Friday, April 30, 2010

What's wrong with personal integrity?

I got an unusual amount of hate mail after my post Would you bet on pro wrestling? In that post, I wrote that the Goldman Sachs affair had demonstrated that Wall Street had lost its way is in the process of destroying its own franchise of trust.

While I did receive some praise, I found that I was also confronted with Libertarians brandishing their Road to Serfdom like so many Red Guards during the Chinese Cultural Revolution holding Chairman Mao’s little red book. They seemed to be reacting instinctively and believed that my answer called for more regulation. They hadn’t even spent time to read the post and their objections didn’t even address my proposals:

  • Bring back the partnership investment bank. Such a structure makes the risk and return symmetric for investment bankers. If bankers want to do something stupid and foolish, then let them. However, I have found in the past that having virtually all of your net worth tied in a firm makes you think a lot more about risk control and how you make money.
  • Require all derivative contracts to be listed on a centralized exchange. Greater transparency would create more transparency and allow market participants to better price risk. While the likes of AIG could repeat its adventure in derivatives, but greater transparency could allow the market to restrain AIG’s actions through the risk pricing mechanism.

These proposals allow the market to work. Does this sound like heavy handed regulation?

In praise of good government
Unlike the Libertarians, I appreciate the role of good government and I don't regard government as evil. Good government is invisible and we don’t appreciate it until something goes wrong, much like how husbands may not appreciate their wives making them dinner every night...until there is no dinner.

Government establishes a structure for the system to work. Government is the mechanism that created a system of weights and measures. It assures us that when we buy a pound of meat or a gallon of gasoline, that we get something that is indeed a pound or is a gallon.

Government is a traffic cop. It compels drivers to stop at red lights and go on green lights so that there is no chaos on the roads. Similarly, it directs traffic in the skies through a system of air traffic control when we fly.

We should be grateful for these invisible functions, which we never think of and take granted. These functions of government make our everyday lives easier.

Political backlash is building
Already, I see the political backlash building. Respected figures, who are hardly on the fringe, are speaking out. Todd Harrison, founder of Minyanville, believes that Goldman Sachs is the poster child for class warfare. Also read Kurt Brouwer’s account of the conflicts on Wall Street and why he left Merrill Lynch. Barry Ritholz at the Big Picture is proposing a commercial in support of financial reform bill.

The peasants are gathering with their pitchforks. Wall Street needs to clean up its act. Any political backlash has the potential to get out of control and the social consequences won't be pretty.

Readers will recall that I concluded my previous post with the comment that:

In finance and in life, all you have in the end is your name and your reputation.
In all of the objections that I've heard, there is one thing that I don't understand. What’s wrong with valuing personal integrity?

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