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Wednesday, March 14, 2012

Goldman Sachs

Everyone else is talking about this piece in the NYT: "Why I am leaving Goldman Sachs." My turn.

First, the key points made by author Greg Smith:
I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
My first reaction: Goldman's corruption is a testament to the shortness of life. If your goal is acquisition for its own sake, why build a company designed to last centuries? Make your pile now. After a few years, you can leave the Street and spend the rest of your days drunk in paradise, if that floats your boat.

Come to think of it, isn't that Smith's own story?

It's not that I doubt his insider's description of how Goldman works: I'm sure he's right. But that man is free to exit the company, and to post a "farewell and fuck you" note designed to scare away potential clients, because he has already made his pile. Greg Smith can spend the rest of his days drinking margaritas in Acapulco or taking in the baths at Cauterets or sport-hunting polar bears in the Antarctic if he so wishes.

Don't get me wrong: I'm glad he left when he left, and I'm glad he wrote what he wrote. But it's hard to label him a man of courage and sacrifice.

Let's look at some other reactions. Kat at Skydancing says...
A nation’s fiat money and its financial system is only as good as the trust it earns and maintains. We are fortunate that the US is still the main game on the planet because the political system and the financial markets are burning through the trust of real businesses and consumers daily. They hold our chits. They buy our politicians. They can bring down entire economies because they provide services and products that grease our machine. Our policymakers should understand the importance of functioning markets and recognize the signs of a very sick system.

It’s probably not coincidence that the major Republican contender for the presidency is a retired corporate raider.
This country remains mired in a capitalism-versus-socialism mindset which blinds us to a truth that was once crystal clear to an earlier generation: Finance capitalism isn't capitalism. The Goldman Saxons don't make things.

We need a new word for what those people do. Once the language is in place, regulations can rectify the problems.

Matt Taibbi:
The essence of Smith’s piece is devastating. He points to one simple, specific problem in the company: the fact that Goldman routinely screws its own clients.
Taibbi modestly neglects to tell us that he made the same point in his book Griftopia.
The resignation will have an effect on Goldman’s business. The firm’s share price opened this morning at 124.52; it’s down to 120.72 as of this writing (it dropped two percent while I was writing this blog), and it will probably dive further. Why? Because you can stack all the exposés on Goldman you want by degenerates like me and the McClatchy group, and you can even have a Senate subcommittee call for your executives to be tried for perjury, but that doesn’t necessarily move the Street.

But when one of the firm’s own partners is saying out loud that his company liked to "rip the eyeballs out" of "muppets" like you, then you start to wonder if maybe this firm is the best choice for managing your money.
Taibbi goes on to make the point I've made earlier:
But what we’ve found out in the last years is that these Too-Big-To-Fail megabanks like Goldman no longer see the margin in being truly trustworthy. The game now is about getting paid as much as possible and as quickly as possible, and if your client doesn’t like the way you managed his money, well, fuck him – let him try to find someone else on the market to deal him straight.

These guys have lost the fear of going out of business, because they can’t go out of business. After all, our government won’t let them.
Digby has some interesting history for us:
The change in Wall Street culture really got off the ground when the old partnership model turned into a publicly traded model. Yes, the elimination of Glass-Steagall led to riskier investing strategies, but as Michael Lewis has noted, the culture change on Wall Street began much earlier, back in the late 1970s if not earlier.

It's important not to glorify the old days of private ownership and back-room dealing, but it did lead to a culture of greater respect of clients. In a publicly traded enterprise, one and only one thing matters: the quarterly bottom line. So there's increasing pressure from the shareholders to invent smoke and mirrors accounting to fatten the profit margin while screwing the clients.
Digby believes that the culture on Wall Street is immutable. No point in trying to change it.
Taibbi may be right that regulation and hard-nosed reporting won't fix the mess on Wall Street. But clients leaving the big firms won't do it, either. The only thing that will is rethinking the entire publicly traded financial services company model.

True, that's an impossibly heavy lift right now. But especially in a world where financial services firms can trade global commodities anywhere if they find one country's regulations too restrictive, it's important to realize that the only real change will come from dramatically rethinking how business itself is structured, particularly in financial services.
What, then, to do?

My bell-the-cat suggestion runs along these lines: Get the public to understand that finance capitalism is not capitalism. If a company does not make a product, a tangible product, or provide a tangible service (like fixing your plumbing or grooming your dog), then let's call what they do by some other name. Not "capitalism."

I say that everyone who understands this basic distinction should "catapult the propaganda" in a million different ways, incessantly, tirelessly -- in books and articles and films and posters and songs.

Industrial capitalism is good. Finance "capitalism" is dangerous. It isn't even capitalism at all.

The former deserves the Adam Smith approach. And the latter? I'm not sure, and I'm open to suggestions. But we need to see some radical shit go down.
Great post.

Finance capitalism is what Karl Marx rightfully called fictitious capital. Money making money benefiting no one by a tiny few with nothing of value being created.
Finance capital is easily criticised. My own personal dislike is based on banks being in the priviledged position of being able to print their own money. The stuff the system pays us for our labour is the stuff they get to magic into existence. Why? The answer is that it makes the system run better, or it did in the past. The question now is whether the guys who print their own cash might be keeping a little too much for themselves. Why do we give them this right. Why give GS the right to take cash from the Central Bank? For stability? Thats just an argument based on the logic of the protection racket. Pay us or we kidnap your children.

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