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Another Perspective
Let Us Now Praise Famous Investment Banks
It took Greg Smith 12 years to figure out that Goldman Sachs wasn’t for him?
As the mavens of media once again tear into Goldman Sachs, like piranhas devouring a hapless cow that has waded into the Amazon, it is worth remembering a few things about the investment bank, highly successful for decades. The controversy of course is over the recent and very public resignation of investment banker Greg Smith, who has castigated the firm for its practices and culture.
Goldman deserves a lot of credit. How many companies know how to arbitrage an entire country, the world’s largest economy, and a global industry? The masters of the universe at Goldman have executed the challenge of Archimedes, the Greek mathematician of the ancient world, who said that if he had a sufficiently long lever and a place to stand, he could move the world. In its own way, the firm can move global financial markets with its calculus.
It is understatement to say that Goldman is a formidable competitor. While many large companies become distracted and obsess with corporate process, perpetual meetings and verbose PowerPoint slides that explain matrix management, Goldman analyzes the world with remarkable acumen and then executes with precision and excellence. To succeed like Goldman, you have to know how to read a global financial landscape: debt, equity, real estate, commodities, currencies, and regulations. This is a very difficult skill to acquire, and they do it exceptionally well.
Countries and economies have monstrous inefficiencies and swings. For the British, it was mismanagement of interest and exchange rates in the early 1990s. It is well-known that George Soros understood this, and made $1 billion by shorting the British pound sterling. For the U.S. in recent years, it was over allocation of capital into the mortgage industry, aided and abetted by banking regulation that assigned lower risk weighting to mortgages and mortgage-backed securities. This, along with freakishly low interest rates, encouraged overinvestment in derivative financial instruments. And so a bubble was born.
With mortgages long deemed sacrosanct and very low risk, Goldman figured out that there was a massive correction coming and that mortgage-backed securities and other related derivatives should be sold short, profiting mightily when it came time to buy those securities for delivery to counterparties.
In developing countries, there are also massive inefficiencies. Agricultural exports can temporarily drive currency valuations, over regulation protects middlemen that do not add value, and transportation systems such as road, rail, air and sea are fragmented and not integrated. This offers major opportunities to a firm that can eliminate inefficiency in the supply chain and profit from a poor country’s disarray. There is no media frenzy about that.
The trouble with Greg Smith is that he took twelve years to figure out that Goldman wasn’t for him. Of course, that did not stop him from receiving investment banking compensation, nor evidently has he offered to return it. Presumably an intelligent person could join a firm, attend meetings, assist with transactions and quickly discover if a corporate culture was somehow “toxic and destructive.” It should not require twelve years to acquire that kind of personal insight and then glorify it by resigning.
The U.S. Treasury, with all its brilliant financial sentinels and algorithms, allowed itself to be arbitraged by an investment bank. Being able to short a country’s securities or currencies is also a way of maintaining discipline, and when free markets gang up, they can undermine political decisions made by governments.
The world needs more of some elements of the Goldman culture — creative people with global vision, who will execute business adroitly and as ball carriers score touchdowns — not process bound executives who revel in new jargon and celebrate corporate fluff. The world needs more people who can read a global landscape and act on their conviction with imperfect information, knowing that to make money you have to either take risks that others will not take, or be smarter than they are, or both. It is called being an entrepreneur. Alleged ethical breaches and conflicts can and will be dealt with by the courts, and companies will need to vigorously police their own.
Restoring the American economy through entrepreneurship can be God’s work indeed. Perhaps President Obama will someday stand in the White House Rose Garden and say, “We are all investment bankers.”
About the Author
Frank Schell is a business consultant and former international banking executive. He serves on the Dean’s International Council of the Harris School of Public Policy Studies, University of Chicago, where he is a lecturer, and on the editorial board of the Chicago-based National Strategy Forum, which focuses on national security issues.
Letter to the Editor View all comments (29) | Leave a comment
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Ted| 3.19.12 @ 7:31AM
And at the same time, let us not forget that Goldman Sachs is a Democratic Party cash register......
R Martin| 3.19.12 @ 9:18AM
Not anymore.
Drake| 3.19.12 @ 10:41AM
Okay, they are a crony weather vane.
Mark Twain| 3.19.12 @ 11:23AM
Notice when Mitt Romney needs cash so he can run negative ads against Santorum, he goes to his Goldman Sachs buddies in New York. They can't lose. They have Obama in one pocket and Romney in the other one.
All on our TARP funds.
PCC| 3.19.12 @ 12:30PM
Greg Smith is a naive crybaby. His 15 minutes of fame has expired, thank God.
JimH| 3.19.12 @ 7:48AM
Golden Sacks is able to recruit better talent than the regulators because they pay much better. Being efficient in such actions as pushing dodgy securities on your customers and taking a house position against them is no virtue.
PattyMor| 3.19.12 @ 7:56AM
Well maybe they're just smarter than the average investment banker. Or maybe its just that they usually have their "guys" on the inside. A Goldman guy is usually the Treasury Secretary, and they're all over gov'ment in various ways. One of their "guys" used to governor of N.J. before he imploded a small hedge fund. So are they just smarter or they working the deals from the inside out?
Von Mises Jr.| 3.19.12 @ 8:02AM
Patty, you beat me to the point. Your lucid insights posted as I completed writing the same and selecting "submit."
Trebuchet| 3.19.12 @ 7:57AM
The name that stands out in this article on Goldman Sachs is George Soros who was feeding at the same Abacus trough as John Paulson. I know for a fact that Paulson and Soros used these products and had the portfolios stacked with CDO’s from Ameriquest. Why? Because they knew that Democratic presidential hopeful Eliot Spitzer was going to go after Ameriquest and the bonds written on their CDO’s were bound to drop drastically. I also believe all parties involved knew this would collapse the mortgage market. Why do I believe this? Ask yourself, how did Herb and Marion Sandler who owned World Savings the inventor of and the biggest writer of Adjustable Rate Mortgages and huge donors to liberal left wing causes know to sell their company just before the whole thing went south? I do believe this is just the tip of the iceberg and you will see class action suits on behalf of employees of several mortgage companies that were run in to the ground purposefully to make Soros, Paulson and GS billions, while they lost income, homes and savings.
Mark Twain| 3.19.12 @ 11:28AM
If Bush was a real president, he would have fired Paulson the minute he demanded a 750 Billion dollar bailout fund. This bailout and stock market crash lead to Obama, and that is the real sin I blame Bush for.
Todd S| 3.19.12 @ 11:31AM
The close connection between John Paulson (not to be confused with Hank Paulson) and George Soros is not well reported on but there is little doubt they were working together to short mortgage securities to make billions. John Paulson was so successful at it that he made over $20 billion by doing so. It is very interesting that big liberal political supporters like these guys and some others were the same ones who made huge fortunes by betting on the failure of the CDO's that were a direct result of Barney Frank and Andrew Cuomo among others pushing subprime mortgages with the reckless help of Fannie Mae and Freddic Mac. We know that Fannie Mae and Freddie Mac were staffed with Democrat political operatives who made multi-millions by running them into the ground and outright fraud like Franklin Raines. They made millions and some billions while the taxpayers were raped and millions of people who bought homes in good faith
are drowning underwater in debt thanks to reckless policies of our federal government and the collusion between liberal politicians and Wall Street crooks.
Von Mises Jr.| 3.19.12 @ 8:00AM
In the "crony capitalist" world of Goldman; political connections, and reading the legislative and regualtory assaults on capitalism is what one needs to understand to seek "economic rents."
Just like Pelosi, Kerry, Moran, McCaskill and Boehner were able to turn lucrative profits insider trading, Lloyd Blankfein has been a frequent visitor to the Oval Office where dictates originate.
JimH| 3.19.12 @ 8:36AM
Nice to see your posts Ludwig. Your contributions are always informative.
Von Mises Jr.| 3.19.12 @ 10:10AM
Thanks Jim. I know squat about Astronomy, chemistry, Aerospace and many other things. But I know political economics.
Good to hear from you.
Dmac | 3.19.12 @ 9:25AM
In a nut shell the ends justified the means. How good it is to read another article that basically says its okay to be immoral in business. I'm all for free enterprise, but in the last 20-30 years it seems our free enterprise system has completely jumped off the moral tracks. The banks , securities and mortgage companies that we were told were too big to fail should have left to to "free enterprise". Then there would have been a natural breaking up of some of the very large companies, the complete failure of one or two and new large companies formed.
Joe D.| 3.19.12 @ 10:11AM
Frank Schell did you work for Goldman before. I am pro capitalism. However how Goldman practices their crony capitalism I am not. I am sorry that the negativity tords them will be a bad reflection on the good companies in the industry.
But they deserve most of what they get.
cicero| 3.19.12 @ 11:00AM
Unless and until we get an accounting for all the taxpayers' money that went to these engines of free enterprise, I remain cynical about the whole process. I still maintain that the entire debacle could have been over in about 2 weeks had the government immediately gone back to standard accounting practices, and canned mark to market immediately, instead of waiting until March, 2009, after they shovelled about a trillion dollars out of the door, and into the coffers of the likes of Goldman. How was it that Goldman, counter party to AIG's hedge fund, was made whole, while everyone else took a bath on the bet? This article is a disgrace. Granted, the guy now pointing the finger should have been shot for disloyalty. However, even after feeding at the trough for 12 years does not make his disclosures untrue. The free market is for saps. Just ask the guys at Goldman. They will tell you that after the second martini.
Dmac | 3.19.12 @ 11:33AM
You're darn right its for saps. Three times in the last 11 years all of us have seen how the market laughs at our 401k's and thinks of them as their private stash. Yet the federal government has done nothing, nothing at all to put an end to it. As a matter of fact what they have done is made it even more difficult to make a withdrawl from your 401k. I don't mind paying the taxes if I make a withdrawl. I don't mind paying the penalty either, but a darn sure mind the government telling me what I can withdraw it for. It's my money, not theirs. They have no problem letting wall street steal from my 401k, but they do everything they can to keep me from getting my hands on my own money. Are you smelling the same collusionist activity that I am?
The next time the representative of your 401k, ie., Fidelity, The Principal Group etc., come to your office ask them what corporations they sit on the board of. You'll be astounded when they say none. How is it these comapnies that represent huge sums of money on the market have no say on any of these boards? How is it when a financial crisis hits they have no answer other than the statement of leave your money in the market. Sure leave it and watch 50% of it magically disapear. Sure if you leqve it you should eventually make it back. But your better off taking it out til things cool a bit and the volatility settles down, then put it back in. we should all beco0me wise to whats going on. We are saps and thats the first thing we should be wise to so we can quit being saps.
Steve| 3.19.12 @ 11:34AM
Allow me to pile on as well. The author is disingenuous at best. A young man joins a pirate crew and eventually tires of being a pirate and outs his shipmates as buccaneers; shall we cavil that he never should have been a pirate at all, and groan because he has not volunteered to return his cut of the swag? Okay - that still doesn't change the fact that it was a PIRATE SHIP! Goldman is the ultimate in crooked, inside-dealing *capitalism*. They are no more free market capitalists than the chinese communists.
Ladies and gentlemen; they are New York democrats - enough said.
cicero| 3.19.12 @ 11:39AM
They knew that Fredddie and Fannie were cooking their own books back in 2004. That is why they were fined about $400 million at the time. Unless and until someone goes to jail over this rape of the American public, I will not rely on our government to do anything but continue to enrich its friends (donors).
jay hoenemeyer| 3.19.12 @ 11:46AM
There was a joke that was old when I got to the Street in the 60's : Coming across the river from NJ , city mouse points out to country mouse all the yachts on the left side " Those are all the brokers' yachts " and city mouse points to all the flash boats on the right side " Those are all the bankers' yachts " And country mouse thinks for a minute and asks " But where are all the customers' yachts ?'
Dmac | 3.19.12 @ 12:00PM
Maybe its time we all de-vest from Wall Street and see if that gets their attention. Take the publics money away and the game is over because the wall street gang never uses their own money.
R Martin| 3.19.12 @ 12:00PM
I hope all of you do not mind, but I have forwarded your comments to the chairman of the membership recruiting committee for Occupy Wall Street. That organization is always on the lookout for new members woefully ignorant about Wall Street, markets, capitalism and politics.
They also believe the free market is for saps. Perhaps Mr. Cicero could suggest an alternative.
Dmac | 3.19.12 @ 3:39PM
R Martin,
Are you a day trader or a commodties speculator?
DatsunMark| 3.19.12 @ 5:28PM
Hey Frank, a word to the wise....it doesn't take talent and risk to be successful like Goldman Sachs. Just a nose for Sherry and some well connected friends at the Fed and Treasury and they'll feed you all the info you need. And your competition...guys like Paulson can wack Lehman down at your bidding.
Mark in LA| 3.19.12 @ 8:36PM
How many people would go to the crooked casino? Most people understand that the casinos have a built-in advantage and we understand what it is. However, if we found out the house was using crooked equipment and taking us we would be out of that casino in a New York minute.
Wall street has always been crooked. The dumb s*** on the street is finding out just how crooked. This has Wall Street worried so they get their shills to write articles like this.
Page Nelson| 3.19.12 @ 10:50PM
Frank Schell apparently didn't read Smith's OpEd. Neither, seemingly, did the other barking dogs gathered here. Smith said only two things in his essay: 1) Goldman changed over the twelve years that he worked there and became a place where he didn't want to work. 2) It became a place where clients were excessively disdained and their interests trampled or ignored. That's all. The only issue: did Smith describe accurately. The rest of this show is slobbering pooches and canine festivity.
POST American| 3.20.12 @ 12:13AM
---Putting aside genuine, decent,
accountable accountants --local banks
and well-meaning, benighted PORCH
'MAY---SIN---Re'-----
USURY is ABOMINATION.
LAW of MOSES
------------WORD of GOD
-----------------demonstrative FIGURE of CHRIST
---Take your pick.
And even 'A'---theists acquainted with
un-doctored history MUST admit
Unaccountable/Global USURY ---IS---deviant economy
It ALWAYS ---ALWAYS ------ALWAYS
begets EUGENICS
The ULTIMATE and, shall we say, 'perfected'
form of EUGENICS ------IS GENOCIDE.
HISTORY ---OUR---STORY and,
in three shakes of a lambs tail,
------------YOUR STORY-------------
bear witness to this archetypal TRUTH.
---------------HUAC/ Nuremberg 2012----------------
DWH| 3.20.12 @ 8:42AM
Yup, it took 12 years for Greg Smith for his personal integrity to overcome his need for a paycheck, but he did get there. Good. In contrast, by observation, the vast majority of Big Banking employees don't seem to get to that point. Not Good. After reading this article and the author's brief bio, this problem is not surprising - their finance education must be responsible, reinforced by lecturers similar to author Schell.
By the way, the relationships between GS, the Fed & Treasury has NOTHING to do with entrepreneurship - it reinforces barriers to entrepreneurship, to the benefit of the members Crony Club - as long as we can use your taxes & future earnings. Absolutely incomprehensible and morally reprehensible.