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Why Bad Publicity Never Hurts Goldman Sachs

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My last posting focused on the widely-publicized research conducted by Stéphane Côté, PhD, Associate Professor of Organizational Behavior at the University of Toronto’s Rotman School of Management, who worked with a team of four psychologists from the University of California at Berkeley to conduct seven studies on a rather timely subject.  Their article, “Higher social class predicts increased unethical behavior” was published in the February 27 issue of the Proceedings of the National Academy of Sciences (PNAS).  The following excerpt from the abstract of their paper provides the general theme of what their efforts revealed:

.   .   .  investigation revealed upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.

I began my discussion of that paper by looking back at a Washington Post opinion piece entitled, “Angry about inequality?  Don’t blame the rich”.  The essay was written last January by James Q. Wilson (who passed away on March 2).  On March 4, William K. Black took a deeper look at the legacy of James Q. Wilson, which provided a better understanding of why Wilson would champion the “Don’t blame the rich” rationale.  As Bill Black pointed out, Wilson was a political scientist, known best for his theory called “broken windows” – a metaphor based on a vacant building with a few broken windows, which quickly has all of its windows broken because petty criminals feel emboldened to damage a building so neglected by its owners.  Bill Black emphasized that Wilson was exclusively preoccupied with minor, “blue collar” crimes.  Black noted that in a book entitled, Thinking About Crime, Wilson expressed tolerance for “some forms of civic corruption” while presenting an argument that criminology “should focus overwhelmingly on low-status blue collar criminals”.  Bill Black went on to explain how Wilson’s blindness to the relevance of the “broken windows” concept, as it related to “white collar” crime, resulted in a missed opportunity to attenuate the criminogenic milieu which led to the 2008 financial crisis:

Wilson emphasized that it was the willingness of society to tolerate relatively minor blue collar crimes that led to social disintegration and epidemics of severe blue collar crimes, but he engaged in the same willingness to tolerate and excuse less severe white collar crimes.  He predicted in his work on “broken windows” that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints.  The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point.  Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of “a few deals.”  Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we “tolera[te]” it.

*   *   *

Taking Wilson’s “broken windows” reasoning seriously in the elite white collar crime context would require us to take a series of prophylactic measures to restore integrity and strengthen peer pressures against misconduct.  Indeed, we have implicitly tested the applicability of “broken windows” reasoning in that context by adopting policies that acted directly contrary to Wilson’s reasoning.  We have adopted executive and professional compensation systems that are exceptionally criminogenic.

*   *   *

Fiduciary duties are critical means of preventing broken windows from occurring and making it likely that any broken windows in corporate governance will soon be remedied, yet we have steadily weakened fiduciary duties.  For example, Delaware now allows the elimination of the fiduciary duty of care as long as the shareholders approve.  Court decisions have increasingly weakened the fiduciary duties of loyalty and care.  The Chamber of Commerce’s most recent priorities have been to weaken Sarbanes-Oxley and the Foreign Corrupt Practices Act.  We have made it exceptionally difficult for shareholders who are victims of securities fraud to bring civil suits against the officers and entities that led or aided and abetted the securities fraud.

*   *   *

In the elite white collar crime context we have been following the opposite strategy of that recommended under “broken windows” theory.  We have been breaking windows. We have excused those who break the windows.  Indeed, we have praised them and their misconduct.  The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context.

To find a “poster child” example for the type of errant fiduciary behavior which owes its existence to Wilson’s misapplication of the “broken windows” doctrine, one need look no further than Matt Taibbi’s favorite “vampire squid”:  Goldman Sachs.  One would think that after Taibbi’s groundbreaking, 2009 tour de force about Goldman’s involvement in the events which led to the financial crisis . . .  and after the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman’s “Fab Four” testified about selling their customers the Abacus CDO and that “shitty” Timberwolf deal, the firm would at least try to keep a lower profile these days.  Naaaaw!

Goldman Sachs has now found itself in the crosshairs of a man, formerly accused of carrying water for the firm – Andrew Ross Sorkin.  Sorkin’s March 5 DealBook article for The New York Times upbraided Goldman for its flagrant conflict of interest in a deal where the firm served as an adviser to an oil (and natural gas) pipeline company, El Paso, which was being sold to Houston-based Kinder Morgan for $21.1 billion.  Goldman owned a 19.1 percent stake in Kinder Morgan at the time.  Andrew Ross Sorkin quoted from the script which Goldman CEO, Lloyd Blankfein read to El Paso’s CEO, Douglas Foshee, wherein Blankfein confirmed that Foshee was aware of Goldman’s investment in Kinder Morgan.  It was refreshing to see a bit of righteous indignation in Sorkin’s discussion of the dirty details behind this transaction:

When the deal was announced, buried at the end of the news release was a list of Wall Street banks that had advised on the deal, including Goldman Sachs.  Goldman received a $20 million fee for playing matchmaker for El Paso.  The fee, of course, was not disclosed, nor was the Kinder Morgan stake owned by Goldman Sachs’s private equity arm, worth some $4 billion.  Nor did the release disclose that the Goldman banker who advised El Paso to accept Kinder Morgan’s bid owned $340,000 worth of Kinder Morgan stock.

Now, however, a court ruling in a shareholder lawsuit has laid bare the truth:  Goldman was on every conceivable side of the deal.  As a result, El Paso may have unwittingly sold itself far too cheaply.  Mr. Blankfein may have said he was “very sensitive to the appearance of conflict,” but the judge’s order ruling “reluctantly” against a motion to block the merger made it clear that Goldman’s conflicts went far beyond mere appearances.

Here’s just one example:  In an effort to help mitigate its clear conflict, Goldman Sachs recommended that El Paso hire an additional adviser so that El Paso would be able to say that it had received completely impartial advice.  Goldman did not say it would step down, and lose its fee, it simply suggested that El Paso hire one more bank – in this case, Morgan Stanley.

After explaining that Goldman included a provision in the deal that Morgan Stanley would get paid only if El Paso agreed to the sale to Kinder Morgan, Sorkin expressed this reaction:

Goldman’s brazenness in this deal is nothing short of breathtaking.

Goldman’s conflict of interest in the El Paso deal was also the subject of an article by Matthew Philips of Bloomberg BusinessWeek.  Mr. Philips reminded us of whom we have to thank for “helping Greece dupe regulators by disguising billions of dollars’ worth of sovereign debt”:

New details have also emerged about Goldman’s role in helping Greece hide its debt so it could qualify for membership in the European Union.  In a Bloomberg News story out this week, Greek officials talk about how they didn’t truly understand the complex swaps contracts they were buying from Goldman bankers from 2001 to 2005, and that each time Goldman restructured the deal, things got worse for Greece.

The story reads like a cautionary tale of a homeowner who keeps returning to the same contractor to repair the damage done by the previous fix-it job.  At one point, Goldman prohibited Greece’s debt manager, Christoforos Sardelis, from seeking outside price quotes on the complicated derivatives Goldman was selling to Greece.

*   *   *

Yet Goldman’s sullied reputation doesn’t appear to be negatively impacting its business.  In fact, Goldman is outpacing its Wall Street competition recently in key areas of business.  In 2011, Goldman was the top adviser for both global M&A and equity IPOs.  A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business.

In other words:  Goldman Sachs keeps breaking windows and nobody cares.  Thanks for nothing, James Q. Wilson!


Scientists Bust the Top One Percent

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Ever since the Occupy Wall Street movement began last fall, we have been hearing the incessant mantra of:  Don’t blame the rich for wealth inequality.  In fact, Herman Cain’s futile bid for the Presidency was based (in part) on that very theme.  Last January, James Q. Wilson (who passed away on Friday) wrote an opinion piece for The Washington Post entitled, “Angry about inequality?  Don’t blame the rich”.  Paul Buchheit of the Common Dreams blog rebutted Wilson’s essay with this posting:  “So say the rich:  ‘Don’t blame us for having all the money!’ ”.  How often have you read and heard arguments from apologists for the Wall Street banksters, upbraiding those who dared speak ill of those sanctified “job creators” within the top one percent of America’s economic strata?

Finally, a group of scientists has intervened by conducting some research about the ethics of those at the top of America’s socioeconomic food chain.  Stéphane Côté, PhD, Associate Professor of Organizational Behavior at the University of Toronto’s Rotman School of Management, worked with a team of four psychologists from the University of California at Berkeley to conduct seven studies on this subject.  Their paper, “Higher social class predicts increased unethical behavior” was published in the February 27 issue of the Proceedings of the National Academy of Sciences (PNAS).  Here is the abstract:

Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals.  In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals.  In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.  Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

The impact and the timing of this article, with respect to the current debate over income inequality, have resulted in quite a bit of interesting commentary.  I enjoyed the perspective of Peter Dorman at the Econospeak blog:

The tone of the first wave of commentary, as far as I can tell, is that we knew it all along – rich people are nasty.  I would like to put in a word, however, for the other direction of causality, that dishonesty and putting one’s own interests ahead of others are conducive to wealth.

*   *   *

The reason I bring this up is because there is a constant background murmur in our society that says that greater wealth has to be a reward for more talent, more effort or more contribution to society.

Most of the commentary written about the PNAS article has been relatively non-partisan.  Two-day access for reading the article on-line will cost you ten bucks.  For those of us who can’t afford that (as well as for those who can afford it – but are too greedy to pay for anything) I have assembled a number of excerpts from articles written by those who actually read the entire scientific paper.  The following passages will provide you with some interesting details about the research conducted by this group.

Christopher Shea of The Wall Street Journal gave us a brief peek at some of the specific findings of the studies conducted by this team.

It went so far as to show that higher-class people will literally take candy from the mouths of children.

An excerpt quoted by Shea illustrated how the group expanded on an observation made by French sociologist Émile Durkheim:

 “From the top to the bottom of the ladder, greed is aroused,” Durkheim famously wrote.  Although greed may indeed be a motivation all people have felt at points in their lives, we argue that greed motives are not equally prevalent across all social strata.

Brandon Keim of Wired offered us more research data from the article, while focusing on the observations of team member Paul Piff, a Berkeley psychologist:

“This work is important because it suggests that people often act unethically not because they are desperate and in the dumps, but because they feel entitled and want to get ahead,” said evolutionary psychologist and consumer researcher Vladas Griskevicius of the University of Minnesota, who was not involved in the work.  “I am especially impressed that the findings are consistent across seven different studies with varied methodologies.  This work is not just good science, but it is shows deeper insight into the reasons why people lie, cheat, and steal.”

According to Piff, unethical behavior in the study was driven both by greed, which makes people less empathic, and the nature of wealth in a highly stratified society.  It insulates people from the consequences of their actions, reduces their need for social connections and fuels feelings of entitlement, all of which become self-reinforcing cultural norms.

“When pursuit of self-interest is allowed to run unchecked, it can lead to socially pernicious outcomes,” said Piff, who noted that the findings are not politically partisan.  “The same rules apply to liberals and conservatives.  We always control for political persuasion,” he said.

For Thomas B. Edsall of The New York Times, the research performed by this group helped explain the rationale behind a bit of Republican campaign strategy:

Republicans recognize the political usefulness of objectification, capitalizing on “compassion fatigue,” or the exhaustion of empathy, among large swathes of the electorate who are already stressed by the economic collapse of 2008, high levels of unemployment, an epidemic of foreclosures, stagnant wages and a hyper-competitive business arena.

Compassion fatigue was fully evident in Rick Santelli’s 2009 rant on CNBC denouncing a federal plan to prop up “losers’ mortgages” at taxpayer expense, a rant that helped spark the formation of the Tea Party.  Republican debates provided further evidence of compassion fatigue when audiences cheered the record-setting use of the death penalty in Texas and applauded the prospect of a gravely ill pauper who, unable to pay medical fees, was allowed to die.

Jonathan Gitlin of Ars Technica reported on some of the juicy details from a few experiments.  When reading about my favorite experiment, keep in mind that the term “SES” refers to socioeconomic status.

Study number four involved participants rating themselves on the SES scale to heighten their perception of status; they were then answered a number of questions relating to unethical behavior.  At the end of the experiment, they were presented with a jar of individually wrapped candy and told that, although it was for children in a nearby lab, they could take some if they wanted.  At this point you might be able to guess what the results were.  High SES participants took more candy.

Gitlin concluded his review of the paper with this thought:

The researchers argue that “the pursuit of self-interest is a more fundamental motive among society’s elite, and the increased want associated with greater wealth and status can promote wrongdoing.”  However, they point out that their findings aren’t absolute, and that philanthropic efforts such as those of Bill Gates and Warren Buffet buck the observed trend, as does research which has shown a relationship between poverty and violent crime.

Meanwhile, the debate over economic inequality continues to rage on through the 2012 election cycle.  It will be interesting to observe whether this scientific report is exploited to bolster the argument that most of the one-percenters suffer from a character flaw, which not only got them where they are today – but which is shared by their kleptocratic comrades, who have facilitated a system of legalized predation.