The Corner

Market Discipline vs. Mob Discipline

Goldman Sachs has a new risk to manage: mob rage. News that the Wall Street firm has already set aside $16.7 billion for bonuses and other employee pay this year has provoked a visceral reaction.

Goldman has spent the past couple of weeks groping for a proper response to this anger. CEO Lloyd Blankfein has gone from saying that Goldman is “doing God’s work” to saying that “we apologize” for an unspecified catch-all category of “things that were clearly wrong and [that we] have reason to regret.”

The firm also announced an initiative through which new politically powerful “partners” — including the National Federation of Independent Business and the National Urban League — will help it to direct $500 million to certain small businesses (at the likely expense of entrepreneurial start-ups without political backers).

And Goldman has once again cancelled its holiday party and even asked employees not to hold their own traditional at-home parties for workers in their divisions.

These efforts have only provoked more — and uglier — anger. “Blood money. A propitiation,” wrote a Wall Street Journal commenter in response to an article about the small-business initiative. A New York Times commenter agreed. Another Times commenter called it “a drop in the bloody bucket of GS profits.”

It would be comforting to dismiss such sentiments as extreme outliers. But the pop-culture verdict that Goldman is “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” has stuck. Wall Street itself seems to have uneasily settled for treating this disturbing imagery as a joke.

Many other critics, of course, do justly complain that it’s not fair that the government has protected the investment firm from losses while allowing small businesses to fail.

Goldman itself has done nothing wrong, though. All it has done is to master a business that operates within a dysfunctional regulatory system. Washington does not allow for the marketplace credibly or consistently to discipline Wall Street firms, including Goldman. Goldman acts rationally within this irrational regime.

If people don’t like it that Washington’s 2008 bailout of AIG allowed Goldman to avoid billions of dollars in likely losses on AIG contracts, they should blame Washington, not Goldman. Goldman only got its share of what Washington’s bailout menu had on offer.

If people don’t like it that an implicit taxpayer “too big to fail” guarantee helps Goldman to pay billions of dollars in bonuses as unemployment rises, they should blame Washington, not Goldman. Goldman is a player, not a referee, and it cannot change the rules.

Should Goldman “give back” more, maybe give the feds back some of the money it got from the AIG rescue, as a sign of goodwill? No — because a market system that depends on goodwill is no system at all.

Washington must create a system in which the markets provide predictable, rules-based discipline of the vital financial industry. Without fair rules, as we see, popular opinion, including its dark side, will try to provide its own rough form of discipline. 

And as the fury at Goldman and Goldman’s attempts to address it both show, this method uses a blunt instrument that misses its target and often does collateral damage — not good for the country economically or socially.

— Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of the forthcoming After the Fall: Saving Capitalism from Wall Street — and Washington.