Tuesday, October 18, 2011

FLG Doesn't Get

...the appeal of this critique, which was originally written by Conor Friedersdorf apparently has gone viral:
Much easier to decide that it's wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn't aware that you sabotaged it by intentionally picking the misleadingly rated loans most likely to be defaulted upon

But here's what FLG doesn't get -- the client in this case wasn't some mom and pop retail investor, but another sophisticated financial institution, ABN Amro, if FLG remembers correctly. FLG ain't gonna lose sleep that ABN Amro got fucked over. In fact, the people who did the deal for ABN Amro, or whichever financial institution it was, were financial professionals, by definition in that they get paid to make financial decisions on behalf of the bank, and got fucked.

So, FLG isn't losing sleep for two reasons:

1) Financial professionals should be aware that the hands down best way to make money in financial markets is to exploit information asymmetries. (In this case, the composition of the underlying assets of the derivative.) This is why people do due diligence. If this security was cooked, then a sophisticated financial professional should've sniffed it out. Again, it's not like Goldman was forcing this on pensioners whose financial sophistication extends to writing a check.

2) If Goldman really did fuck ABN Amro, then their reputation will be hurt amongst its customers over the long run. There's a self-correcting mechanism to this, even if Goldman is at the center of the financial world right now, it can't fuck its customers over for very long before people go elsewhere.

BUT FLG, wasn't this illegal? Well, Goldman did pay a shitload of money, but the settlement was also wishy-wash on whether there was wrong-doing.

BUT FLG, even if it might not have been strictly illegal, wasn't it unethical? As FLG mentioned above, the fastest way to make money in the financial markets is to exploit information asymmetries. Therefore, we have a variety of laws and norms that encourage disclosure and prevent people from exploiting these asymmetries, insider trading laws probably first and foremost. Goldman admitted mistakes were made, and FLG things in general that they acted in a downright shitty manner and would seriously question doing business with them if he were in that position, which was FLG's point about #2.

But what Conor's statement is really saying is that we shouldn't let banks screw over other banks. Is that really the populist sentiment? Maybe, if you think this is merely emblematic of the corrupt culture on Wall Street. But FLG doubts it. If you asked people down at the protest if they care that Goldman Sachs screwed over another bank, they'd probably say whatevs, as long as there doesn't need to be a bailout. More likely, people think "the client" in this case was an individual investor, which it wasn't.


Anonymous said...

Do you ever read Conn Carroll? I find myself turning to him more and more. You might find this interesting :


Mrs. P

William Brafford said...

I'm not going to argue that the government should spend a lot of time or money trying to stop sophisticated financial experts from "exploiting information asymmetries" against each other, but I will insist that such practices corrupt the souls of the exploiters.

FLG said...


Agreed. But I'm sanguine that the market can root out the bad apples over time.

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