On April 7th, Lloyd Blankfein, CEO of Goldman Sachs, delivered the mea culpa many have been waiting for. Wall Street, he said, "look self-serving and greedy in hindsight." He admitted that "we rationalized because our self-interest in preserving and growing our market share, as competitors, sometimes blinds us," and wondered "we collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public's long-term interests." This wasn't a mistake, he said. It was a systemic failure. And a new regulatory structure will be required to prevent its recurrence.Blankfein's whole speech is here, and worth a read. Steve Pearlstein gave it a nice write-up in The Washington Post, and made a corrective point that's worth echoing:Blankfein also makes the common mistake to think that the problem with compensation has only to do with how the pay is structured and not with the overall level of pay, which on Wall Street got to be ridiculously out of line with that of similarly skilled and equally successful people in other industries. No matter how it is structured, pay at such astronomical levels has a tendency to swell heads, inflate egos and tempt people to take undue risks of all sorts, ethical as well as financial.[...]Of course, an industry that earns so much profit that it can afford to pay multimillion-dollar bonuses to 26-year-old traders also has too much money to lavish on the political process in ways that undermine those who would regulate it. I wouldn't go as far as MIT economist Simon Johnson, who argues in the May Atlantic magazine that the United States has effectively become a banana republic with the Wall Street oligarchy running the show. What is undeniable, however, is that there are regulators here in Washington who have been reluctant to rein in the industry out of fear that they would be thwarted by the White House, the Treasury and key members of Congress acting under pressure from the industry.
Right. Everyone agrees on that the structure of the money misaligned the incentives. But the arguably bigger problem was that there was simply too much goddamn money. The possible rewards for discovering a new instrument or exploiting an innovative arbitrage scheme were so awesome, so staggering, that it would have been contrary to human nature for the industry not to fall into wild excess. Put it this way: If every time journalists broke even a small news story, they were given $6 million, you'd probably have a lot more unethical behavior, a lot more burned sources, and a lot more useless, and even counterproductive, competition to sensationalize scoops or invent new controversies that could then be dominated. Some profit motive is good. But too much profit motive turns sane men mad.
