Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley

by Antonio García Martínez

So why not trade CDSs on exchanges, as we do shares of Google? The question was raised in 2008 as the financial world burned. The internal chatter on the desk was that the government would exploit the crisis to regulate our Wild West market. Goldman (briefly) considered taking the initiative and self-regulating into exchange-traded markets instead. It decided against doing so, with reasoning I’d see again at Facebook: an incumbent in a market dominated by a few, with total information asymmetry, and the ability to make prices on the market rather than just take them, has little incentive to increase transparency. The bid-ask spread—that is, Goldman’s difference in price when buying or selling the same thing—was huge on credit derivatives. Goldman made fortunes simply passing a piece of paper from its left hand to its right, from seller of risk to buyer of it. While trading on exchanges might have increased the overall volume of trade and hence profits, the openness would have eroded Goldman’s privileged view of the credit markets, and opened it to upstart competition, not to mention financial scrutiny. Even if the open approach had increased the total size of the market, Goldman felt more comfortable owning a small market than merely participating in a larger one. Thus, many markets were and are inefficient, because that inefficiency is very profitable to those running the market, even if only in the short-term picture.