Jack Balkin: jackbalkin at yahoo.com
Bruce Ackerman bruce.ackerman at yale.edu
Ian Ayres ian.ayres at yale.edu
Corey Brettschneider corey_brettschneider at brown.edu
Mary Dudziak mary.l.dudziak at emory.edu
Joey Fishkin joey.fishkin at gmail.com
Heather Gerken heather.gerken at yale.edu
Abbe Gluck abbe.gluck at yale.edu
Mark Graber mgraber at law.umaryland.edu
Stephen Griffin sgriffin at tulane.edu
Jonathan Hafetz jonathan.hafetz at shu.edu
Jeremy Kessler jkessler at law.columbia.edu
Andrew Koppelman akoppelman at law.northwestern.edu
Marty Lederman msl46 at law.georgetown.edu
Sanford Levinson slevinson at law.utexas.edu
David Luban david.luban at gmail.com
Gerard Magliocca gmaglioc at iupui.edu
Jason Mazzone mazzonej at illinois.edu
Linda McClain lmcclain at bu.edu
John Mikhail mikhail at law.georgetown.edu
Frank Pasquale pasquale.frank at gmail.com
Nate Persily npersily at gmail.com
Michael Stokes Paulsen michaelstokespaulsen at gmail.com
Deborah Pearlstein dpearlst at yu.edu
Rick Pildes rick.pildes at nyu.edu
David Pozen dpozen at law.columbia.edu
Richard Primus raprimus at umich.edu
K. Sabeel Rahmansabeel.rahman at brooklaw.edu
Alice Ristroph alice.ristroph at shu.edu
Neil Siegel siegel at law.duke.edu
David Super david.super at law.georgetown.edu
Brian Tamanaha btamanaha at wulaw.wustl.edu
Nelson Tebbe nelson.tebbe at brooklaw.edu
Mark Tushnet mtushnet at law.harvard.edu
Adam Winkler winkler at ucla.edu
On the West Coast, James Whittaker explains "Why I Left Google." His complaints are more measured than Smith's: "The old Google made a fortune on ads because they had good content. It was like TV used to be: make the best show and you get the most ad revenue from commercials. The new Google seems more focused on the commercials themselves." Whittaker laments that the company has become obsessed, Ahab-like, with the social web's whale, Facebook.
On one level, it's not fair to compare the companies: the engineers at Google have contributed far more to society than finance's "money-massagers." Goldman represents the terminal phase of a liquidationist capitalism unmoored from social value. But its culture did not rot overnight. Rather, legal and material factors accelerated decay. Silicon Valley's managers and regulators should take notice: the same process could happen there. Goldman's Decline: Power Without Accountability
Smith's resignation letter states that Goldman used to prioritize client service. Now, cruder metrics of excellence determine who gets ahead:
Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.*
Many writers have focused on a) and b). I'd like to focus on c), the illiquid and opaque, since I don't think it fully captures the nature of the problem here. Liquidity is one of finance's weasel words; it tends to disappear just when you need it most. Illiquidity may just be part of the commitment that long-term investment needs. Opacity, too, can get a bum rap. As Steve Randy Waldman has stated, "If the trail of tears were truly clear, if it were as obvious as it is in textbooks who takes what losses, banking systems would simply fail in their core task of attracting risk-averse investment to deploy in risky projects."
Waldman is no Pollyanna; he realizes that lack of transparency can cause problems:
[A]s we allow finance to be opaque and complex, it may become difficult to police and impose good incentives. So we may, as a society, face an unpleasant tradeoff. Tolerating more opacity may help mobilize capital for useful purposes, but any benefit may be offset by a diminishment of our capacity to regulate and police.
I too think there is a role for information advantages to accrue to different players on Wall Street, and for "value investors" to triumph in the long run. But the bets need to have consequences; they can't be "sure things." A key problem with Goldman-style financial legerdemain is that a corporation with limited liability is now making bets that once were made by a partnership. As ex-Goldmanite (and current financial reformer) Wallace Turbeville observes, in the firm's best years, it was "not a publicly traded corporation, and the partners’ wealth was largely invested in the firm." Leaders had an interest in cultivating long-term relationships, to keep the enterprise going.
The old Goldman motto was “Be long-term greedy, not short-term greedy;" promote clients' interests to court repeat business. (Or, in more mundane terms, sell wool, not mutton.) Now, quarterly revenue and even more short-term goals are paramount:
[Clients] became a source of transactions, the success of which was measured by the payday, not the enhancement of a long-term relationship. . . . Trading was always part of Goldman (and all of Wall Street), the counterpoint to investment banking. Investment bankers advise clients on capital raising and mergers and acquisitions. These activities are collaborative and essentially serve the client’s interest. As a result, long-term relationships and service to the client are essential to success in investment banking. In contrast, traders each have a book of long and short positions. Trader successes and failures are far more individual and immediate. The goal is not to help a client but to strike a favorable deal with a counterparty. Through the years, there were legendary struggles between bankers and traders for leadership of Wall Street firms. For the most part, however, the bankers ran the firms.
The world shifted. Trading exploded, largely fueled by information technology. It seemed that every number on earth could be divided by every other number, all in real time. Everything could be priced, and, once priced, could be traded. Markets were deregulated and carved into pieces, each representing a trading opportunity. The Wall Street firms, and Goldman in particular, with their enormous capital resources, could dominate more and more of the price points in the American economy, extracting value from the producers and consumers. Software programs could be written to access electronic trading platforms so that the enormous force of the trading houses could be brought to bear without the inefficiency of human intervention. It seemed that a business model relying on dispassionate exploitation of immediate opportunity had been perfected.
The concept of "immediate gain" is limited only by technology. It led to an epidemic of "I'll be gone, you'll be gone" opportunism among Wall Street elites. And like Tom and Daisy Buchanan, "they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made." Shoshana Zuboff, who was the Charles Edward Wilson Professor of Business Administration at Harvard Business School, noticed the syndrome in 2009:
[The economic crisis] derives from a business model that routinely produced . . . remoteness and thoughtlessness, compounded by a widespread abrogation of individual moral judgment. As we learn more about the behavior within our financial institutions, we see that just about everyone accepted a reckless system that rewards transactions but rejects responsibility for the consequences of those transactions. Bankers, brokers, and financial specialists were all willing participants in a self-centered business model that celebrates what's good for organization insiders while dehumanizing and distancing everyone else--the outsiders.
However cliched the conflict between "Wall Street" and "Main Street" may seem, this fundamental distinction between those "in on the scam" and the "muppets" pervades Smith's article.
Silicon Valley's Hypocrisy on Transparency
What happens when the owners of networks and finance---rather than, say, the products or people they ostensibly support---become the kingpins of an economy? Some refuse to play by the rules they'd impose on others. danah boyd argues that Silicon Valley's touted commitment to "radical transparency" means little more than tech leaders "making a name for themselves by being exhibitionists." They hide key decisions about how their companies are run. As boyd notes,
What I find most fascinating in all of the discussions of transparency is the lack of transparency by Facebook itself. Sure, it would be nice to see executives use the same privacy settings that they determine are the acceptable defaults. . . . . But that’s not the kind of transparency I mean. I mean transparency in interface design.
If Facebook wanted radical transparency, they could communicate to users every single person and entity who can see their content. They could notify then when the content is accessed by a partner. They could show them who all is included in “friends-of-friends” (or at least a number of people). They hide behind lists because people’s abstractions allow them to share more. When people think “friends-of-friends” they don’t think about all of the types of people that their friends might link to; they think of the people that their friends would bring to a dinner party if they were to host it. When they think of everyone, they think of individual people who might have an interest in them, not 3rd party services who want to monetize or redistribute their data. Users have no sense of how their data is being used and Facebook is not radically transparent about what that data is used for. Quite the opposite. Convolution works. It keeps the press out.
Here the cultural style of Silicon Valley matches that of its Wall Street backers. They pride themselves on "discretion" and similar euphemisms for secrecy. The inscrutability of Wall Street balance sheets is common knowledge, and even basic questions are left unanswered. The larger idea here appears to be to make individuals' lives an open book, while leaving the corporations that employ them a black box.
If there were some longer-term, substantial relationship formed between networks like Facebook and their users, maybe the "long-term greed" that Turbeville praised could overtake short-term manipulation. But that type of relationship is hard to build at massive enterprises, and workplace instability can make it even less realistic. Moreover, given the weak privacy laws of the United States, there's little hope of true accountability when the supposed guardians of personal data fail to protect it, or actively exploit it in unethical ways.
Precarity Erodes Morals
Another cultural intersection between Silicon Valley and Wall Street involves the insecurity, volatility, and churn among their workers. As Karen Ho has convincingly argues in her "ethnography of Wall Street" (Liquidated), finance workers are constantly on the prowl for the "big score" because no one knows what tomorrow may bring:
I had bankers telling me, "I might not be at my job next year so I'm going to make sure to get the biggest bonus possible." I had bankers who advised the AOL–Time Warner merger saying, "Oh, gosh, this might not work out, but I probably won't be here when it doesn't work out." I looked at them like, "What?" Their temporality is truncated.
[When they look at the rest of corporate America,] [t]he kind of worker they imagine is a worker like themselves. A worker who is constantly retraining, a worker who is constantly networked, a worker whose skill set is very interchangeable, a worker who thinks of downsizing as a challenge — a worker who thrives on this. . .. [But job] insecurity isn't the same thing for the average American worker. They often experience downward mobility or don't land on their feet.
The intermediary economies of both Wall Street and Silicon Valley revolve around disposable, adjustable, and protean workers, resilient in the face of constant change. But the material substrate for such adaptability is often possession of a net worth of many hundreds of thousands or millions of dollars---a luxury the majority of Americans can barely conceive or hope for. Silicon Valley and Wall Street project onto a main street an appetite for risk and self-reinvention that has little to do with the average worker's lived experience. As boyd notes,
I’m terrified of the consequences that these moves are having for those who don’t live in a lap of luxury. . . .Being publicly visible isn’t always easy, it’s not always fun. . . . So I’m angry. . .Angry that some people aren’t being given that choice, angry that they don’t know what’s going on, angry that it’s become OK in my industry to expose people.
Now even the engineers in Silicon Valley are facing precarity. Barry Lynn reports that "the Justice Department complained in 2010 that senior executives at Apple, Google, Intel, Pixar, and two other corporations had 'formed and actively managed' an agreement that 'deprived' the engineers and scientists who work for them of 'access to better job opportunities.'" Lynn also describes one group of workers who labored "for 110 hours per week for nine months straight," then were fired the day after the project was finished. In that type of environment, would you be able to resist a corporate imperative to invade users' privacy or skew content in misleading ways?
Finally, the most disturbing cultural commonality of retrograde pockets of Silicon Valley and Wall Street is a casually contemptuous attitude toward unsophisticated customers. Here is "Zuck" from an early IM session:
Zuck: Yeah so if you ever need info about anyone at Harvard
Zuck: Just ask.
Zuck: I have over 4,000 emails, pictures, addresses, SNS
[Redacted Friend's Name]: What? How'd you manage that one?
Zuck: People just submitted it.
Zuck: I don't know why.
Zuck: They "trust me"
Zuck: Dumb f***s.
Books like Econned and 13 Bankers chronicle similar attitudes on Wall Street. As Johnson & Kwak note,
In 1998, derivatives were the hottest frontier of the financial services industry. Traders and salesmen would boast about “ripping the face off ” their clients— structuring and selling complicated deals that clients did not understand but that generated huge profits for the bank that was brokering the trade. . . .Even if the business might be bad for their clients, the top Wall Street banks could not resist, because their derivatives desks were generating ever-increasing shares of their profits while putting up little of the banks’ own capital.
The "Fabulous Fab" at the heart of the Goldman Sachs Abacus scandal halfheartedly tried to defend his amoral alchemy:
[W]hat if we created a 'thing', which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price? . . . .Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) . . .. amazing how good I am in convincing myself !!!
At least Tourre called those he sold his services to "widows and orphans," rather than the more colorful terms Zuckerberg preferred.
Culture follows money. That's one of the key insights of Brad DeLong & Stephen Cohen's The End of Influence: What Happens When Other Countries Have the Money, which predicts a long term decline in US "soft power" as our share of global product shrinks. DeLong & Cohen try to predict what countries will fill the void, but I think it might be more fruitful to think about the industries that are the new cultural exemplars. With their promises of rapid wealth, technological supremacy, and glamor, Silicon Valley and Wall St. are deeply affecting how individuals conceive of themselves and society at large.
The financial industry occupies the commanding heights of the U.S. economy, claiming over 30% of all corporate profits by the mid-2000s with less than 9% of the workers. What finance firms do for money, leading internet companies do for attention. They direct it toward some ideas, services, and ads, and away from others. They create marketplaces that make some secrecy a competitive necessity, as algorithms like PageRank and EdgeRank are constantly tweaked to produce more profit.
Even if their methods were completely open to the public, the modern banking and internet sectors would be difficult to understand. They employ legions of highly educated engineers, lawyers, and quantitative analysts. Both search engineers and financial risk managers use complex formulas to determine values like the relevance of a website and the likely returns from an investment.
Both of these industries depend on trust---from clients, users, governments, and many other stakeholders. Goldman will likely never be able to earn that trust back. The lessons from its decline are clear. Treat all sides of a transaction fairly. Make sure some third party can truly audit the company and give frank advice on whether its business model is sustainable. Offer some account of what the company is doing for the economy as a whole, and not just for ephemeral stock values.
Unfortunately, Whittaker's letter suggests that Wall Street values may be infecting innovators. We can see it in business analysts who casually hypostatize shareholders or dismiss innovation beyond core competencies. We also see it in the parade of privacy violations chronicled weekly by the tech press. Firms like Google, Facebook, and other Silicon Valley giants should consider whether they want to end up as reviled as Greg Smith's former firm.
Corporations can no longer be judged simply by how much money they make. Goldman's cardinal sin was spinning profits out of power, not productivity. As regulators judge aggressive moves toward consolidation and data collection in Silicon Valley, they should ensure that its flagship firms aren't following the same disastrous example.
*Speaking of regulators' "forbearance," Charles Calomiris quipped that "whenever you hear three-syllable words in finance, they typically are synonymous with 'lie.'" Maybe he would say the same of some of Smith's acronyms.