It is rare when my two primary gigs — technology and finance — intersect in some philosophically satisfying way but it happened recently when Goldman Sachs was being charged with civil fraud by the SEC and I was speaking the same day at the Palmetto Open Source Software Conference (POSSCON) in Columbia, South Carolina. Just minutes before my time to speak I realized that what I had to talk about was trust — the T-word — a word which has very different meanings in each of these realms.
Trust is present or it is absent. Grab a nerd and he’ll tell you that even the absence of trust is a measure of trust and that particular measure is zero. When trust is non-zero (which is better, believe me) it is based on one of two methodologies — empiricism or transparency (the other T-word).
The empirical way to create trust is by not trusting anybody. Here I literally mean canceling out of the equation trust as we know it in any interpersonal sense. This can be done through hedging or laying-off the risk ASAP to a rube. Goldman appears to have done both. The essence of empirical trust in this instance is “I trust because I don’t need to trust because I am (or soon will be in the rube scenario) immune to harm.” This immunity comes from a mathematical proof, whether that proof is provided by a strongly encrypted password on a computer file or by the hedging of counter-parties in some complex financial derivatives play. Empirical trust is a zero-sum game.
It also has no soul.
We see empirical trust in the current REPO-based big bank funding system that has collateral obligations being swapped back and forth like loyalty oaths in Catch-22. The big banks don’t trust each other and for good reason, because they’ve all been lying all along and now that has been revealed. That’s why the lending market has been starved despite the best efforts of the Fed and Treasury to get banks lending again.
Trust through transparency is a completely different creature based on the novel idea that people say what they mean, do what they say they will, and make things that work because you can see how they work inside. Those workings are transparent, get it?
Transparent trust is the basis of Open Source software, which is code that is written for free by volunteers and shared openly with the world. Bill Gates, when he first heard about Open Source, called it communism. But in this case at least it is communism that seems to work.
Open Source works precisely because there is no money in it. If there is no obvious financial reward what’s mainly left is doing it for glory. Linus Torvalds, the original author of the Linux operating system, likes to point out that Microsoft ships new products to meet revenue goals while volunteer Linux developers ship new products when they are ready. To do it any other way would be embarrassing. Viewed in this way Windows Vista, which was two years late but still terrible, suddenly begins to make sense.
Open Source software authors have their names on the product and their reputations at stake, so they make sure the code they ship is as good as it can be. How quaint.
Contrast this with Lehman’s Repo 105 gambit or Goldman’s custom ABACUS CDO’s for Paulson & Co. What Lehman and Goldman sought was the exact opposite of transparency. They sought opacity and hid behind it. They didn’t tell any more than they were legally required to about what was really going on. They lied.
There’s a funny thing about lying — it only works well when done by a slim minority. Nobody wants a strong reliable currency more than does organized crime, for example, which operates mainly in cash. It doesn’t matter how much you steal if the money is worthless, so Tony Soprano was a fiscal conservative.
Empirical trust says that if we properly hedge our bets it won’t matter who is telling the truth. But that just as firmly proves that we have no ethical expectations and no reason to do the right thing, especially if doing the wrong thing is more profitable.
There is an irony here and it is that Open Source software is very successful on Wall Street, where it dominates, while proprietary products from companies like Microsoft and even Oracle are in relative decline. Linux, Java, and a vast array of similar Open Source products are at the very basis of these Wall Street calculations that have been getting us in such trouble. One of the big reasons why Open Source has become so successful is because banks like Goldman have embraced it. They’ve done so because in the case of technology for running your business, transparency is a no-brainer and empirical trust, well that’s just stupid.