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The Price of Clarity

LONDON -- “Through the contrivance and cunning of stock jobbers there hath been brought in such a complication of knavery and cozenage, such a mystery of iniquity, and such an unintelligible jargon of terms to involve it in, as were never known in any other age or country.” Jonathan Swift’s eighteenth-century barb resonates in today’s world of financial “intermediation”: now, as then, finance shrouds its “complication of knavery and cozenage” in “unintelligible jargon.” As US President Barack Obama explained in a speech in April: “Many practices were so opaque and complex that few within these companies – let alone those charged with oversight – were fully aware of the massive wagers being made.”

But was Swift right to see knavery as the main motive for unintelligibility? Obviously, it is a very powerful motive, in politics no less than in finance. The less people understand about something, the easier it is to fool them. There has never been a shortage of snake-oil merchants: Donizetti wrote an opera, L’Elisir D’Amore, about one of them advertising a love potion in a nonsensical patter. But the intention to deceive, or even to make money, is not necessarily what has driven the recent explosion of financial innovation.

Consider the US Securities and Exchange Commission’s current civil suit against Goldman Sachs. Goldman whiz-kid Fabrice Tourre is charged with having created a complicated security that was designed to fail. Was his intention to deceive? Or was it the intellectual pleasure he got from creating a “Frankenstein monster” (as one of his e-mails described it), regardless of the consequences?

The latter seems the dominant motive. As another of his e-mails put it:  “The entire system is about to crumble any moment...the only potential survivor the fabulous Fab...standing in the middle of all these complex, highly levered, exotic trades he created.” To be cleverer than the pack (and of course making money by his cleverness) seems to have been Tourre’s driving passion.