drug would you like? A stimulus from Democrats or a tax cut from Republicans? A national energy policy? Too hard. For a decade we sent our best minds not to make computer chips in Silicon Valley but to make poker chips on Wall Street, while telling ourselves we could have the American dream — a home — without saving and investing, for nothing down and nothing to pay for two years. Our leadership message to the world (except for our brave soldiers): “After you.”
For Exhibit B, here's David Brooks from Friday:
After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place.
The shift is evident at all levels of society. First, the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.
It would be embarrassing or at least countercultural for an Ivy League grad to go to Akron and work for a small manufacturing company. By contrast, in 2007, 58 percent of male Harvard graduates and 43 percent of female graduates went into finance and consulting....
[T]he value shifts are real. Up and down society, people are moving away from commercial, productive activities and toward pleasant, enlightened but less productive ones.
OK, I'm calling a Vizzini foul on the word "values" here.
A broad spectrum of American saved less over the past decade because they were responding rationally to massive asset appreciation. High-skilled Americans went into finance because it paid remarkably well. Americans didn't do these things because they suddenly got lazy. Indeed, the opposite was true, if U.S. labor productivity figures are any guide. And while much calumny has been heaped upon Wall Street in the past few years, is anyone actually accusing bankers of either not working hard enough or not putting in enough hours?
Americans haven't suddenly gotten contemptuous of either saving or manufacturing. They were responding to the price signals that the market communicated to them.
This is great news, by the way. Changing values is really, really hard. Shifting material incentives is not exactly easy, but it's much more doable than fomenting a values shift.
I suspect that
ranting writing only about incentives and not about values makes better copy. That said, I'd prefer it if the most influential op-ed columnists in the land correctly diagnosed what ails the American political economy rather than saying "distemper" or "an imbalance of humors."
I have a review essay of four books about Big Finance in the latest issue of The National Interest entitled "First Bank of the Living Dead." The books reviewed were: Sebastian Mallaby's More Money Than God, Robert Reich's Aftershock, Nouriel Roubini and Stephen Mihm's Crisis Economics, and John Quiggin's Zombie Economics. Despite my obvious affinity for zombies, I tried to avoid any favortism towards Quiggin's
awesome brilliant spot-on unorthodox metaphor.
The opening paragraph:
Earlier this year, Goldman Sachs CEO Lloyd Blankfein attempted to justify his professional existence, proclaiming, “We’re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. . . . We have a social purpose.” This all sounds good enough, except that finance went from being responsible for 2.5 percent of GDP in 1947 to 7.7 percent in 2005. And at the peak of the housing bubble, the financial sector comprised 40 percent of all the earnings in the Standard & Poor’s 500. The incomes of the country’s top-twenty-five hedge-fund managers exceeded the total income of all the CEOs in that index. And by 2007, just about half of all Harvard graduates headed into finance jobs. If capital markets merely serve as conduits from savers to entrepreneurs, then why does such a large slice get siphoned off to compensate people like Lloyd Blankfein? To put it more broadly, what is the role of finance in a good and just society?
And the thesis paragraph:
Some of these books address some of the big questions some of the time. Most of the authors, however, focus on the retrospective at the expense of the prospective. With the partial exception of Roubini and Mihm’s Crisis Economics, these authors seem more concerned with looking back at the halcyon days of the postwar era than looking forward to the twenty-first century. Unfortunately, none of these books recognizes two important facts of life. First, at present, no economic model perfectly captures the interrelationship between the financial sector and the global economy. Second, no matter what regulatory arrangements are put in place, the next global financial order will last no longer than a generation—because whatever ideas replace the current ones will also prove fallible over time.
I fear that last paragraph reads a bit harsher than the rest of the essay. I learned something from all four books, and enjoyed engaging with all of them.
A revolt among big donors on Wall Street is hurting fundraising for the Democrats' two congressional campaign committees, with contributions from the world's financial capital down 65 percent from two years ago.
The drop in support comes from many of the same bankers, hedge fund executives and financial services chief executives who are most upset about the financial regulatory reform bill that House Democrats passed last week with almost no Republican support. The Senate expects to take up the measure this month.
This fundraising free fall from the New York area has left Democrats with diminished resources to defend their House and Senate majorities in November's midterm elections. Although the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee have seen just a 16 percent drop in overall donations compared with this stage of the 2008 campaign, party leaders are concerned about the loss of big-dollar donors.
And now Politico:
With the financial reform bill likely to hit President Barack Obama’s desk in coming weeks, Wall Street's top political players are warning Democrats to brace themselves for the next phase of the fight: the fundraising blowback.
Democrats who backed the bill are finding big banks far less eager to host fundraisers and provide campaign cash heading into the tightly contested midterm elections this fall, insiders say.
Some banks, in fact, have discussed not attending or hosting fundraisers at all for the next few months. Goldman Sachs is already staying away from all fundraisers, according to two sources. The company would not comment.
“I think at least in the short term there is going to be a great deal of frustration with people who were beating the hell out of us — then turning around and asking for money,” said a senior executive of a Wall Street bank.
Based on these stories,
when if the Democrats get hammered come November, expect a lot of pixels and ink spilled on the awesome power of the financial sector to get what it wants in Washington. And don't believe a word of it.
This is the lobbying equivalent of a good but struggling baseball club calling a team meeting right before they play the worst ballclub in the league. That is to say, sports managers often save their rousing speeches before a game they're pretty likely to win, so they can claim that their motivation was what led their team to victory.
As Charlie Cook notes, the Democrats are heading into a Category 5 political disaster come November. This has nothing to do with FinReg, and everything to do with a struggling economy, an ecological disaster in the Gulf, fired-up conservatives, and disaffected liberals. Wall Street antipathy is really the least of their problems.
I'm laying this marker down now -- unless we see some shocking upsets among the New York delegation (the real target of Wall Street's ire), analysts who proclaim the awesome political power of financial sector will be doing so with sloppy facts and sloppy argumentation.
In recent years, I've seen some very... let's say exaggerated arguments about the power of political lobbies in Washington. They do possess political influence, but much of that influence rests on the perception that they can make or break electoral fortunes. In Wall Street's case, however, they're pushing on a door that was already wide open.
Which is not surprising. Powerful interests tend to apportion their money to candidates they think will win. Indeed, to use a term of art, Wall Street's political preferences appear to be -- dare I say it -- pro-cyclical.
Analysts are trying to decipher the content and implications of the Senate's financial regulation bill. Noam Scheiber and James Pethokoukis have surprisingly similar takes, in that the bill doesn't directly address the "too big to fail" problem, though Scheiber thinks it does address the problem indirectly.
Wall Street has an enduring PR problem. Yes, big banks are unpopular. But it has gotten so bad that they may not be able to so easily counter their image issues with campaign cash. Getting Wall Street money now has a stigma attached to it like oil and tobacco money. Candidates like Meg Whitman in California and John Kasich are getting hammered for their Wall Street ties. The industry’s continued unpopularity will no doubt spawn further attempts to tax, regulate and restrict the sector.
If the public stays this outraged for this lomg, then Pethokoukis is right. The political problems of finance are becoming so great that we could be talking about a shift in social norms with regard to what is considered "honorable" work.
Of course, paradoxically, this could serve to increase the salaraies of those still willing to go into finance. As Adam Smith pointed out in Wealth of Nations:
[T]he wages of labour vary with... the honourableness or dishonourableness of the employment.... Honour makes a great part of the reward of all honourable professions. In point of pecuniary gain, all things considered, they are generally under-recompensed, as I shall endeavour to show by and by. Disgrace has the contrary effect. The trade of a butcher is a brutal and an odious business; but it is in most places more profitable than the greater part of common trades. The most detestable of all employments, that of public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.
Question to readers: Will the social stigma against Big Finance persist or fade as the economy bounces back?
The price of credit default swaps on five-year US government debt hit a record 18 basis points in early trading, according to CMA Datavision. This means that it costs $18,000 a year to buy insurance on $10m of US government debt. Tim Backshall, chief strategist at Credit Derivatives Research, said the price implied that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.