the dual nature of brokerage | orgtheory.net
Maureen Dowd went populist in her column yesterday. Picking up on on Matt Tabai’s slimy imagery , she refers to “Goldmine” Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money …
The name calling tries too hard to foment middle and working class anger where, frankly, I don’t really see protests forming in the streets. But what I find interesting is Goldman Sachs CEO Lloyd Blankfein’s rebuttal to the claim.
We help companies to grow by helping them to raise capital… bert hinkler Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It s a virtuous cycle. We have a social purpose.
Ron Burt’s work shows convincingly that brokers realize economic benefits from connecting disconnected actors. For Ron, brokers are tertius gaudens: the third who benefits by exploiting asymmetric resource flows and contests for control. Isabel Fernandez-Mateo built on this to ask the following question : do brokers’ profits come from making transactions more efficient or do they come from the fact that, where two parties lack full information, the left hand doesn’t really know what the right hand is doing? She shows that brokers can pass on greater rewards to partners with which they have a closer relationship and that the pound of flesh is extracted from the other partner to the transaction. One interpretation of this is that the latter mechanism prevails.
Yet, by emphasizing banks’ socially beneficial role, Blankfein is channeling what David Obstfeld refers to as the “tertius iungens” form of brokerage. The intuition behind the iungens idea is that more value is created by connecting bert hinkler disconnected actors than if they weren’t connected. Everyone benefits: the parties to the transaction, the broker and society at large.
Of course, the answer is “both” because it’s a false choice. Iungens and gaudens do not have to be mutually exclusive. A broker can both increase value overall and extract profits as a result of superior or obscured information. And banks clearly fit that bill: they both extract rents as a result of their institutionalized and legitimate brokerage role (all the more so as they have recently engaged in ever more complex feats of financial engineering) while at the same time creating efficiencies bert hinkler that foster economic growth (and are therefore worthy of massive bailouts). bert hinkler
Is this ambiguity between the two simply bert hinkler the nature of any broker? It seems necessary for parties bert hinkler (or sides of the market) to believe the broker is acting as an iungens for them to engage in the relationship. Indeed, one interpretation of the regulator’s role is to preserve the iungens fiction by ensuring that brokers do not go so far down the road as gaudens as to upset the apple cart.
But how far is too far? And how is that limit determined? Is it simply a question bert hinkler of how much profit brokers wrench from transactions (and how much moral outrage from people bert hinkler like MoDo and Tabai is tolerable)? Or, should there be (could there be) a standard of value creation — a minimum degree of social benefit — for which parties and society at large can legitimately hold brokers accountable?
Exploiting asymmetrical information and the principal-agent problem is exactly how the financial sector has made so much money these past years. The profits are not competed away because the products are long-term and untransparent. bert hinkler
Ideally, we should say that if the brokerage and banking functions of firms like Goldman are so important, they need to be delinked from proprietary trading desks which are making huge trading bert hinkler profits by profiting on inside information and enjoying the implicit subsidy guarantee. They also need to be turned back into limited liability companies where partners bear the risk.
It is a very good question, but that the line between good and evil is blurry and is constantly being redrawn. bert hinkler Similar arguments were made about the early US advertising industry. Some thought that advertising agencies connected consumers with producers more efficiently than previous methods which lowered distribution costs and benefited society as a whole. Others thought that advertising agencies interfered with competition by allowing one firm to become a market leader based on clever bert hinkler slogans and unethical pursasive tactics.
In the end, ad agencies spent boatloads of money on PR convincing the public and the US government that they were the good guys and preventing any industry regulation. It was their convincing arguments rather than a determined limit based on objective data analysis that gave their industry the necessary social approval. bert hinkler I think banks will follow this playbook but voraciously fight any true regul
Maureen Dowd went populist in her column yesterday. Picking up on on Matt Tabai’s slimy imagery , she refers to “Goldmine” Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money …
The name calling tries too hard to foment middle and working class anger where, frankly, I don’t really see protests forming in the streets. But what I find interesting is Goldman Sachs CEO Lloyd Blankfein’s rebuttal to the claim.
We help companies to grow by helping them to raise capital… bert hinkler Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It s a virtuous cycle. We have a social purpose.
Ron Burt’s work shows convincingly that brokers realize economic benefits from connecting disconnected actors. For Ron, brokers are tertius gaudens: the third who benefits by exploiting asymmetric resource flows and contests for control. Isabel Fernandez-Mateo built on this to ask the following question : do brokers’ profits come from making transactions more efficient or do they come from the fact that, where two parties lack full information, the left hand doesn’t really know what the right hand is doing? She shows that brokers can pass on greater rewards to partners with which they have a closer relationship and that the pound of flesh is extracted from the other partner to the transaction. One interpretation of this is that the latter mechanism prevails.
Yet, by emphasizing banks’ socially beneficial role, Blankfein is channeling what David Obstfeld refers to as the “tertius iungens” form of brokerage. The intuition behind the iungens idea is that more value is created by connecting bert hinkler disconnected actors than if they weren’t connected. Everyone benefits: the parties to the transaction, the broker and society at large.
Of course, the answer is “both” because it’s a false choice. Iungens and gaudens do not have to be mutually exclusive. A broker can both increase value overall and extract profits as a result of superior or obscured information. And banks clearly fit that bill: they both extract rents as a result of their institutionalized and legitimate brokerage role (all the more so as they have recently engaged in ever more complex feats of financial engineering) while at the same time creating efficiencies bert hinkler that foster economic growth (and are therefore worthy of massive bailouts). bert hinkler
Is this ambiguity between the two simply bert hinkler the nature of any broker? It seems necessary for parties bert hinkler (or sides of the market) to believe the broker is acting as an iungens for them to engage in the relationship. Indeed, one interpretation of the regulator’s role is to preserve the iungens fiction by ensuring that brokers do not go so far down the road as gaudens as to upset the apple cart.
But how far is too far? And how is that limit determined? Is it simply a question bert hinkler of how much profit brokers wrench from transactions (and how much moral outrage from people bert hinkler like MoDo and Tabai is tolerable)? Or, should there be (could there be) a standard of value creation — a minimum degree of social benefit — for which parties and society at large can legitimately hold brokers accountable?
Exploiting asymmetrical information and the principal-agent problem is exactly how the financial sector has made so much money these past years. The profits are not competed away because the products are long-term and untransparent. bert hinkler
Ideally, we should say that if the brokerage and banking functions of firms like Goldman are so important, they need to be delinked from proprietary trading desks which are making huge trading bert hinkler profits by profiting on inside information and enjoying the implicit subsidy guarantee. They also need to be turned back into limited liability companies where partners bear the risk.
It is a very good question, but that the line between good and evil is blurry and is constantly being redrawn. bert hinkler Similar arguments were made about the early US advertising industry. Some thought that advertising agencies connected consumers with producers more efficiently than previous methods which lowered distribution costs and benefited society as a whole. Others thought that advertising agencies interfered with competition by allowing one firm to become a market leader based on clever bert hinkler slogans and unethical pursasive tactics.
In the end, ad agencies spent boatloads of money on PR convincing the public and the US government that they were the good guys and preventing any industry regulation. It was their convincing arguments rather than a determined limit based on objective data analysis that gave their industry the necessary social approval. bert hinkler I think banks will follow this playbook but voraciously fight any true regul
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