Why Pick on Goldman?

By NOAH K

Frank Partnoy, a finance professor at the University of San Diego, writes in the FT of May 11 that the SEC has unfairly targeted Goldman Sachs for censure in an act of "misguided political theatre." For Partnoy, Goldman is being punished for its success. In his counter-factual, if everyone had taken the positions Goldman had on sub-prime, we wouldn't be in this mess. I'm no philosopher -- or economist -- but I'm not sure that such a counter-factual world exists in the realm of possibility. But the core of Partnoy's case is that the SEC is not doing its job, which is to protect "investors." By going after Goldman, the SEC is advocating for "European banks" instead of Joe Six-Pack. Never mind that Joe Six-Pack, if he's lucky, has his retirement tied up with the fortunes of some of these "European banks." What Partnoy and others no doubt are really mad about is Goldman being singled out.

So, is it legitimate for the government to prosecute selectively? Absolutely. The SEC is a law enforcement agency with limited resources with which to prosecute. They are bound to prosecute selectively, but what makes their selection legitimate is the discretion awarded to them in the law. Not that this discretion hasn't been challenged and circumscribed. For example, in 1996, the Supreme Court heard United States vs. Armstrong, et al. Christopher Armstrong and his co-respondents filed a motion for discovery or dismissal alleging that they were unfairly selected for prosecution on federal crack cocaine charges because they were black. The due-process and equal protection clauses of the Constitution are meant to protect against "invidious discrimination in the exercise of prosecutorial discrimination." In other words, there are limits on prosecutorial discretion. You can't prosecute somebody on the basis of race, for instance. But in the Armstrong case, the court ruled in favor of the government, confirming a broad, robust concept of prosecutorial discretion.

Targeting Goldman precisely because of their stature in order to deter other banks from similar misdeeds is entirely within the scope of prosecutorial discretion as confirmed in Armstrong. For Partnoy, "these government officials do not understand modern markets." On the other hand, his understanding of the law leaves something to be desired.

Growth of Islamic Banking in Turkey

On Wednesday, FT contained a special insert called "Istanbul as a Financial Centre." The headline read, "Ambition yet to be matched by reality," a state of affairs which is then explained in articles about lack of political and social consensus, a conservative business oligarchy that offers little power and protection to equity holders, and competition from Moscow to be the regional hub both for multinationals and financial services. All this is set across the backdrop of a city that is potentially very attractive to highly skilled migrants. As for the Turkish economy, as George Bush used to say, "The fundamentals are strong."

What caught my eye was the article by Delphine Strauss on the growing stake of Islamic banks in Turkey's financial sector. These banks have grown at almost double the rate of commercial banks over the last three years. In Turkey's case in particular, we could chalk this up to a political climate that is increasingly friendly to these institutions, as the Islamic AKP has entrenched its power. Yet it appears that these banks are increasingly competitive across the Islamic world. In a very interesting article in October's Anthropology News, BU PhD candidate Sarah Tobin, analyzes the gains made by Islamic banks during the global financial crisis (UC Berkeley, sadly, doesn't give me access to the article online; as for the performance of Islamic banks, it should be noted, that the Dubai credit crisis damaged them considerably). Tobin, whose work is in Jordan, sees the rise of these institutions as more than just the result of their cautious investments in a volatile market. Islamic banks are providing all kinds of non-pecuniary services, from giving customers a daily feeling of religious authenticity, to "Islamicizing" certain transactions that the Koran on some readings would seem to disallow, to scoring brownie points with an Islamic regime -- which is where Turkey might come in, though it sounds like many of the banks' biggest customers are religiously conservative Anatolian businessman, the new elite of the AKP world.

One gets the sense from Strauss's report on Turkey that the Turks lag behind the rest of the Islamic world on this score both because of the secular Kemalist legacy and because participation in Islamic finance is more "political" -- or less "authentic" than elsewhere. On this account, if the AKP loses power tomorrow, the sector shrinks precipitously. Here, Tobin's article is a helpful companion. She underscores that with each bank maintaining its own Shari'ah board charged with interpreting a great diversity of financial instruments, practices, and markets ultimately, as I understand it, in light of the Koranic injunction against taking and receiving interest, no clear standard of "Islamic banking" exists. The local diversity of Islamic law surely plays a role too. And though Jordanian banks may be more conservative than those in Dubai, it seems the charge of "un-Islamic" might be leveled against anyone at anytime. This is not to say that particular forms of investment, types of enterprise, and grand strategy do not pattern the Islamic banking sector. They do, and that's what I find so interesting. The FT piece, for example, describes "sukuk-style bonds," which are offered but twice a year, and are indexed to the revenues of government agencies. Whatever Islamic banking is, it's certainly not a simple reaction against modernity. Standard & Poor's just started rating a Shari'ah-compliant fund from Qatar last Tuesday.