Monday, May 3, 2010

Beyond Legal Victory

Last week it seemed as if Goldman Sachs' reaction to the civil fraud charges filed by the Securities and Exchange Commission (SEC) was that, if the matter came to court, Goldman Sachs would have no problem winning the case. However, a lot happened last week; and it now appears that, between the beating it took from both its Senate hearing and the public reaction to that hearing and the decision by the Department of Justice to begin a formal investigation based on the SEC charges, Goldman Sachs is showing signs of rethinking its position (an ironic word choice considering how much of this case hangs on their own particular semantics of the noun "position"). As I argued last Friday, Goldman Sachs sees no grounds for fraud, since they were only engaged in "normative business practices consistent with the constructed reality of Planet Wall Street." It now appears that, while Goldman Sachs still feels that this provides valid grounds for defense, it might actually be in their best interest to rethink their business practices.

This is based on a report that Justin Baer and Francesco Guerrera filed last night for the Financial Times, suggesting that Goldman Sachs is now leaning towards an out-of-court settlement that could be facilitated by this "good faith effort" (my words) towards business practices showing more respect for the interests of clients. I use that noun "respect" in the context of Richard Sennett's 2003 book, Respect in a World of Inequality, even though Sennett was more concerned with the gutter of the disenfranchised than with the elevated games of the financial sector. One of Sennett's points is that we need to call out the concept of the "level playing field" for the myth it really is, recognizing that it no longer is (if it ever was) a "fiction of convenience." (Again, those quotes are my own words.) Of course money, itself, is a "fiction of convenience," as has been observed by Niall Ferguson and many of his predecessors. However, many of the instruments behind the current economic crisis and SEC accusations of fraud are based on mathematical theories which assume that all parties can know the layout of the playing field, even if it is not perfectly flat, and that, provided with such knowledge, any party can make decisions to optimize its own returns. The fact that those theories are also fictions plays a significant role in Benjamin M. Friedman's recent analysis of the economic crisis for The New York Review.

One of Friedman's key points is that reality is messier than any model posed by those mathematical theories, and one might say that Sennett's book suggests that the social capital of respect is more effective in negotiating the messes of reality than any of the fictions of convenience of the financial sector. So will respect figure into the ways in which Goldman Sachs rethinks its normative business practices? The report by Baer and Guerrera makes it clear that they have not yet progressed beyond "leaning." However, they have teased out a few hints of the possible directions of that leaning:

According to one person familiar with Goldman’s plans, it would now tell employees to seek confirmation from clients that they understand the risks associated with any given security, and how their dealings with Goldman might change their total exposure.

Goldman is also studying ways to ensure that complicated securities are marketed only to appropriate clients, the person said. Goldman’s push to “tighten up” standards suggests its willingness to adapt in the face of mounting scrutiny.

At the very least this seems to indicate that more communication will take place before any transaction is settled. The real question will be whether or not that communication is effectively informative. If what is ultimately at stake is a normative acceptance that Goldman Sachs will respect each of its clients, then the real sign of respect is not that Goldman Sachs communicates but that the client understands; and the nature of understanding is one of the messiest aspects of reality, which is why someone like Jürgen Habermas has invested well over a thousand pages of text to come to grips with that concept.

This is not to suggest that trying to achieve better client understanding is a fool's errand. However, it is not necessarily a goal that Goldman Sachs can achieve if left to its own devices. Because it is an instance of reality at its messiest, it is a situation that demands what I previously called "invoking the methods of Ian Mitroff, through which different perspectives of those realities duke it out with well-formed arguments as part of a process of critical inquiry that makes sense" of the mess in all its complexity. Put another way, if Goldman Sachs really wants to take on this problem, then it would do well to invite the SEC to present its own perspective of this messy reality. The confrontation could be as antagonistic as a court case. However, there is a better chance that fewer people will get hurt; and more people might actually benefit!

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