Friday, February 01, 2013

A voice in the wilderness

My light reading for this week was Greg Smith's Why I Left Goldman Sachs, the book by a 34-year old South African of Jewish ancestry (he discusses that frequently) who, two years ago, announced in a New York Times op-ed that he was leaving the firm, where he had been a rising star, because he could no longer stand its toxic values. It's a troubling book in dozens of different ways, and I will try to do it justice.

Smith came to the United States in 1996 or so to go to college and Stanford, and he clearly has been a high achiever all his life. He had been a summer intern in another financial firm, and he felt very fortunate to be a Goldman new hire. I couldn't help thinking about my older son, Smith's exact contemporary, as I read the book: he too had landed a prime consulting job when he graduated in 2001, but by the time of his graduation the recession had struck, and that weekend his firm informed all their new hires that they would have to wait a while. Eventually the firm bought them all out rather cheaply, and his life took a very different turn. Smith threw himself enthusiastically into life at Goldman Sachs. He was taking his Series 7 professional exam on September 11, 2001, but he remained at the firm despite the subsequent crash, and eventually, he became involved heavily in derivatives.

For unrelated reasons, I had recently been going through some of my old books about professional football, and I was astonished at the similarities between Goldman Sachs and a pro football training camp. Indeed, Wall Street loves jocks for their competitiveness and their ability to summon up adrenalin, and many of Smith's colleagues had been varsity athletes of one kind or another. He himself had competed in the Maccabee Games in Israel as a ping pong player. (He describes how he threw a much-ballyhooed match to a client in order not to antagonize him, which for me was one of the more painful moments of the book.) As traders--the entry-level job--the new employees live a life quite similar to on-line poker players playing at least five games at a time. They are constantly given trades to execute, all in shorthand, and they have to remember them, close the deals, and properly record them. A young trader who sticks an extra zero on a trade is likely to be screamed at like one of Vince Lombardi's Green Bay Packers missing a block. This is the job so many of our best and brightest undergraduates aspire to, and I couldn't help thinking that it involves a shockingly small amount of real thought. Later on, if they are good, they begin dealing directly with clients, which is another matter altogether. The clients of Goldman Sachs are other players in the financial community--hedge funds, mutual funds, pension funds, private equity firms, etc., etc, etc. None of them seem to spend too much time thinking about the long-term economic health of firms or national economies; they are relentlessly focused upon squeezing the last penny from each of an endless, constant series of trades.

We still call the industry Smith worked in the financial services industry, but the whole point of his book is that it isn't much about servicing at all any more. Let me lead with his conclusion, which is by far the most important part of the book: proprietary trading, which since the repeal of the Glass-Steagall Act has allowed investment banks to trade on their own while executing huge trades for clients, has turned our financial markets into rigged casinos. Goldman can make trades of its own based on what its clients are thinking and doing. It's like a card game in which the dealer--Goldman Sachs, or one of its competitors--is not only a player, but can see most of the other players' cards. Wall Street since at least the early 1980s hasn't run on the analysis of long-term economic trends or of the performance of corporations, it runs on information. The new rules give the big banks an unbeatable information edge and a license to drain money out of the economy. Smith doesn't say so in so many words, but he evidently doesn't think the Dodd-Frank Bill did nearly enough to stop this.

That wasn't all. In the old days, Smith at least was led to believe, Goldman dedicated itself to the best interest of their clients. They had to, because, without proprietary trading, they depended on their commissions to live, and the only way to increase their profits was to get more clients by building up their reputation. Those days are gone. Clients are now prey, and Goldman preys on them in many ways, as Smith describes. Goldman was caught, spectacularly, when it worked with hedge fund manager John Paulsen to construct a derivative composed of particularly toxic subprimes and marketed it to unwitting customers. For that they paid a fine which amounts to cab fare for them. Only one person went to jail, and Lloyd Blankfein of Goldman defended the whole deal in front of a Congressional committee as part of being an investment bank.

Smith comes across as a very charming innocent, which may be why he rose pretty far pretty fast. He is extremely discreet in his discussion of the Wall Street culture, acknowledging drinking, downplaying drug use, and ignoring sexual behavior entirely. He generally looked up to his bosses and there are hints that they used him in ways he didn't fully understand. But Smith is painfully honest and he quit because he couldn't bear lying to his clients. For that I salute him. I was depressed, though, that he doesn't even seem to be able to imagine a world in which investment bankers were really looking out for the long-term health of the economy.

Smith's colleagues cared only about money, money and more money. Some of them, and some of his bosses, were women, and I must say they tended to undermine the expectations of the feminists of 40 years ago who expected women to transform institutions once they got the chance. The values of the women of Goldman Sachs were identical to those of the men, and I can't say I'm surprised. Nor can anyone be surprised that the Obama team essentially left the Wall Street system intact. Smith obviously feels more market disasters lie ahead, and I'm afraid he's right. I am not confident, however, that even another one will lead to fundamental change.

9 comments:

Larry said...

"The values of the women of Goldman Sachs were identical to those of the men, and I can't say I'm surprised."

I remember having a conversation when I was in college back in the 70's as the women's right issue was unfolding. I made the claim then to a female friend that once women found themselves in the positions of power men were, they too would become as corrupt as their male counterparts. This has essentially been the case in almost all venues where women have crashed through the glass ceiling.

galacticsurfer said...

Perhaps when the rich are viewed again as in Dickens' novels as being simply evil and universal moral aspects are taken more seriously by the general population then the religious right will sort out from the "republican" business people who have no morals (how would puritans have thought?). I think of the Catholic church left (liberation theology) in Latin America which was supplanted by for example right wing fundamentalist churches in Guatmala(churhchgoers found it preferable going there to being killed for being catholic). These churches have no opposition to govt. power and the moneyed. It's strange to observe the catholic exteremism regarding birth control and liberal attitude in charity and poverty questions compared to the other churches. Mainline and Jewish are probably closer to one another being liberal in both repects (except perhaps orthodox Jews).

The Reagan coalition is of course composed of people with wildly different values and interests and when they wake up to that the party will move to the middle. There is of course the classic trick of pitting the working poor against welfare mothers and "poor white trash"(working low educated poor in south/midwest/suburbia) against equally poor blacks /latinos. All tricks of the moneyed interests to maintain control(divide and conquer). Anti- climate changers use the same tactics(my car is a God-given right to freedom and those liberals ain't taking it away). The word liberal is so loaded in America. If I were a "big-city-gay-jewish-communist-atheist" rolling in money and supporting all the govt. programs to help the "poor and lazy"(i.e. minorities) on the backs of every hard working "real American (=anglo-saxon protestant)" this would be approximately the meaning of the word in the USA, whereas elsewhere it just means taking an open minded view of things without judgmentalism. To say nothing of Gun Control. It is my God given right to carry a concealed gun and kill anybody as long as he looks at me funny and when he is dead I just say I felt threatened. So 20,000 dead a year and no civil war, Syrians would be surprised. That America works at all is a surprise. Perhaps it doesn't really work and never did it was just an experiment in entropy over several hundred years and the heat has almost all escaped.

Bruce Post said...

David, your linking of Goldman Sachs and pro football bring to mind this poem by the great theologian Walter Brueggemann. It is fitting to reference it on the eve of this year's Super Bowl. To wit:

A Prayer for Super Bowl Sunday

The world of fast money,
And loud talk,
And much hype
Is upon us.

We praise huge men whose names will linger only briefly.
We will eat and drink,
And gamble and laugh,
And cheer and hiss,
And marvel and then yawn.

We show up, most of us, for such a circus,
For such an indulgence.
Loud clashing bodies,
Violence within rules,
And money, and merchandise, and music.

And you Lord – like every day –
You govern and watch and summon,
You are glad when there is joy in the earth,
But you notice our liturgies of disregard and
Our litanies of selves made too big,
And our fascination with machismo power,
And our lust for bodies, and big bucks.

And around you gather, as every day,
Elsewhere uninvited, but noticed by you,
Those disabled and gone feeble,
Those alone and failed,
Those uninvited and shamed.
And you, Lord, whose gift is more than “super,”
Overflowing, abundant, adequate, and sufficient.

The day of preoccupation with creature comforts writ large.
We pause to be mindful of our creatureliness,
Our commonality with all that is small, vulnerable and exposed,
Your creatures called to obedience and praise.

Give us some distance from the noise,
Some reserve about the loud success of the day,
That we may remember that our life consists
Not in the things we consume,
But in the neighbors we embrace.
Be our good neighbor that we may practice
Your neighborly generosity all through our needy neighborhood.

tructor man said...

The bokk "Bailout" and the movie "Too Big To Fail" accurately describe this on a broader canvas, and both give troubling insight into the nexus between Wall Street and Treasury. The SEC is a puppy-dog for Wall Street, and the new Consumer Protection Agency's powers have already been cut. (A bright spot is the election of Elizabeth Warren to the Senate, but she's mostly alone in her aim to rein in Wall Street excesses).
The next fincial debacle will be much, much worse than 2008-09, and we may not recover, as it means a collapse of the debt bubble and unwinding of derivatives the way that morgage-backed-securities unwound to produce the collapse.
To my knowledge, the only mainstream voice countering this house of cards is Dallas Federal Reserve CEO Richard Fisher , who is adamant that Dodd-Frank is a farce, and urges return of Glass-Steagall.
The financial gloom may be overcome by the huge boom in natural gas, whose build-out to fuel US cars, trucks and buses could mean millions of new jobs, and huge redress of our deficit by export revenues. Nat Gas is 3x-4x more expensive in Europe and Asia, and we will export to them -- if Obama doesn't cave to the environmentalists and the new rail barrons like Warren Buffet...
We need to rapidly buid pipelines, LNG export terminals and a distruibution network with NG "gas" stations every 200 miles across the US.

PJ Cats said...

There's an interesting article on The New Republic about the same book. http://www.newrepublic.com/article/112209/michael-lewis-goldman-sachs# The gist of the article is that the institution Goldman Sachs has grown out of control, rather like the robots in dystopian science fiction novels. I think that is a good point. GS exists to run a short-term profit, no matter how and what. It does that, no matter who's at the wheel. It's like one of this Jean Tinguely machines that will clunkingly destroy itself. And our society along with it, but hey, what can you do?

E said...

Good post, I urge anyone who has not read "When Genius Failed" by Roger Lowenstein to read it. It brings home how we have not learned from the recent past as well as the nexus between Wall Street, academia, and the failure to regulate.

Bozon said...

Professor

Great stuff.

I read PJ's comment, and went to Lewis' article......

That is a good thing to do, it seems to me.

all the best,
GM

Locke said...

David,

Let me just say that your blog here is refreshing. My hope for my generation (I was born in the late 80s) is that they will open their eyes and see these things.

I look forward to future posts.

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