The Talmud and Goldman Sachs
“Collateralized synthetic credit default swaps.” The Talmud saw this coming.
Just as Goldman Sachs was being called on the carpet to explain the latest mechanism it and other banks had used to fleece the public, I was studying a portion of the Talmud that seems altogether distant from today’s financial inventions, and yet it is eerily relevant.
The Mishnah is the definition of brevity. It lays out the problem with little fanfare, little hoopla, and little explanation. The importance, or at the least relevance, of the issue at hand is assumed and to narrate it would be redundant or somehow condescending to the reader. Read, discuss, argue – that is the purview of the Gemara, where the rabbis never met an issue that couldn’t be unpacked to fill a house the size of the world.
The issue at hand in Tractate Bava Metzia is this: what happens if I ask you to take care of something of mine and under your care the thing is stolen or damaged? The answer of the Mishnah seems clear enough: if you take an oath that you did nothing wrong, then you are absolved of all blame. Case closed. If you don’t take an oath, and pay me for the lost object or animal, then you are entitled to the payment (double if the animal is recovered; quadruple if it has been slaughtered) from the thief, if he is apprehended.
Simple? Of course not.
There is much that follows from this situation. For example, there is a debate about whether you get the milk and the shearings of the animal being watched if you later “acquire” it by paying off the original owner. No, say the rabbis – you are understood to have acquired the animal very close to the time that it disappeared, even if you had it safely in your care for many weeks before it was stolen.
But there is a moment early on in the Gemara that shoots through to today from a thousand years ago and seemed made for the travesty of Goldman Sachs. The debate focuses on whether or not this compensation (for a stolen animal) can be transferred from the owner to the caretaker, at the very start, that is, when the owner first deposits the animal.
The rabbis seem deeply concerned about this notion. Rami bar Hama instantly objects to a line of reasoning that endorses the transfer of some future double or quadruple compensation from some potential thief. “Surely a person cannot transfer ownership of something that has not yet come into the world!” The animal has not disappeared; it has not been determined that a thief stole it; the thief was not discovered; the thief has not agreed to, nor has the ability to make the payment; the payment has not been made. The compensation that the owner is ready to transfer “has not yet come into the world.”
Rami bar Hama acknowledges that in some cases it may be possible to trade something that has not yet come into being. For example, it is reasonable to sell crop “futures,” as they are naturally occurring. The fruit of a palm tree is in all likelihood going to produce fruit next year. It is reasonable to trade on that likelihood. But this unnatural, human exchange that requires a series of unlikely event to occur?
The outrage expressed by Rami bar Hama is not based on a romantic notion that we should only live in a barter economy, and only deal in wholly tangible things. But it represents a healthy skepticism about exchanges that take place further and further away from the real object of exchange. A market in mortgages is one thing; a market in a bundle of mortgages is another; and a market in protection against the default of mortgages that have been chopped and diced and never actually sold (and are therefore “synthetic”) is another. The rabbis of the Gemara are rightly worried about the social and economic fiascos that can multiply as we start to trade in things that have not yet come into the world.
It is something the bankers at Goldman Sachs who sell synthetic collateralized default swaps might want to think about while studying Talmud, in prison.