Saturday, February 20, 2010

Matt Taibbi

As I am scarcely the first to point out, Matt Taibbi is playing the role of a modern-day Ida Tarbell, and playing it with panache. Tarbell (1857-1944) has been an inspiration to me ever since I read, in my early adolescence, a wonderful 1970 article on her in American Heritage, "The Gentlewoman and the Robber Baron" by Virginia Van der Veer Hamilton, available for your reading pleasure through the miracle of the Internet:

Tarbell had her Standard Oil, which she helped to bring down; Taibbi has his Goldman Sachs. I mentioned in passing the other day the calculations of Lloyd Blankfein; Taibbi lays out for us just what those calculations have been and are:

Like Tarbell, Taibbi is an investigative journalist, not an economist, so there will always be economists and insiders to say he's getting this or that wrong. But I don't think his basic thrust is off at all. He starts by asking the right questions, and proceeds to see where that will take him:

The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly?

His explanations and his conclusions are so plainly put that anyone can understand -- which is precisely the journalist's role, of course:

It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

I've noticed that one of the flashpoints for Taibbi's critics is his critical account of how investment banks not only bet against their own customers, but against the actual advice they have given those customers. To insiders and to many economists, that's unremarkable, all in a day's business. To Taibbi, and to the man in the street, it seems surreal, especially at the massive level at which it occurs; and I think this common sense view of the situation has merit that economists and insiders, deep in their more "nuanced" view, often completely fail to see.

One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.

Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.

The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."

Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.

To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager.

For a little guy like me, whose every dollar is valuable, allowing a bank to take advantage of me in that way -- especially when the facts are pretty much out there -- would be idiotic. Does money not mean as much to the clients of Goldman Sachs? The value of common sense it that it reasserts itself if you let it, and the reassertion here would be the simple query, Why would you, why would anyone, do business with these people? It doesn't compute on the capitalist face of it, let alone the ethical face.

This is the role of a Taibbi or a Tarbell: to simplify matters even at the risk of occasionally over-simplifying them, to act as a counter-force to the purposeful obfuscation and manufactured complexity that allows the swindlers to swindle you. We needed that illumination a hundred years ago, and we need it now. We never stop needing it.

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