I am a fan of Goldman Sachs. It is one of the few individual stocks I own, running against all my standard corporate finance professor ‘buy index funds!!’ instincts. Although we have had a surfeit of bankers and a surfeit of talent in financial engineering rather than, say, robotics, it is very scary to see the “silver linings” analyses talking about how it is such a good thing that smart Harvard or MIT students will no longer go to Wall Street, but will instead enrich elementary education or nursing or mountain-guiding. While they might not be efficiently deployed in finance, it is a mistake to rejoice that the credit crash, deficit, tax rates, and other disincentives to innovation through risk-taking will push, through sheer lack of opportunity, smart people into things that do not take full advantage of their talents to the ultimate benefit of everyone. I do a lot of development finance in the developing world, and the misallocation of talent simply from inability to supply opportunity is heartbreaking and worse.
The work of allocating capital in the capital markets, if not precisely God’s work, is so crucially important to men and women on earth that there is something wrong with these days having to defend it. The little pieces of paper are vastly more efficient to steering rivers and seas of capital to and among enterprises – little gates and sluices in which small movements on paper can create immense movements in real life – than trying to do it by, what exactly? Physical occupation of the premises as the sign of ownership? Holding of hostages as collateral for a loan? So I am untroubled by Goldman bankers getting rich, provided that their services serve efficient allocation; the problem is rules of a game that reward many wrong things and turn investment banking into a combination of crony capitalism and moral hazard. Goldman’s current bonus pool is in large part a transfer, via yet more subsidized risk, from taxpayers to the firm; I trust in God and Blankfein that a goodly share of the booty will eventually wend to we shareholders. But booty it is.
The problem here is not, and never has been, finding yet another little political fix to stick on top of the existing set of mis-allocation rules. A “political offensiveness” tax, perhaps, under the socialist-sounding name of ‘excess profits’ or the capitalist-sounding name of ‘clawback’? It’s neither, or both, of course. The fixes-on-fixes eventually become flow-throughs to politicians like Chris Dodd; they permanently shift capital allocation into political allocation; and above all they don’t efficiently allocate capital. Unless of course you’re Senator Dodd. The answer has to lie at creating level playing fields at the base level, so that risk and return correlate for private parties, and they don’t have to apologize to anyone for the risks or the returns or the losses.
This is why Goldman Sachs’s cynical and tone-deaf small business program should serve as a wake up call for what business our capital allocators seem to think they are in. At $500 million, the amount is paltry – 2.5% of the Goldman compensation pool or that ballpark. And it does not even go to small business as such. As the Wall Street Journal reports this morning (Deals and Deal Makers, Mike Specter, C5, November 19, 2009, I’ll post a link later), none of the small businesses emailing and telephoning in desperation for financing will “receive a check from Goldman Sachs.” Instead:
“Goldman will spend $200 million on education and training programs, while funneling $300 million to so-called community-development financial institutions which largely serve historically disadvantaged communities that have had trouble accessing capital.“
One does not have to be a populist of the right or left to sniff that this is a ham-fisted PR program backed by miniscule funding. Nor is this simply (as the quite interesting FT feature today on Goldman suggested) an ordinary case of Goldman corporate charity, of which it traditionally has done a great deal. If it were, it would be much less problematic.
The much more important point is not what charity means – it is what high level business and finance have come to mean, when Goldman Sachs urgently decides that it needs to ”give back“ a sliver of what the taxpayers gave by giving it to … community organizing. It’s not corporate charity; it is protection money, clumsily done because unlike, say, Fannie and Freddie, Goldman is not used to doing it. The message is that the future of the economy lies in crony capitalism and tending to the government relationships that happen, in this administration, to be community development institutions. Even if the GSEs, Fannie and Freddie, showed what a splendid business model could be had tending to the care and feeding of Congress, its embrace by supposedly non-GSE Goldman Sachs shows us the way. Apparently it will be a very efficient political capital market indeed.
(PS. Note to journalists … might any of the community-development institutions turn out to have ACORN ties? I have zero idea whether this might be so. Given the long-standing relationship of ACORN to the banking world via precisely these kinds of institutions, however, one should at least wonder. And I at least would be curious to know whether Goldman thought vetting for this was a consideration. Would Goldman consider this a bug or a feature in dealing with the current powers that be?)