MF Global, MBS, and the Goldman Resignation

Matt Taibbi has a good piece on the important and public resignation of a former Goldman executive, Greg Smith.

The essence of Smith’s piece is devastating. He points to one simple, specific problem in the company: the fact that Goldman routinely screws its own clients.

Paul Volcker has already referred to Smith’s op-ed, blaming Goldman for the change in the culture of Wall Street. Taibbi argues that having an insider come out and blast the culture of Goldman is “the endgame for reforming Wall Street.”

It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.

Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren’t just arrogant sleazebags, they’re also not terribly good at managing your money.

There’s a lot to like about this method of thinking. As Tom Ferguson routinely points out, it is changes in the coalition of elites that are necessary (though often not sufficient) for changes in political economy. That said, I don’t think it’s right to argue that the policy choices made by the Bush and then the Obama administration around foreclosures, bailouts, and banking regulations were marginal.

It’s important to recognize that Tim Geithner’s policy architecture mattered deeply, that Barack Obama and Shaun Donovan have pursued certain policies with aggressiveness and sharpness, and that the consequences of those policies are not small. Moreover, the entire housing finance space is a deeply co-mingled Wall Street – government structure designed ostensibly to house Americans and create a channel for investment and savings as well as macroeconomic regulation. Just saying that change will have to come from Wall Street misses this angle, as well as the political corruption that has been part of the space since the 1970s.

Smith is a brave and courageous soul, and it’s great that he’s speaking out as aggressively as he is. Hopefully this will prompt investors, many of whom know they are getting ripped off, to organize against the power of these large banks. We see, with Goldman, with MBS investors and Shaun Donovan, and with MF Global, the powerlessness of the investor community.

Bloomberg bankruptcy columnist Bill Rochelle and Bloomberg anchor Lee Pacchia talked about this last week regarding MF Global, as the Bankruptcy Trustees are causing profound anger among investors who have lost money. This is not something that can be fixed by investors taking their business “elsewhere” – there is no elsewhere.

This is a political problem, and investors better get wise to whose ox will be gored if they don’t fix it.