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The financial world has changed a lot since I worked in it and the biggest change is more people are playing with more of other people’s money. When most of the banks were partnerships, they had to be in it for the long run because people who were partners were playing with their own capital and taking risk with their own assets.

Emanuel Derman, formerly of Goldman Sachs. (via The Daily Dish)

Reading Derman’s words, I was struck — yet again — by how prescient Michael Lewis was way back in 1989. Here’s page 136 of Liar’s Poker:

“When the firm was a partnership (1910-1981) and managers had their own money in the till, loose controls sufficed. Now, however, the money didn’t belong to them but to the shareholders. And what worked for a partnership proved disastrous in a publicly owned corporation. Instead of focusing on profits, trading managers focused on revenues. They were rewarded for indiscriminate growth.”

Lewis put a finer point on things this year in the closing pages of The Big Short:

“At some point I could not help but ask John Gutfreund about his biggest and most fateful act: Combing through the rubble of the avalanche, the decision to turn the Wall Street partnership into a public corporation looked a lot like the first pebble kicked off the top of the hill. … The main effect of turning a partnership into a corporation was to transfer financial risk to the shareholders. ‘When things go wrong it’s their problem,’ (Gutfreund) said …”

I was touting The Big Short just yesterday to a guy I hadn’t seen in months. He, in turn, had great things to say about 13 Bankers, which I haven’t read yet. A website for that book is here.