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.”
