NFL and Wall Street
If the NFL Can Make and Enforce Rules of Fair Play, so Can Wall Street
Football players can’t legally gamble on those games but 25-year old Wall Street traders, middlemen, and the most traditional bankers (the so-called captains of our financial industry) are allowed gamble away trillions of dollars using other people’s money and call it a “ hedge.” These derivative investments, the CDO’s, CMO’s, the swaps – they are synthetic investments. In other words they don’t really exist because they are not really investments. They are simply bets. Like all gambling, these bets don’t create any value. Gambling is simply a “someone wins and someone has to lose” proposition. Personally, I don’t blame the math geeks who invented these high tech financial vehicles. Derivatives are the tools and I don’t believe by themselves, derivatives caused the economy to lose 8 million jobs and trillions of dollars of family wealth. The derivatives are just like any other weapon that can be used for good or evil. This mess was and still is about leverage: how much can one bank borrow in order to place a super-sized bet on the future direction of prices of a particular asset? My issue is: there are no clear and enforceable rules in the financial services game. I mean really – who is in charge here? Why bother with credit ratings if the ratings agencies can’t understand the investments that they are assessing? At a football game the referees are all over the field. Where are the referees on Wall Street? If the regulators can’t figure out what the biggest players can and should be doing, how can they enforce the rules? As Ben Stein says… “Class? Anybody”?
Forget Wall Street for a moment. Think about professional football. If the NFL can figure out how to make and enforce rules whereby the team owners, the coaches, referees, players and the fans can all understand and play those rules, why can’t we do the same with Wall Street? Is Wall Street really more complex than the business of football? I doubt it. Football has overlapping layers of officials in place around the field during games and they are there to enforce the rules. Should a player violate or even test one tiny principle of behavior, the referee will jump right in and yank that player out of the game. Sometimes the league will fine the player.
It is black and white because football is big business and whenever there’s an action in question, officials just roll the video in slow motion and study the play over and over until it is crystal clear. The rules of football don’t in any way interfere with the game, they exist to make it possible to win. When the weaker team loses, they lose. No team is too big or too important to fail. Can you imagine the NFL selling tickets to the public to fill up the stadium and then later at half-time all of a sudden they realize… “Oh shucks, we failed to establish the boundaries of the game and now we can’t tell if a player went out of bounds. We are now forced to ask the ticket-holders to pony up more money in order to keep the game going while the officials argue the rules.” I don’t think the NFL wants to fleece its fans because I think they need those fans to watch and attend games. Those fans must have confidence that the game is played by the rules and big institutional investors like teachers’ pension funds must have confidence that financial intermediaries aren’t cheating.
Watching members of congress grill Goldman Sach’s CEO and its 31-year old trader was an embarrassment. I know there are plenty of complicated laws governing the securities industry but clearly they are not current and officials are not-up-to-speed on how to apply the rules of the game. Otherwise, why would so much of this discussion keep going back to the 1999 decision to repeal the Glass-Steagall act created in 1933? It’s 2010! Are we not living in the most advanced capitalist society on the planet? Yet Wall Street is just now struggling to define the rules of fair play after the biggest financial fumble in our history. Surely, we can do better in this second half of this game. Let’s hope.
Where’s the Crime?
What did Goldman Sachs do wrong?
I’ve been sitting here trying to simplify this whole Goldman story so that my 18 year old niece and I can discuss the right and the wrong of Goldman Sachs’ behavior. The only way I know how to do this is to imagine this discussion doesn’t require an advanced degree in high tech financial derivatives. In fact, let’s just for a moment leave out any references to the instruments and just focus on the relationships.
I came up with a completely make-believe scenario that we can all understand: Say I’m a middleman for the chicken industry. At the same time, I also facilitate deals in the fox business. As a broker, my primary job in the chicken business is to advertise, package and sell as many different grades of chickens (and eggs) as I possibly can on behalf of my chicken farmer clients. I then find buyers who become customers. My buyers are everyday working people. Now, my very existence depends on my longstanding reputation in providing a great supply of chicken related goods – - for eating, for the eggs, for feathers, or for pets! Whatever usages you can possibly think of that might involve chickens.
Keep in mind, I’m a middleman in the chicken business who also happens to assist the fox industry and my neighbor, who happens to own some very hungry foxes, is a client. But we all know foxes eat chickens right? Here’s how that works – whenever my fox client believes there is an over supply of chickens he calls me (all excited) because he sees this as an incredible opportunity to pluck (pun intended) lots of very cheap chickens to feed his hungry foxes. I can help him by making a few calls and arranging for him to buy some nice plump chickens dirt cheap. This is all just business as usual. This activity even helps my chicken clients because they can sell extra chickens they might have had to have given away or destroyed. I assist my fox friend, at the same time I help my chicken friend, and I get to collect a nice fat fee for our middleman services. Everybody’s happy.
Now, I want you to know my great grandfather started this business and today we are considered the gold standard of chicken distribution. It all works as long as the market’s behaving normally but lately, chickens have made headlines. Turns out, chickens are now considered to be health food! Scientists discovered chickens have powerful antioxidants and their eggs do too. Now the chicken market’s gone bizzerk and everybody’s bid up the price of chickens to the point where people are getting sick because they are eating too much – and the eggs forget about it! Every American is eating chicken and eggs everyday! While all this chicken frenzy is going on, my fox client suggests we make secret deal. He wants direct access to my chickens, and since there are so many chickens varieties, his foxes could have their way and grab the fattest in the hen house. Heck, I could still market and sell the skinny chickens. I agree to keep this arrangement just between us. After all, my core chicken clientele doesn’t really need to know. To make sure his foxes get satisfied, my fox client even wants to bring in a special outside consultant who actually hand-selects the highest quality chickens in the yard so that the foxes are assured to be fed well. At three o’clock in the morning, we do the deal. His foxes are fat and happy, and I have collected my handsome fee. The only real challenge for me is that now all I have left to peddle to my chicken clients are the one’s leftover, the lower-grade chickens and eggs that his foxes didn’t eat. But to the untrained eye, all the chickens still appear to be the healthy high quality poultry my trusting customers have come to rely upon. If they can’t see the chickens are lower-grade, why enlighten them – where’s the crime?
Well we’re not talking chickens, eggs or foxes but the essence of the SEC complaint against Goldman Sachs is pretty darn old fashioned. Where is the crime? Did Goldman withhold information that was material about the quality of the investments they were peddling to their clients? Should they have told their chicken customers that Mr. Fox advised them about which chickens to sell and that Mr. Fox had his own agenda that was not in the chicken customers’ interest?
At the heart of the issue is the role of the middleman serving two sides of a market and the inherent conflicts of interest. Rest assured, this is business as usual. If over the many decades of offering high, medium and low grade chicken products, the question outstanding is… did the middlemen in this case misrepresent or mislead the customers?
The question I would want to ask the CEO of Goldman Sachs is simple: What is your responsibility to your clients? If you were that client, would you continue to do buy your chickens from Goldman? Personally, I wouldn’t even touch those eggs.
After reading this article, I hope that this Wall Street Journal article about the Goldman case might make a bit more sense. Click here.
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Kids & Money
Financial literacy starts at home…
Confused about how to talk to your kids about money? Check out Pam’s Tips to get you started.
