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Goldman Sachs: Proxy Piñata

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Physician, heal theyself. - Luke 4:23

 

March Madness starts this week, so I'll keep this as tight as possible. A few days ago, a Goldman Sachs executive named Greg Smith quit his job. No big deal, right? Happens every day. Not exactly. This Mr. Smith published his resignation in the New York Times, in what was touted as a scathing criticism of Goldman's "screw the client" culture.

Again, no big deal. Who doesn't assume Goldman, or for that matter any Wall Street bank engaging in its own proprietary trading, is screwing thousands of its customers?

Still, I read the article, figuring that to have made the Oped pages of the Times, it must've contained at least some admission of shocking illegal behavior.

I was wrong about that. But the piece did lead me to a curious observation. Absorbing Mr. Smith's description of Goldman Sachs, it's clear only a few paragraphs in that he may as well have been describing eighty percent of all mid-sized to large corporations, professional firms and governmental entities. From hospitals, to federal and state agencies, to banks, to manufacturers, to law firms, to consulting firms, to hedge funds, to utilities, to just about any hierarchy in which more than fifty or so people get together with the shared goal of making money or pushing the organization's interests, the malfeasance and enabling culture decried by Mr. Smith are ubiquitous.*

If there's anything at all shocking about his article, it's not that Goldman is uniquely malignant. It's that almost all of us, or at least those of us who work in sizable hierarchical structures, where we can get away with Goldman-like behavior, are guilty of the same failings Mr. Smith attacks in his article. The deeper takeaway from Mr. Smith's critique is that it isn't about Goldman at all - that his ex-firm is merely a proxy target for the moment, a convenient whipping boy on which to vent a broader disgust for ourselves and what our business culture has become.

Consider Mr. Smith's sharpest criticisms:

 

"To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money..."

In these brutally competitive times, can anyone name me a business in which this is not the case? If there's any special indictment for Goldman here, it's merely one of degree - that they defraud their clients on a much larger scale than the thousands of corporations lacking access to so many fattened "marks."

 

"I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work..."

I wonder where Mr. Smith might go? If enjoying his work, as opposed to tolerating it for money, is a prerequisite, he's ruled out ninety percent of corporate entities. And even if government functionaries liked what they do, he's far too bright for that sort of paper-cycling. The poor man would go insane in such an environment. This leaves him to what career path? Poet? Arborist?

 

"I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs..."

We all start out that way. Then reality sets in. That reality being, we are at the end of a global debt super-cycle, the impending final act of which is not going to be pleasant. The smart aren't greedy, but scared. They realize we're in a "let's pretend" economy. They realize though markets may climb a wall of worry, they will eventually tumble back down that same sheer face, as they have done without fail in the past. And when that happens again, there won't be any stomach for bailouts. The next crisis will probably cause a radical restructuring of the way we live. In such a high stakes game of musical chairs, the only shrewd move is to grab as much as you can as fast as you can, and protect it.

 

"What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."

Is this any different than the thousands of doctors and medical practices performing unnecessary tests every day to maximize revenue? Any different than the millions of marketers selling people products and services they don't need, the purchase of which (on credit, almost always) will likely imperil their finances, simply to book a sale? Any different than the realtor trying to pawn off garbage inventory with no hope of appreciation as "fixer uppers" in "up and coming neighborhoods"? The lawyer using a bought-and-paid for expert report from a "whore" to argue a factual narrative he knows is improbable, if not a flat-out lie, to a jury?

In our crassly commercialized society, a client is a customer, and a customer is sold things, by salesmen. The majority of sales work necessarily involves, at least on some level, persuasion. To convince a person to buy what he doesn't need requires advocacy. Advocacy involves shading facts. And shading facts is, as much as PR hacks, lawyers, and salesmen would protest otherwise, a form of lying.

That salesmen of discretionary purchases often have to bend truth to move product is not Goldman's fault. That's just the reality of Capitalism - no different from the dance we see every day on used car lots around the world. In most deals, one side's getting the better of the other. Somebody's paying more than the cost of producing the thing being sold, or the price for which the seller acquired it. In that difference lies the profit margin, the grease of the gears of commerce. It'd be nice if every transaction could be entirely honorable, but to generate the aggregate economic activity we need to survive, such a scenario is impossible.

 

"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. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact."

If consumers could observe how marketers describe them as "targets," how they fine tune campaigns to prey on Joe Sixpack's reptile brain, neuroses, and emotional triggers to sell him products, or get him fervently behind some candidate, or to hate another, often using the same tricks we use to train dogs, they'd never trust another advertisement in their lives. And these professionals are picking on the common masses - getting the most easily manipulated among us to think they need a new pair of shoes every week, liposuction, or a Cadillac SUV. Goldman may be lying, but give the bank some credit for at least having the decency to prey on worthy opponents.

Regarding humility, really? Mr. Smith expects a crowd of obscenely paid young men to keep their egos in check?

Finally, as to "illegal behavior," the only reason Mr. Smith says he doesn't know about that (other than being smart enough to know he'd be roped into a investigation if he disclosed any in a national newspaper) is because white collar crime isn't illegal until a prosecutor says it is. Check the US Code. A crime as seemingly pedestrian as insider trading isn't even defined. Prosecutors apply a know-it-when-we-see-it test cobbled together from case law. A few obvious, or high ticket, violators like Raj Rajaratnam and Martha Stewart get nailed, but the overwhelming majority of practitioners get away with it. (And that's just one of many white collar crimes, offered only as an example.) Why? Because the law recognizes commerce is combat. The soldiers in the trenches, including many millions of professionals and businessmen beyond those at Goldman, can only be policed so much. To keep the economy going, they have to be allowed to fleece and be fleeced, and if the price of that is some becoming more successful than we'd like, so be it. The alternative - less economic activity - is worse.

 

"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..."

If that were true, it would have already started. Goldman would be on the wane, and the New York Times would have little interest in an editorial spilling its inside secrets. The actual truth is, people will deal with thieves, liars, and cheats as readily as they will with the honest given the right profit incentive. They'll hedge the risk of being screwed by doing more homework, and negotiating more aggressively. This creates more honesty in the system as Goldman, or any other bank selling garbage to its clients, inevitably runs out of lies. There are only so many ways to conceal truth, and people talk. The trouble with screwing people isn't becoming a pariah - it's becoming obvious. If everyone knows how you're creating profit at their cost, they'll preclude your devices. They'll make money off you.

 

"These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave..."

Think that's a conflict of interest? Hang out in any of the hundreds of law firms around the country where partners routinely hold meetings discussing how to generate more billable hours. How do you think they do that? By encouraging their members to work cases in a more efficient manner? If that business model doesn't meet your standard of plausibly deniable fraud, check out what business consultants charge per hour to run stock models and pump out canned studies for their clients (most of which provide obvious answers, and recommend more consulting). Or perhaps listen to a group of bank executives managing credit card portfolios discuss revenue streams accruing from delinquency fees on cards given to borrowers who should never be offered credit. "How much did we make off the client?" isn't the question. It's "How much can we make off the client?" And if you want to get specific, "Should we gouge the client in a one hit deal?" or "Are they the kind of whale we can tap for greater gain over the long haul?"

 

"I hope this can be a wake-up call... Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer."

Ninety five percent of people work only to make money. They perform dull, stressful work (historically described as "merchant class" toil because of its baseness) no one would ever chose to engage in but to accrue wealth. And as productivity soars with technology, it's only getting worse. Modern man runs on a cruel, unforgiving timetable - trapped in a consumer society, wired on a deadly cocktail of affluenza and paranoia. Keeping up with $5.00 a day competition in Asia, while keeping up with Joneses, while simultaneously attempting to save for a future in which a computer makes sixty percent of what he does obsolete. We're all obsessed with money. Nobody has a choice. If Goldman should fail because of this obsession, then it will fail among thousands of other firms just like it. It will collapse among thousands of similarly fallen health systems, law firms, accounting firms, advertisers, unions, movie studios, government agencies, and just about every other organization filled with individuals loyal only to the concept of "More! Faster! Now!"

 

Goldman Sachs, the "Vampire Squid," "Government Sacks," or whatever pejorative we might apply, is nothing but a proxy, a piñata we can abuse to divert our gazes from a much bigger problem. When we attack it, what we're really attacking is a symbol of the dark side of our own human nature. If we're at all candid with ourselves, we'll admit, if we could hide behind the power and influence Goldman enjoys, we'd probably engage in a lot of the same chicanery it allegedly has.

How am I sure of this? Because most of us already do so. Consider the corporation or agency you work for right now. Is it large, perhaps multinational? Well, then it's probably done many distasteful, harmful things you'd never have done directly, or even the people in the company immediately responsible for the decisions leading to those actions would not have done on their own. But give us the "mob comfort" of working in a large organization, behind the corporate veil, and we'll behave, well, like a mob. I've sued and defended more corporations than I can count. "Inc." is a beautiful thing. A man under the corporate veil can engage in all sorts of nefarious behavior, but when called on the carpet for it, he has the handy "Nuremberg Alibis": "I was just following orders... I was only responsible for a disconnected piece of it... Everything was done in my corporate capacity... I am not individually responsible."

At some point in our lives, we all receive income from a corporate structure (or for the government employees, a Kafkaesque bureaucracy) in which this sort of cowardice is rampant. Allow men to push blame off on the organization in which they work - a fiction which can never be brought to account for its actions like an individual - and they'll engage in endless abuses. Pollute with abandon? Lie on food labels? Obscure terms in loan documents? Make a cancer-causing product more addictive? Bribe-- ahem, "Donate to" Congressmen to modify regulation to suit themselves and damage competitors? Pay doctors to push unnecessary drugs on patients? Sell predatory loans to the day-time TV watcher demographic? The list of sins otherwise decent men will engage in when grouped behind a common interest is endless.

The ugliness we employ to suck money from one another today would trip P.T. Barnum's gag reflex. We are, frankly, a society of grifters. And we don't like it. But we can't fathom an alternative. The business of America is supposed to be business. Only that business has now been spread around the rest of the world. What we have in its place is a nation of "dealers," compelled to routinely engage in grey-area frauds - things that aren't exactly crimes, but aren't honest or ethical either. Some of it's small and, in the case of behemoths like Goldman, some of it's big. Nearly all of it, and certainly the worst of it, emanates from corporations, professional firms, and political and governmental entities. And almost all of us are part of it. Almost all of us in some way, at some time, even if only indirectly, profit from conduct like Goldman's.

The only reason we vilify Goldman is because it's better at the game than almost everybody else. It operates at the top of a sector of the economy where the profits accrued from a good fleecing are literally millions of times the size of those a common marketer, lawyer, consultant, or salesman gains from his commercial pickpocketry.

The truth for almost everyone reading this piece is, We Are All Goldman Sachs. The Vampire Squid is a reflection of an environment we allowed to flourish, and in which we revel - the perfect commercial predator of our times. A monstrous collection of the nihilist tendencies in every human cerebellum encouraged, supercharged, and aimed at the goal of making money. To single out Goldman as Mr. Smith has, however brave and laudable his letter might be, is shooting at the player instead of the deserving target: the game. That we're uncomfortable considering the broader failings of our society's debased business culture is no excuse to slay a proxy whose only crime is excelling in the system we've created and continue to enable.


* Government agencies are included in this list because, despite the fact that they are not created for the purpose of making money, their prime objective is self-preservation, and enhancement of funding wrung out of taxpayers. ^

 

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