Is Goldman Sachs the next Toyota?

The lawsuit filed by the SEC against Goldman is in the same category as Toyota’s unintended acceleration problem. Both are about tainted products and whether the firms dealt honestly with their customers. And it could be just as devastating to Goldman’s business as it was to Toyota’s. At stake is the bank’s most valuable economic asset—its integrity.

Conventionally, we think of integrity as an ‘eat your spinach’ topic: a personal issue, entirely up to individuals. But integrity is widely misunderstood. Integrity isn’t personal, it’s collective. It’s the underpinnings for all our commercial transactions. Integrity is a shared asset that brings financial and economic rewards. To understand why, you need to see integrity as a relationship of trust. To actually practice integrity there has to be someone on the other side of the transaction. On one side of the transaction is the firm operating with integrity (or trustworthiness) on the other side is a customer who buys into that integrity (who trusts). Once you have a relationship of integrity and trust you have an asset that produces economic value. Integrity isn’t something nice to have it’s something a firm has to have in order to sell its product and create wealth.

Goldman has built up enormous integrity over decades. It’s the gold standard for the financial industry. Whether or not the firm broke the law though, the lawsuit raises doubts about whether the bank deals honestly with its clients and whether clients should continue to trust Goldman. It also raises big issues about how it operates with trading and investment banking under one roof. It’s critical how Goldman handles this integrity crisis. First, Goldman has to move quickly to explain the extent of the problem in a convincing way. Second, it has to provide a solution that builds trust with its customers. So far, Goldman has told its customers they should have known better. That is, Goldman has effectively blamed its own customers. If Goldman is as smart as everyone says, they will learn from Toyota’s initial mistakes and turn this lawsuit into an opportunity to build greater integrity that may underpin its prosperity for years to come.

The Biggest Blunder on Financial Reform

Thank heavens President Obama is taking on financial regulation as his next priority. It’s our biggest economic policy issue by a long shot. The trouble is the pitch is all wrong and that’s why it’s shaping up to be a tougher fight than it should have been.

The White House wants to make sure that we “never again” have to bail out our big banks. But arguments in favor of safety work best during times of fear. More than a year has passed since the worst of the crisis, and during that time the fear has abated, at least on Wall Street.

For many ordinary people, financial reform still seems like a no brainer but not to bankers. To understand why you have to enter the mind of a Wall Street banker. Here’s what he’s thinking: “I (or my company) took a lot of risks. We effectively went bust. But the government got so scared that it bailed me out and all but a tiny minority of my colleagues. Most of us got to keep our money and our jobs too. And then the government showered us with limitless free money that we are using to make money hand over fist. Why, exactly, should I worry about another crisis? Things look ok to me. In fact, I strongly prefer keeping things just the way they are!”

There was a time not so long ago when bankers were scared themselves. Terrified in fact. The story goes that Hank Paulson (formerly Goldman’s chief) actually got down on his knees—his knees!—to beg Nancy Pelosi to pass the TARP bill. If some of our officials, like Geithner, Summers, Bernanke or President Obama had taken that opportunity to make the bailout conditional on smart reforms, there would have been nary a whimper. But alas the chance was missed, and with the passage of each day the strength and resistance of the bankers increases.

So what should the pitch be? Instead of appeals based on altruism or increased “safety” the focus should be on self interest. Putting people in jail or outlawing practices that are easily evaded won’t accomplish much. We have a unique opportunity to build a better, more valuable financial system. If the US seizes the opportunity and offers real leadership to improve the global system, Wall Street will benefit by continuing to be the global center of capitalism for years to come. That’s what a financial system less prone to cheating can do. It’s a message we can all get behind: politicians, the public and Wall Street. And it means bankers themselves can use their creative brain trust to help make the financial system better and stronger without waiting for Washington. (see Top 5 Ways for Wall Street to regain Trust)

There may not be a second chance.

The Shoe is on the other Foot

After 20 years as a journalist I’m getting a taste of what it’s like to be on the other side of the media. Two days after my book “The Economics of Integrity” was published the Wall Street Journal mentioned it in its “Heard on the Street” column. Which is fine with me, except that the reporter involved admitted to me he didn’t actually read it before he set out to make a jibe at it. The Journal wouldn’t agree to a retraction, but they did print my letter. I’m not all that upset about the incident. On the whole I probably shouldn’t complain too much about people discussing my book, even in ways I don’t approve. But it will give me a little perspective as I write, not always flatteringly, about the people, firms and institutions affecting our economy.

Digging into another myth about health care

Trying to distract myself during a medical appointment this morning, I asked my doctor what she thought of the health care reform proposals before the House and Senate. In a resigned tone, she flatly stated that the proposals did little for doctors or patients and mostly benefited insurance companies. I agreed with her and we commiserated together that little would probably end up being done to fundamentally reform health care. Then I asked what she thought about a government funded health care system. She was favorable to it and had familiarity with the British system but wondered how such an overhaul could be carried out in the United States. I was encouraged that she didn’t run a mile from the suggestion. So often we are told that our doctors would stop being doctors under a government funded national health care plan. In fact, my doctor seemed to indicate just the opposite. She told me stories of her doctor friends who are struggling just to stay in business under the current system. When I got home I checked the number of doctors per patients in major industrialized countries to see if there was any truth to this argument. According to the OECD, Australia, France, Germany, and the UK, all nations with so called ‘socialized medicine’ have more doctors per patients than the US. Only Canada and New Zealand have fewer doctors per person than the US. The claim that there would be a doctor shortage under “socialized medicine” turns out to be just another myth.

Practicing physicians, Density per 1 000 population (head counts)
(Source: OECD 2006 data)
Australia 2.81 Canada 2.15 France 3.37 Germany 3.5 Netherlands 3.82 NZ 2.28 UK 2.44 US 2.42

A Darker Side to Claim's of Women's Earnings Progress

This morning I listened to NPR and was interested in the latest findings about the economics of marriage. New research by the Pew Research Center has found more men are marrying women with higher incomes than anytime in the past. Both the radio and newspapers portrayed this in a positive way for women—that women are becoming more educated than men and in fact are making gains in the workforce. I wish that were the entire story. Unfortunately there is a disturbing and darker side to this. Is it really women making gains in wages or could it also be that high paying jobs, traditionally held by men, are disappearing? Haven’t we all heard that during this recession most jobs being lost are by men? According to the US department of labor, women’s median wages were still 79.9% of men’s in 2008. While women’s wages have been increasing as a percent of men’s over the past few decades those gains are masked by what is happening to average male earnings. They have been stagnating at best. According to the National Association of Colleges and Employers, real starting pay for men with bachelor’s degrees fell 3.2 percent between 2000 to 2007 and 1.7 percent among women during that time. This isn’t only about gender it’s about what’s happening to the middle class. And it’s not a pretty picture.

Who Benefits from Complexity?

This week Jonathan Gruber, an MIT health economist who provided the key analysis which supported the Obama Administration’s health care reform plans, was being criticized for not disclosing a lucrative government contract. What’s fascinating about this incident is what it reveals about public policy. (See my HuffPo post for more) There’s only one expert in the entire nation who has the know how to quickly estimate the effect of health care reform in various scenarios. And none of us have a clue so we have to take his word for it. Isn’t that a little crazy? What’s the value of having such complicated legislation so that only one person in the entire nation actually takes the time to dig through it?

Why we shouldn't give up on the public option

At first when I thought about health care reform I thought of universal health care as a moral issue. But when I took the time to look behind the rhetoric and dig into the numbers I discovered that universal health care, or more explicitly government funded universal health care, is really an economic obligation. When you compare the US to other industrialized nations on the basis of costs, health outcomes, quality and satisfaction there’s only one conclusion you can reach—it’s foolish and wasteful not to move to a government funded health care system. I just wrote a Huff Po post looking at one of the more startling facts about cost. There are lots of angles to look at, and they all seem to point in the same direction. If the current health care legislation does pass, it absolutely can’t be the last word. Without a common sense system similar to other developed countries, the US will be competing with a serious economic handicap.