“Greed, for a lack of better words, is good.”
Adam Smith echoed these words anachronistically in his perennial work on capitalism, and 200 years later the fictional investor Gordon Gekko popularized the actual phrase in Oliver Stone’s film “Wall Street.”
Fictional or not, Gekko’s application of this supposed maxim highlights what’s truly wrong with the capitalism that runs rampant on today’s Wall Street.
In 1776, Smith described a system of economics — never using the word “capitalism” — with an underlying faith in humanity. The economist believed that even “the most hardened violator of the laws of society” had an interest in the happiness of his fellow man. He believed “greed” to be a means to prosperity, not only for its possessors, but for their community.
The concept was simple: The natural fluctuations of a free market i.e. the financial transactions of this market, would occur in a way that benefitted all. This benefit would occur not in the egalitarian sense of communism, but in a manner that rewarded the efforts of those involved.
How is this possible? A lack of complexity coupled with morality would render all financial transactions just. In others words, people would know what was best for themselves.
Nowadays, the ability to discern benefit in financial transactions has been circumvented with a lack of simplicity and a lack of accountability has all but eliminated morality. The capitalism of Wall Street hides behind the guise of complexity.
Unregulated capitalism works justly when people are moral and things are simple. Anything else needs regulation.
In the world of limited liability corporations, derivatives, credit default swaps, hedge funds, and all other sorts of extravagant financial transactions, the market needs regulation.
A prime example of this need for regulation is the bankruptcy of financial giant Lehman Brothers.
On March 12, a 2,209-page report was released on Lehman Brothers’ bankruptcy. The report alleged that Lehman, one of the first financial institutions to go belly up in this recession, misrepresented their balance sheets in the months leading up to their bankruptcy and the subsequent collapse of the financial market.
The most heinous act Lehman is accused of committing is a financial transaction the company called Repo 105.
Repo 105 transactions involved selling off negative assets for capital, days before quarter reports, in order to reduce company leverage. Simply put, leverage is debt.
Lehman would sell $105 worth of negative assets, hence the name Repo 105, for $100 dollars and then later buy them back at market price plus interest.
The Repo 105 process is usually legal. Used to build quick capital, according to accounting rules, debt-carrying assets would be left on balance sheets. However, because they sold these assets at lower prices, Lehman did not consider them loans but rather actual selling transactions. This allowed them to take these debt-carrying assets off their balance sheets — making the company look like it was worth more than it actually was.
But who’s to be held accountable for this act? Many point the finger at Lehman CEO Dick Fuld. However, he claims to be unaware of these transactions. In today’s financial world, apparently you can be Chief Executive Officer of a company and still not be aware of major financial transactions. In the first two quarters of 2008 Lehman removed approximately $50 billion worth of debt-carrying assets off its balance sheets.
In a system governed by morality, a lack of accountability screams for regulation.
True greed, like that of the famed Gordon Gekko, exists veiled behind large corporations. Corporations can’t be greedy, though. Inanimate objects cannot be characterized with greed. So who do we hold responsible for the immoral and unlawful actions committed by American corporations?
The culture of Wall Street is the way it is because of a lack of accountability. Criminals hide behind market complexity, profit off investors and then blame their corporations for misdoings.
Do we charge Lehman Brothers or CEO Dick Fuld with misrepresenting balance sheets? American lawmakers need to create accountability on Wall Street; keeping in mind our jail cells can’t house corporate skyscrapers.