Wherein Tom Day of Sungard drops out of hyperspace just long enough to write the following missive on the PRMIA DC web rant soapbox and get a few hours sleeep. Ode to Frank Partnoy. -- Chris
Frank Partnoy's article from FT, Friday March 16, 2012 (click here) may
well have been written by Mr. Blankfein or Mr. Dimon too. Maybe it was?
It does make you wonder: Are academics routinely "bought-in" (not
"brought, but bought") to add credibility? A mouthpiece to help
deflate existing, imagined, or other reputational risks? I think this
every time I read anything Paul
Krugman bothers to write, which is usually nothing but "print it,
spend it, print some more". Theory being (in my opinion) - we will
own Africa and the Middle East one day anyway, so why worry about debt.
Perhaps a new breed of lawyer, banker and economist is upon us.
The "'SIFI Spring' Evangelist"
SSE's seem to be everywhere these days, trying to pump-up the market to convince
the world that there is a hopeful, global, and persistent recovery right around
Partnoy begins his article with a false conditional assumption that asserts
that the central difference between animals and humans is "thinking about
the future". Obviously this is a false premise, as squirrels "think
about the future".
The central difference between humans and animals - besides having a
"soul" (or perhaps 'animal spirits' at minimum) - is something
Partnoy obviously didn't learn in kindergarten, but all kindergartners seem to
The central differences include:
- Values, like Honesty and Fair Play
- Committed Relationships
- Sophisticated and Actionable Communication
Here is a link for a gentle reminder of some others: http://www.peace.ca/kindergarten.htm
It is worth reading the list from the above link. Doing the right thing with
the right attitude isn't all that hard, after all. Perhaps Partnoy can
use this link as a reference point for how to properly think about enhancing
corporate ethics and standards. Oddly, Partnoy states that:
"[obviously] no one should
expect derivatives sales people to be honourable, any more than we should
expect a zebra to scrub off its stripes."
His point seems to be that the "natural habitat" for financial
product salespeople is one that we all should obviously realize is
dishonorable, at least in Partnoy's "academic" (i.e., fictional)
For most of the rest of the bankers in the room, aren't you a little
offended by this illuminati arrogance? Here is a professor with a new
book he is about to trot-out in June 2012 entitled: "Wait:
the Art and Science of Delay" evangelizing the world that we bank
salesmen/women are, "of course", dishonourable.
Listen: trying to sell a book called "Wait"
by concluding your FT article with the advice that everyone should draw a deep
breath and "....take time to think about these [i.e., proposed SEC and
Dodd-Frank] rules" - does this not strike you as a little disingenuous?
Slightly less than straight-shooting and, obviously, self-serving? As my young
children would say: "It seems to be somewhat 'sketchy'".
What am I missing?
Based on what I was able to surmize about the book, I feel it can be safely
avoided as its title summarizes its axiomatic points:
When all the world is having
'black-swan dreams' (my word, and yes - please use it!) or living through an
actual black-swan event, or simply when you need to make a choice between one
or another thing(s), those with clarity, wisdom, patience and understanding will
be the survivors and winners.
This is so basic it does make me wonder about book publishers. Very
few of us in the trenches probably need 200 or 300 pages of yet another
text that conveys a simple idea over the span of 200-300 pages. This is
why I love Twitter. Economy. Economy of words.
What isn't clear to me, something that seems obvious to Partnoy, is that
financial product salespeople (especially those evil "derivative"
salesmen) are dishonorable.
Axiomatic again, of course, is that there are bad actors - and Vampire Squid
companies are all around us like some hard to observe virus; however,
banks are full of "good guys" not just "bad guys".
Further, I don't think we need Washington D.C. to define what
"honorable" or "fiduciary responsibility" means. If
we as an industry are so oligopolistically "captured" that we
actually do need such "wisdom" from Capital Hill, God help us.
We don't need to "Wait", as Partnoy seems to suggest. Shapiro
has a nice set of fiduciary standards - informed by years of case-flaw (oops, I
mean "law") and court decisions under ERISA - that we can immediately
apply and enforce.
PROBLEM: All of these GSE G-SIFI and SIFI
banks don't want a new fiduciary standard. Conclusion: Shapiro and
the SEC will never in 100 years get a new one passed. The ugly truth is
that while Greg
Smith wrote a scathing blast about Goldman's internal cultural weaknesses, these
same weaknesses exists up and down the street - not just Wall Street, but Main
Street too. The difference is that on Wall Street we are now the owners
of an oligopolitic, palm-pressing, politically and policy saavy industry
(cross-border, not just domestic) that has enough "inside the
beltway" clout that "deimplementation" not
"implementation" of financial reform is the primary focus of the
banks and their army of lawyers. The Volcker
provides a vivid example, as does the sabotage of the Office
of Financial Research - supported and virtually sponsored in being crushed
by Administration and Supervisory leadership before Dodd-Frank was even born.
Next, Partnoy thinks there is a difference between a client and a
counterparty? Fiduciary rules should only apply
if you are an "unsophisticated" investor. The idea:
"Shame on you Mr. Banker if the
faces are ripped off your poor hapless unsophisticated hoi polloi."
But "sophisticated" investors? Well, they get to play under
different rules because they are smart and the others are not.
By Partnoy's own logic - and therefore justifying Goldman's actions and
making the tacit point that Greg Smith is "disgruntled" - it's o.k.
to insert the vampire blood funnel down the throat
of your "sophisticated" clients because they are labeled
Using Partnoy's logic, if you are a "sophisticated
investor" (i.e., $2.5 million or $250k in income over the last two
years), and assuming he is right, perhaps clients ought to consider running
away from Goldman?
As Partnoy tells us in his article: it is always open-season
on non-client "sophisticated" accounts (i.e., the "institutional
guys"). Goldman bankers have a "license to kill" and, of course,
the recipricol: "the right to be killed" - in theory. However,
"...the right to be killed" was itself "killed" as soon as
these monolithinc oligopolies became functional GSEs. Given the AIG
situation, not to meantion the Abacus deal, and
many other non-investigated
inside "deals", we have been forced to implement tastless
programs like the TARP, the Capital Purchase Program (CPP), the TLGB, the TAG,
and many other "innovative" bailout programs. This is total
asymmetry of outcomes: Tails I win, and heads you lose. The big
banks can kill clients and markets, and when the punch-bowl gets drained, and
everyone is walking around bumping into each other and passing out, they are
saved by the very hands that are supposed to be protecting our citizens from
unsafe and unsound practices. Something
sounds wrong in Kansas. As Thomas Sowell has said:
"What is more frightening
than any particular policy or ideology is the widespread habit of disregarding
facts." - Thomas Sowell
If this isn't a shout-out to all Goldman client and institutional accounts,
few of which are likely to be "unsophisticated", to "run"
on the "bank" (they are now a Bank
Holding Company after all) then it must mean only one of two things:
- GS clients are almost universally “ignorant
(i.e., ‘dumb’) money and they believe Goldman is the
"smart-money" and they need the Goldman
"smart-machine" to help them “look smart” about
investments. In all of this, we can assume they are right, and firms
like Goldman are benevolent and looking out for their clients and
- You realize that the Ivy League salesman
with his Rolex, limo, sexy wife (or girlfriends), house in the Hampton's
and access to the GS jets are "designed", pre-packaged and
taught how to make you feel "less" so they can "take
more". Like many on the financial sell side, they pimp the
"ride" (i.e., their NY banker lifestyle) and then take you on a
ride. This is pretty much the way the world works for the "dumb
money", while the smart money bankers giggle in the corner.
Here I can't help but think of a CEO I used to know in the Southeast
US. He refused to do business with anyone other than Goldman. No offense
intended, but this particular CEO wasn't the sharpest tack in the box.
After one especially hard aquisition - one which a well known Vampire Squid
advised - he never really realized that the advice received cost his
shareholders years of sacrificed returns due to the Squid recommending an
over-oversized liquidity pool, post acquisition. The CFO, a mere southern
banker -not a NY whiz kid - felt the liquidity pool should be half the size
that the Squid recommended, and so did the Treasurer (another blunt tack, but
nonetheless some intellectual pulse).
This Squid's advice was provided right about the time rates dropped from
6.5% to 1%, and the liquidity pool was largely mortgage securities that the
Squid sold to them (at large premiums) from their own inventory. You can
imagine the harmful result. Rates radically reduce, prepayments spike, premiums
become an albratross, and effective yields go through the floor.
Oddly enough, this same CEO will tell you - to this day - that the Squid is
great because, heck, they helped finance "his" two jets and are just
good people. He had
- definition: a person who feels good with another bankers hand in his
pocket, sifting for loose and not so loose change.
What about Partnoy's new term: "pseudo client
I went to ERISA, Google, and many other sources. I encourage you to do
As far as I can tell, Frank is the proud creator of this term. Better
him than me.
I will take my creations: "black-swan dreams" and being
"Goldmanized" over his creation: "pseudo client
relationships". Sounds like something a lawyer might say.
Do we all need to take Frank's wisdom and mark-up all our finance, banking,
risk management, and economic texts to add this new special word?
All "counterparties" take
note: it is open season on you and your neck. According to Partnoy, the Goldman-Sachs
(skip the "ad", it is political and stupid) is totally justified to
rip your head off when it is to their advantage. Why would any
counterparty trust having their business managed or cleared through any SIFI
Clearly - we are also informed by Partnoy - Goldman appears to be an ardent
supporter of the Volcker Rule (I can hear protests to the contrary). This
was/is a shocker. I have always assumed Goldman would want to keep their
"hedge fund within a bank holding company" structure, and any bank
charters forever. This allows them to finance their trading books with
government "back-stopped" money. Therefore, I can only assume
Partnoy has some inside knowledge or insights. In the article, Partnoy
clearly makes the point that Goldman is merely a "fellow
gambler around [the] poker table." There is it: Goldman
the Casino. This is precisely the problem the Volcker Rule is hoping to
dislodge from the Bank Insurance Fund, and something I am sure the Federal
Reserve would like to see curtailed.
I am sure Frank is probably right about this, but I suppose we just didn't
fully appreciate Goldman considers themselves gamblers as described in the
article. Goldman has always traded its proprietary views, but martingale
suckers Goldman is not.
Since we have now been so ably and thoughtfully educated by Partnoy -
with clear confirmation that Goldman is merely another casino gambler - I am
sure Lloyd and company would agree that the Goldman Bank Holding Company (BHC)
should be a "source-of-strength" as required by the Federal Reserve's
long-standing capital policies. Therefore, we must expect Goldman will be
divesting of any and all banking charters, and flipping them out of their Bank
Holding Company structure? Thanks for the tip about the spinoff! I will
keep my eyes peeled open for that one (**note to self: do not hold your
But Frank must be right, right? Clearly the Goldman is strong enough
to stand on its own two feet. After all, the CCAR stress-test proves this
to be true. Therefore, why would the FRB or FDIC, or anyone else want to
subject them to the Fed's safety net, much less the FDIC's safety net. Let Goldman
give up their charter - BHC and any IDIs. Why not? They aren't a
real bank and were approved to be a BHC over a weekend, a process that normally
takes 6 - 9 months of due diligence.
No. The Goldman, like others, will never give up this exclusive and
valuable (in times of stress) charter. GS can never give up the BHC
charter because, systemically, they aren't strong enough to stand on their own;
like most, they are too interconnected. They are, as we all know, Too Big
To Fail - regardless of protests to the contrary. Moral hazard has been a
growth industry these last few years. And the Goldman, as others, like to
ensure that they have access to the variety of legal "options" that
can be exploited as a regulated depository underneath a BHC.
In conclusion, Partnoy gets to a point - finally - that I believe is proper:
a new fiduciary standard is needed.
The industry is fighting this effort, and you know what: they will
win. Like the Volcker Rule, there are too many palm-pressing, campaign
donating, back-room shinanigans between NY and DC to believe the
"industry" won't trump the "government" and, therefore, the
rights of "We the People".
The article does make you reflect on two final points:
- Are there other Partnoy's out
there that are paid "angel economists" that make it their
business to defend Vampire Squids upon whom the "curtain has been
parted" and instead of seeing "God", they see a little old
man hunched over some basic gears and levers blowing a lot of smoke, and
related hot air. Washington DC doesn't need to "...tell us what
the word 'client' really means." We are all adults. The
banks should tell the world what 'client' really means. No need for
the SEC, the FRB, or the US Government to tell us this answer. Ask
your kindergartner: he or she can help.
- Caveat emptor works when
there are no oligopolies and the system isn't rigged. The US
financial system is an oligopoly and "rigged" financial system
that benefits the few, and writes-off the many. This structure
continues to produce significant "welfare loss" to our
nation. Welfare loss is when marginal social costs aren't offset by
marginal social benefits. Throughout the on-going financial crisis, if
there is anything we have learned it is that the marginal social costs of
allowing our banks to be too big to fail are far outweighed by the
marginal benefits from these same organizations. One way to end TBTF
is to take seriously the "living wills" and "recovery and
resolution planning" concepts of the Dodd-Frank Act (2010).