Well, here's a meme that's picking up speed as it bounces down the hill: Wall Street (whatever that means these days) needs to return to the days of private partnerships. On Wednesday, I commented on a piece in The Wall Street Journal urging a return to private partnerships. Now we have another contribution to this notion: An opinion piece on the New Republic Web site by William Gruver, former Goldman, Sachs & Co. (NYSE:GS) partner and current Bucknell University management professor. Gruver went limited at Goldman in 1992 and spends most of his column discussing the firm, its sordid past in the run-up to the Great Depression and its internal debate over going public, an event he missed out on by half-a-dozen years.
Gruver makes some decent points. In theory, private partnerships would eliminate systemic risk, reduce leverage dramatically and apply an accountability mechanism to the compensation of Wall Street professionals. But it's the knotty difficulties Gruver doesn't wrestle with that are so striking. For instance, what does he mean by "Wall Street?" Is he talking about Goldman and Morgan Stanley (NYSE:MS), both of whom are currently bank holding companies, but were once so-called independent Wall Street firms or, in a Glass-Steagall context, investment banks? Does "Wall Street" include the big banks, which contain former investment banks? Or is "Wall Street" entities like advisory boutiques, buyout shops, hedge funds, money managers -- many of which remain private partnerships?
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That's important because if we're just talking about Goldman, Morgan Stanley and, say, Blackstone Group LP, then who cares? The real problems are elsewhere, among the universal banks. Indeed, there are times in his piece when Gruver seems only to care about the fate of Goldman, continuing, as it were, the debate over the IPO from the '90s, which makes this piece a kind of meditation on original sin, Wall Street-style. But we should care about what the system looks like today and tomorrow. One implication of his logic would be to return finance to a Glass-Steagall-like separation between highly regulated public commercial banks and more lightly regulated risk-taking investment banks. The other possibility is that he'd urge all financial operators to go the partnership route.
I strongly suspect it's not the latter, because the result would be a huge, permanent deleveraging of the system that would whisk us back to the hard money days of the 19th century. If, however, he's talking about the renewed separation of commercial and investment banking, then that poses really difficult political and economic choices. First, you'd have to figure out a way for public companies, like Goldman, which have large slugs of federal bailout money, to go private; how will it look politically if Goldman partners escape the clutches of the public -- and kick out public investors -- for their own gain? Second, how will all the "Wall Street" parts of the universal bank be spun out into MBOs? What will Barney Frank think? Why shouldn't the investing public participate in the gains that may follow massive taxpayer bailouts? Third, why should the investing public buy only the shares of commodity-oriented banks, but not the potentially more profitable (and more volatile) investment banks? This is the problem that led to the breakdown of Glass-Steagall in the first place.
The fact is questions of incentivization, accountability and compensation are a lot easier to deal with in theory than in practice. Private partnerships are fine ideas -- and there's actually a ton of them out there, though again they're not often politically popular -- but as a universal rule they no longer fit the economy most Americans seem to want and need. So we better keep thinking. - Robert Teitelman
Robert Teitelman is the editor in chief of The Deal.
