Platt Perspective on Business and Technology

Considering a cost-benefits analysis of economic regulatory rules – 3

Posted in in the News, macroeconomics, outsourcing and globalization by Timothy Platt on April 13, 2012

This is my third installment in a series on the cost-benefits analysis of economic regulatory rules (see Part 1 in which I outlined a case study of regulatory reform drawn from United States history, and Part 2 in which I outlined a matching case study from more recent events in the news.)

I stated at the end of Part 2 that I would continue this series with a third case study, focusing on the Volcker Rule and the pressures that have been brought to bear to limit or repeal it. But to put this into context and explain the basis for the resistance to this regulatory restriction coming from the financial community, I am also going to discuss a currently breaking news story with the breaking of ranks of a now former executive at Goldman Sachs.

The Volcker Rule, named after the former chairman of the US Federal Reserve, Paul Volcker, was enacted specifically to protect bank customers from certain high risk, speculative investments that a series of large banks had been making and increasingly as a matter of standard practice. I add that these were investments that were not designed or developed to benefit bank customers, but were rather designed to enrich those banks and their officers and executives. And the categories of high risk investments that the Volcker Rule specifically addresses all led to significant losses for the specific financial institutions that participated in them, and their institutional downturns collectively contributed to creating our still very recent Great Recession.

More specifically, the Volcker Rule is a provision included in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. The rule specifically prohibits proprietary trading in which banks use customer deposits to trade on the banks own accounts as if those funds were bank owned. This is clearly and specifically a situation where the customer, or rather the Federal Deposit Insurance Corporation carries risk of loss of investment but the bank and its executives carry opportunity for gain. And this rule was seen, even as the law was first proposed in the depths of the still unfolding Great Recession, as controversial and as a challenge to the management prerogatives of those banks and their leadership. Alarms were raised that if the government sought to limit banks in this way the result would be to make them less competitive in the global financial marketplace. So initial implementation and enforcement of the provisions of this part of the Dodd-Frank Act was postponed and scheduled to commence only after a two year delay. President Obama signed this Act into law July 21, 2010 so the Volcker Rule is scheduled to go into effect this July 21, in 2012. And lobbyists have been busy since before the Dodd-Frank Act was even fully drafted, seeking to get this provision repealed. And this brings me to the still unfolding story of Greg Smith and Goldman Sachs.

In one sense the story of Greg Smith and his experience at Goldman Sachs is simply his own, at first very positive and then disappointing and worse with an employer that he had invested a great deal of effort and hope with. In a larger sense, his is a story of business ethics and particularly as he outlines his side of the story as to how he came to be so disenchanted with this particular employer and as his experience might reflect the conditions pertaining more industry-wide. I note the validity of both perspectives, but I cite this news story and the controversy that surrounds it for a different reason – the insight that it at least potentially offers into the underlying business mindset and practices that led to the Great Recession- and that by all appearances have continued on in the face of that challenge and in spite of the change that so much of the public has demanded.

Greg Smith was a London based vice president at Goldman Sachs, serving as their executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa. He resigned his position there with a glaringly public statement announcing his departure, published as an Op-Ed piece in the New York Times. And his so public a resignation letter was presented as a direct attack on Goldman Sach’s corporate culture and how he sees it as having sunk into venality and corruption – to the direct and intentional detriment of their clients and solely to enrich the business and its executives. And mirroring the underlying rationale behind the Volcker Rule, much if not most of what Smith wrote about, where he delved into the details, involved getting ahead and succeeding at Goldman Sachs precisely by engaging in the types of investment practices that could in the long run only cost the client and dearly, and benefit Goldman Sachs – at least until the bubble burst.

And one of the more sordid details to jump out at me was the petty way that clients were dehumanized and marginalized in how they were identified in day to day workplace conversation – as Muppets and other things. Muppets are puppets. I have also, since then heard that names such as Clampetts were commonly used to denigrate the clients that made this business possible – there citing Jed Clampett and his family of rich but ignorantly uninformed hicks who happened to have come into a fortune that other, wiser heads had to then manage for them. This sticks out for me precisely because of its familiarity – as a shared thread that ran through the stories coming out of companies such as Enron. This follows an all too common pattern. Those you would destroy, or at least cause harm to without regard, you first trivialize and even dehumanize in how you see them – and in how you speak of them.

I am going to turn to a more positive story in my next posting as a starting point for a more general discussion. But as a final thought here, I note that this story has resonated and spread. In that regard I cite one of many parodies that have already come out with Darth Vader’s Why I am Leaving the Empire. The issues I write of here will not simply go away.

You can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization.

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