This post will have two somewhat unrelated topics; both are pretty short, but I find both pretty interesting.
Goldman and Greg Smith
The past few weeks, the biggest story in the financial press has concerned Goldman Sachs executive director Greg Smith's resignation letter, printed in the New York Times op-ed page. Smith was an executive director in the London office who decided he was bolting, and would try to take a shot on his way out the door. The reaction was predictable-- the left and populist right jumped on it as further proof that big banks like Goldman put the interests of their clients ("muppets") behind the firm's bottom line. The right saw it as another disgruntled employee kicking a bank when it was down.
The truth is, both are probably right to a substantial extent. I don't doubt that the facts in Smith's op-ed are all, or at least mostly, true. I don't doubt that there are managing directors who call their clients muppets, that the firm prioritizes its bottom line over the interests of its clients, and is ready and willing to throw them under the bus if their interests aren't perfectly aligned with Goldman's. But Smith's claim that the Goldman he joined in 2000 is unrecognizable in 2012 is deeply disingenuous. He claims that its CEO Lloyd Blankfein and COO Gary Cohn who have "ruined" the firm that he joined. That seems to be a patently absurd charge-- five years ago, Goldman was putting together transactions like the infamous Abacus deal that involved dumping junk assets on less aware (though technically not "unsophisticated") parties. Instead of bolting then, Smith waited another 5 years. But Goldman putting its own interests ahead of its clients is hardly a new development-- in the 1970s, they were dumping bonds of the bankrupt Penn Central railroad on their unwitting clients. In the 1920s, they launched the Goldman Sachs Trading Corporation, a closed-end fund that was, in essence, a Ponzi scheme. Again, Goldman's clients lost. So Goldman hardly transformed from paragon of Wall Street to vampire squid in a 6-year span. Or even a 12-year span. To a certain extent, they've always been that way.
None of which is to say that Goldman is unique-- given the opportunity, Morgan Stanley would do the same thing in an instant. If Lehman and Bear Stearns were still around, so would they. Goldman gets the bum rap because they're better at it than their rivals-- in 2004, Goldman was loading up on mortgage-related assets, neck and neck with Merrill, Bear, Lehman and Citi. But in 2006 and 2007, when those rivals were accelerating their exposure, Goldman was dumping its holdings. And when the bubble burst, Goldman came out ahead while its rivals fell into what was probably insolvency. In cutting its exposure, Goldman threw its clients under the bus for its own benefit. But if its rivals had had the same insight Goldman had, they would have done the same thing. And Goldman's clients thought that they were getting a good deal. So the story isn't as black and white as some would claim.
And it's probably true that there have been times when Goldman has been a good fiduciary-- in the 1950s, when Sidney Weinberg was at the helm, Goldman was Ford's banker, managing the company's IPO and taking, by today's standards, minuscule fees in the process. But those periods were probably the exception rather than the rule.
My instinct about Smith, though, is that he was ready to stay the good soldier until he fell out of favor-- contrary to the press's account, he was hardly a bigwig. At Goldman, an "executive director" in London is the equivalent of a vice president in the US. At the firm, that's a middle management position-- the equivalent of a fourth- or fifth-year associate at a law firm. My guess is Smith was passed over for a promotion and/or fell into disfavor. He felt aggrieved, decided Blankfein and Cohn were at fault, and decided he'd throw them under the bus on his way out. It may well be true that there was some culture change from when Smith came in (with Hank Paulson at the helm) to the time he left, just because Paulson was a dealmaker, while Blankfein was a commodities salesman. But I'm also certain that the Goldman Smith entered in 2000 is the same Goldman, for all intents and purposes, that he left in 2000. What changed wasn't the firm-- it was Smith's relationship to it.
Obama and the Hedge Funds
Even more interesting, to me, was an article in the latest New Republic by Alec MacGillis about the frayed relationship between the hedge fund industry and President Obama. There's been a pretty remarkable move of managers like Clifford Asness (AQR Capital) and Ken Griffin (Citadel) into the Republican column. What MacGillis underlined was that it hasn't necessarily been the polices of the Obama adminstration that have driven the managers away-- it's been rhetoric. The administration has pushed somewhat for elimination of preferred tax treatment for capital gains (though hedge funds are typically in and out of trades so quickly that they don't get the tax benefits anyway), and has used some slightly cool rhetoric in describing hedge fund managers ("fat cats" is about as insulting as it got), but it hasn't done much that would keep hedge fund managers from making hundreds of millions, provided they make the right bets.
What strikes me as the source of their anger, though, is these managers' incredibly thin skin. Because, as much as they may not think so, these "masters of the universe" seem to want acceptance more than just about anyone else. Their complaints amount, in essence, to Obama and Larry Summers not taking the time to read their memos, calling them fat cats, and refusing to coddle them. It's kind of ridiculous that they've essentially decided to "take their ball and go home" because the President looked at them funny.
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