April 20, 2010

"Regulators will never keep pace with financial innovation, and bankers run circles around even the best-intentioned rules". While this aphorism is taken by many as a reason to avoid rules altogether, Frank Partnoy draws a rather different conclusion (*). "Show[ing] how litigation can fill gaps regulation will miss", he advocates all relevant actors be made fully liable. Having myself criticized a flight from responsibility as an all too present trend, I can hardly criticize him.

Still let us not forget what rules are really about. As Frank Partnoy says, they should not be counted upon to deter criminals. No surprise here, such has never been their goal. What they are for is to increase the productivity of social relationships. A clear legal framework offers legal certainty to honest and prudent people, one of the characteristics of capitalism. It also enables justice to deal efficiently with the lazy sleazy. Had Charles Ponzi never inspired any rule against his famous scheme, Bernard Madoff would still be battling his case in court. After all he had only accepted money from investors foolish enough to believe his promises. As a rule however, account statements are deemed to represent facts, not just promises.

Good rule making unfortunately is an art whose output must be ceaselessly revised, similar to the battle between guns and armor. Principles matter because they maintain one's sense of direction throughout these constant adaptations. For instance these fillips argue that our Information Age will know no sustainable development until all are bound to respect the privacy principle, the right to own our own data.

In the name of this simple principle, we continue to condemn Facebook as it persists in finding how to profit from our confidential information. It tries to sell its users' profiles to advertisers. Now it wants to tap behavioral targeting with a button which David Gelles says "would allow users to signal the content they like on other websites" (**). In other word it plans to entice users to let themselves be monitored as they navigate the web.

The same principle makes us hopeful in the case of Twitter. While the latter has so far followed the same Micawber business plan as Facebook, it now proposes to advertisers what Google has so brilliantly done before. It "will allow businesses to bid on keywords and have their "promoted tweets" appear at the top of search results", David Gelles reports (***).

In so doing Twitter ruffles some feathers. This move gives developers a reason to fear Twitter may steal their best ideas, applying the same diabolo strategy which makes Google so dominant today. "That's part of the game", declares co-founder Eric Williams, correct if undiplomatic. Users too might object if those paid for persistent ads are not made visually different from other tweets. But certainly user privacy has not been infringed.

Is Twitter now a responsible grown-up then? Will its money making scheme eschew greed for good? It is entirely feasible. But caution is necessary.

"Show promoted posts in a user's Twitter stream, even if a user did not perform a search and does not follow the advertiser"? "Users could resent [it]" muses Claire Cain Miller (****). True, but again not based on their data rights. Contrary to emails sent via Google mail, tweets are broadcast. Contrary to content snipets delivered via Google search, tweets are part of the public domain. Twitter acts as any ad-supported content provider.

"People on Twitter [...] will be able to reveal exactly where they are", Claire Cain Miller writes about its "points of interest" feature (*****). I am against being tracked by cellular services. But again when someone yells "I am here" in a public place, I see this as an exercise in personal freedom. Let us remember from its very beginning Twitter famously enabled civic activists to broadcast their arrests to their supporters. May I suggest that Twitter add jails to its "database of places", along hotels and parks?

Perhaps some readers may wonder if I have not walked into a trap. When "similar to Facebook Connect, @anywhere will allow people to log in to Twitter from other Web sites", am I going to give Twitter a pass for what I just blamed in Facebook? I can and I will. Twitter is not about sharing with your friends, it is about shouting in public. But this is precisely where my call for caution must be acted upon.

While everything I do when I step outside of my home is public, I would complain of being harassed or stalked, though, if someone was to take this as an opportunity to follow me everywhere. The more successful Twitter becomes at monetizing itself, the more responsibility it should accept for protecting its users. Advertisers will say they want to delight us. Don't deluded stalkers make the same claim? Twitter beware.

And what about those users who take pain to limit their broadcast to pre-approved followers? Suddenly all the extra features dreamt by Twitter look like future privacy violations, Twitter itself liable to become a cross of Google and Facebook, spying on our every mail and social interaction.

These fillips have become interested in modern finances because our Information Age makes no difference between money and data. The current financial crisis has its origin in market distorsions. I have already suggested what principles to follow to fashion better market rules. Can we hope to get help in this regard from the fraud suit brought by the SEC against Goldman Sachs, claiming "the bank created and sold a mortgage investment that was secretly intended to fail", per Louise Story and Gretchen Morgenson's story (******)?

The only certainty at this point is that the outcome will be costly to determine. Perhaps it will be gambled on a jury trial and a string of appeals. So much for efficiency. But suppose no company were allowed to work for both sides of a deal, as law firms are forbidden to represent both parties to a suit? Suppose a company which executes orders for its client were prevented to trade, directly or indirectly, for its own account, as insider traders are accused of doing? Wouldn't Goldman Sachs be more eager to settle?

Goldman Sachs may retort, far from being a professional service company, it merely manufactures financial products. It has no clients, only customers. Caveat emptor! Perhaps indeed Goldman Sachs prefers to be treated like Toyota and fined for selling defective vehicules.

Principles are avoided at all costs by those who profit from obscurity. For them pragmatism is another name for self-interest. Tweet this!

Philippe Coueignoux

• (*) ............ Wall Street beware: the lawyers are coming, by Frank Partnoy (Financial Times) - April 19, 2010
• (**) .......... Facebook to track users' web trail, by David Gelles (Financial Times) - April 19, 2010
• (***) ....... Twitter builds on its character, by David Gelles (Financial Times) - April 16, 2010
• (****) ..... Advertising Enters Flow On Twitter, by Claire Cain Miller (New York Times) - April 13, 2010
• (*****) ... In Expanding Reach, Twitter Loses Its Scrappy Start-Up Status, by Claire Cain Miller (New York Times) - April 16, 2010
• (******) . S.E.C. Files a Fraud Suit Against Goldman Sachs, by Louise Story and Gretchen Morgenson (New York Times) - April 17, 2010