Better Bankers Book Symposium: Forget “God’s Work,” Just Do your Clients’
If Oliver Stone made another Wall Street movie, he might include Goldman CEO Lloyd Blankfein’s remarkably tone-deaf quip about his bank doing “God’s Work”. This quote has come to represent just how out of touch and unscrupulous Wall Street has become. Talk like this is what made the modern pitchfork wielders excoriate the whole banking enterprise. Stephen Colbert, after repeating the quote called the bank Goldman Calf. Matt Taibbi called Goldman “the great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Many people have demanded that bankers go to jail, disgorge their bonuses, and that banks should be broken up. It’s either Golden Calves or God’s work—greed is good or it is evil.
Hill and Painter’s Better Bankers, Better Markets comes in like a grownup to this squabble to describe banks not as vampire squids, but as a collection of people motivated by the same things that motivate you and me. Hill and Painter are not naïve nor do they sugarcoat the banks’ collective bad behavior. The first few chapters of the book thoroughly outline the misdeeds from the specific (LIBOR manipulations) to the general (putting lipstick on worthless assets). The book is valuable if only for the thorough and well-explained cataloguing of the ways in which banks as a collection of individual decision makers defrauded clients or otherwise engaged in unethical behavior.
Hill and Painter accept that bankers and shareholders are motivated by personal profit, they’re just asking that they don’t “rip their clients’ eyeballs out.” This book is firmly grounded in reality of modern banking industry without excusing or soft pedaling the problematic behavior of those banks. And they are clear that there is a big problem. Hill and Painter explain the genesis as the investment banking world’s shift from the partnership structure to the shareholder structure. In other words, there is no skin in the game, they aren’t eating their own cooking, the incentives are all wrong. It seems to me that Hill and Painter are joining (though not explicitly) a growing chorus of critics who doubt that market discipline can properly reign in Wall Street excess.
While most other reform proposals focus on changing the banks’ incentives—making them smaller, higher capital, more skin in the game—Hill and Painter look to change the individual bankers’ incentives. They are realistic enough to not suggest that we go back to partnerships, but they want bankers to feel some obligation or duty to the firm and to their clients. Hill and Painter suggest that the best way to do this is through covenant banking: to impose both contractual obligations and fiduciary duties, make banking to be a professional enterprise like law or medicine—a career with ethical boundaries, codes, and consequences for violating those.
Hill and Painter’s proposals are both traditional in that they want banking to return to the days when bankers felt duty-bound to both the firm and their clients, but also forward-thinking in that it recognizes that current activity restrictions and bright line rules in banking can easily be averted and real reform happens only insofar as the bankers’ and the publics’ incentives are aligned. The strength of the book’s argument is that the authors are not suggesting radical change, rather a look back to what worked in the past and distill those lessons to meet the needs of the present. While the bankers of the past are not perfect, perhaps there is comfort in the fact they were never accused of being vampire squid.