SKIN IN THE GAME:

There is a huge difference between Goldman Sachs, the partnership, and Goldman Sachs, the publicly-traded entity. If you're a partner at an investment bank, your incentives are long-term-oriented. You're going to be a partner for decades, and you know that you stand to be best rewarded by maintaining the loyalty of your best clients. This incentive, in turn, leads you to want to take pride in your work, as something that is about your clients, rather than about short-term moneymaking.

On the other hand, Goldman the publicly-traded entity is owned by its shareholders, who demand quarterly profits. A bank that is oriented towards quarterly profits is going to put short-term financial incentives above the long-term interests of its clients. When it comes to investment banks, not all profit motives are created equal.

Goldman's 1990s partners did just fine. At the time of the Goldman IPO, the largest partnership interest belonged to Jon Corzine. Corzine converted his 0.9 percent partnership interest into $305 million. But Goldman's clients were not as well-served by the change.

Goldman wasn't the first major investment bank to convert from a partnership into a public company. Indeed, it was one of the last. It was John Gutfreund, the former kingpin of Salomon Brothers, who pioneered the conversion of investment bank partnerships into public corporations. Indeed, one can make the case that one of the primary causes of the financial crisis was Gutfreund's innovation. "No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.'s," observed Michael Lewis in 2008. "I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.'s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit."

So what can be done about this problem? The stock left-wing answer is: tax the rich. If you reduce bankers' profits, the thinking goes, you reduce their ability to be rewarded by their greed. But eliminating greed is impossible, whether in bankers or painters. The more thoughtful question to answer is: how can bankers' self-interest be realigned with that of their clients and the public? And that answer, necessarily, involves moving back to the partnership model.

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