Daily Commentary: On Goldman Sachs
Topic du Jour: Goldman Sachs
Everyone is talking about Goldman. I have nothing to add publicly. But let me express my thoughts here in the privacy of our paywalled-enabled environment. Greg Smith was right. Something is seriously wrong, but not just at Goldman; it is everywhere on Wall Street and the City of London. Two years ago, I wrote about it:
What has happened is that major international investment banking groups have taken on a sales & trading ethos of caveat emptor where once the client was king. In my view, this is a direct result of the rise of securitization, structured products and derivatives as a profit center in financial services and is the major contributor to Wall Street’s new unfortunate public image as a casino.
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Goldman is run by traders now, not bankers. This shift is evident everywhere else on Wall Street and the City of London. And I would put derivatives front and center…
The key in all of this was that a lot of new business was linked to issuing securities even if it originated in the advisory business. The model went from advise- originate- make market to (advise)- originate- make market. And so the origination of securities became aligned with selling and trading them instead of advising clients. And the appetite for new products increased.
Of course, there were only so many bonds and stocks one could sell (think of Pets.com or PSINet), so naturally most of the new products were derivatives. In structured products, the mortgage-backed securities model was expanded into every conceivable asset class – remember David Bowie’s Bowie bond issue? And OTC derivatives became an immense source of revenue when it was clear they would not be regulated.
So, naturally, the traders became more and more dominant. They already were the power center at firms like Bear Stearns and Lehman Brothers. But, eventually they came to dominate all of the major investment banking groups from Goldman to Deutsche Bank to UBS to Merrill Lynch.
I suggest you read the whole piece.
A few more things:
ALWAYS shoot the messenger. I say that sarcastically. Greg Smith is the messenger. So he will get shot up by the typical defenders of the status quo irrespective of whether what he says is true or not. For example, some people have accused him of title inflation, calling himself an Executive Director when he’s just a lowly Vice President. Executive Director is the title for VPs who are London-based. It’s the same thing. Greg Smith was in London when he resigned, So he used the ED title instead of the VP title. It was the same thing at Morgan Grnefell/Deutchse Bank when I was there.
See here on Goldman’s site:
https://www.goldmansachs.com/careers/choose-your-path/our-people/sebako-profile.html
Anyway, people who don’t like the message will always find an excuse to tear him down. It’s pure confabulation. The reality is that we wouldn’t have had a financial crisis if everything was just hunky dory. Clearly, something is seriously wrong on Wall Street and in the City of London and Greg Smith is giving his version of exactly what. What he writes rhymes well enough with what I wrote to tell you he’s on the money.
Read the Goldman-related articles below. I think they are more even-handed than many of the others floating around the Internet.
That’s it. Here are the links.
P.S. – I am not a Goldman hater. Mostly, I blame government.
cash on the sidelines, as defined above, is at its highest level in roughly 30 years, should this be taken as a sign of pent-up demand that could lead to a huge rally once unleashed? We would still argue it is not. If and when investment opportunities become more enticing, we will see these levels fall from 14.24% to the historical norm of the past 30 years of 10%-11%. It is not as though companies currently have 40% of their assets in the form of cash waiting to be invested, as was the case in the 1950s.
Hello, I am a current JPMorgan Chase employee. This is an open letter to all commissioners and regulators. I am emailing you today b/c I know of insider information that will be damning at best for JPMorgan Chase. I have decided to play the role of whistleblower b/c I no longer have faith and belief that what we are doing for society is bringing value to people. I am now under the opinion that we are actually putting hard working Americans unaware of what lays ahead at extreme market risk. This risk is unnecessary and will lead to wide-scale market collapse if not handled properly. With the release of Mr. Smith’s open letter to Goldman, I too would like to set the record straight for JPM as well
The public reaction over this week’s Goldman Sachs revelations speaks volumes of the firm’s power and the public rage over its ethical lapses.
The problem for Goldman is that it’s hard to question the motives of Leo Strine, the lead judge on the Delaware Court of Chancery and perhaps the most revered judge in the United States when it comes to corporate law. In a Feb. 29 ruling, he said much the same thing about Goldman as Mr. Smith does.
A company whose value is dependent on the continued success of two key products, now has a larger market capitalization (at $542 billion), than the entire US retail sector (as defined by the S&P 500). Little to add here.
Mozambique-born Ibraimo Alberto was the only black man in the eastern German town of Schwedt. But half a year ago, after 21 years, he fled the daily racism and moved to the western city of Karlsruhe with his family. The social worker and former boxer is trying to come to terms with his experiences.
Weighed down by higher-than-average unemployment, student- loan debt and concerns that the economy will continue to struggle, Americans 18 to 34 years old are increasingly reluctant to shop, according to researcher WSL Strategic Retail.
US non-financial corporate cash holdings rose to $1.24 trillion at the end of 2011, reflecting the strength of companies’ operations in emerging markets and the negative tax consequences of repatriating cash to the US, according to a new report from Moody’s Investors Service. Apple Inc., Microsoft, Cisco, Google and Pfizer held the largest amounts of cash, says the report. Those five cash kings have $276 billion, or 22% of the total non-financial corporate cash balances, up from $207 billion, which represented 17% of the total in 2010, says Moody’s. The top 50 holders of cash account for $749 billion, up 13% from $665 billion in 2010.
After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it
Everyone is all abuzz this morning about the acerbic resignation letter of Greg Smith, head of the firm’s United States equity derivatives business in Europe out of their London office.
Fast ein Viertel der deutschen Arbeitnehmer erhält einen Stundenlohn unter 9,15 Euro brutto. Besonders im Westen stieg die Zahl der Niedrigbezahlten.
Sure, something’s wrong. But I wouldn’t limit it to Goldman, or financial services for that matter. The cultural decline Smith points to is pervasive.
See: government/corporate cronyism and the grants/loans/favorable legislation and regulations that are born of this
See: the congress/lobbyist revolving door
See: the student loan scam, bankruptcy remote debt and a worthless degree
See: public sector unions and the pension crisis they have brought us
See: hollywood, and the end of any sense of restraint in entertainment
And on and on and on…
John,
I agree 100%. It,s not just Goldman and as you say, not even just financial services either. The terrible thing is the same broken corpoatism that got us here is still with us, as if we need things to be even worse before we change it. Sad and depressing
Ed