On Wednesday, Greg Smith quit his post as an executive director at Goldman Sachs Group Inc. (GS), one of the world’s largest investment banks. That day, the New York Times published Smith’s op-ed explaining he could no longer work at a GS that chronically preys on its own clients – or “ripping their eyeballs out,” as GS veterans call it.
On Thursday, GS shares lost $2.2 billion in value. A seismic event, that (they regained it later in the day).
The talk of the global financial community this week is that Smith’s allegations are on the mark. And that four years after GS helped cause the Wall Street meltdown and the Great Recession that followed, now rippling across Europe, GS has not changed its ways.
If GS, Ground Zero of the worst capitalist failure in eight decades, cannot or will not reform itself, there’s not much hope for the financial system. And more reason to believe experts who say it will keep crashing every decade or so.
Speaking of certain GS colleagues, Smith wrote: “It makes me ill how callously people talk about ripping their clients off.”
A near-12-year veteran of GS, Smith had been repeatedly promoted. He epitomizes the best and brightest that GS prides itself on recruiting.
That today’s GS culture then twists these folks into treating GS’s own clients – or “muppets,” as Smith says his colleagues called them – as marks to be hoodwinked makes one doubt that the Street will ever reacquaint itself with fair dealing.
After all, GS has been given every break to survive, and to reform itself.
GS was rescued as part of the unprecedented $700-billion taxpayer bailout of Wall Street in 2008-09. That rescue was orchestrated by former GS CEO Hank Paulson, then-president George W. Bush’s treasury secretary. That bailout, not “Obamacare,” is what first inspired the creation of a Tea Party movement enraged by the “rewarding” of fat-cat bankers for their gross incompetence.
At the height of the crisis, GS and Morgan Stanley Co., the only other survivor in the meltdown of America’s Big Five investment banks, hastily converted to bank status to enjoy the protections of Uncle Sam, with the blessing of the U.S. Federal Reserve Board. And GS was not cut out of the lucrative Treasury bill auctions that should have been the least of its punishments.
To repair the self-destructive culture of GM, U.S. President Barack Obama was compelled to sack the automaker’s CEO and board of directors. But GS’s top five executives, who trousered almost $70 million in pay last year, are safe in their jobs.
And so GS sees no upside in a culture makeover.
In 2010, the U.S. Securities and Exchange Commission settled charges against GS of defrauding its customers, with GS paying $550 million in fines, a Wall Street record.
Just as it indirectly lent to Florida 30-somethings who couldn’t afford the monster homes they bought, GS helped Greece load up on still more unmanageable debt. That was scant months before the possibility of a Greek default ignited fears of defaults across Europe – the continent’s worst crisis since the end of the Second World War.
Just last month, Leo Strine, chancellor of the Delaware Court of Chancery –the go-to venue for U.S. corporate disputes – painstakingly dissected GS’s role in the merger of two giant U.S. energy firms. Strine found that GS had a huge financial stake in one firm, and stood to pocket a whopping fee from advising the other – a screaming conflict of interest.
Strine, recall, once found that Conrad Black’s testimony in his court lacked “the ring of truth” regarding Black’s unorthodox dealings in the sale of a U.K. newspaper. In February, Strine said of GS that its “kind of furtive behaviour engenders legitimate concern and distrust.”
GS might not quite be the “financial snake pit” described by U.S. Sen. Carl Levin, whose committee investigating the Wall Street meltdown released 900 pages of internal GS documents showing GS’s role in helping trigger the 2008-09 financial crisis.
But it was Wall Street itself that dumped GS’s shares. Wall Street that doesn’t buy GS’s avowal that Greg Smith’s assertions “do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients,” as GS boasted Thursday.
You might ask how we got here. And the answer is that investment banks, private partnerships since the days of the Medici, went public. GS was the last giant to do so, in 1996. And so the partners’ own money is no longer on the line.
Washington helped, expanding the ambit of mischief in which investment banks could engage, often without adequate regulatory supervision.
The timing of the Smith shocker couldn’t be worse, as U.S. federal regulators are putting the finishing touches on a new rule that would re-instate a division between investment and commercial banking.
But you can be assured that nefarious operators will find ways around the rule. The Canadian approach was for our Big Six banks simply to absorb our investment banking sector. The banks easily imposed their cultures of prudence on the cowboy antics to which securities underwriters and traders are given.
Character is all. You cannot legislate it. Americans, priding themselves as a land of laws, not men, “solve” problems with loophole-ridden laws. We have our laws, too. But the Canadian ethic leans heavily on the Golden Rule, of doing the right thing even if the wrong thing is perfectly legal.
We are not choirboys up here. But the U.S. financial system is rotten at the core because it is driven by a greed that carries only trifling consequences for malefactors. Excessive compensation is a cancer on capitalism, and unless it ends, free-market economics is doomed. One shudders at what would replace it.
A neighbour brought to my attention that the aforementioned Conrad Black faulted me in another paper last Saturday for “snorting out of the same undergrowth as other pathological Star antagonists,” by which Black referred to colleagues I hold in high regard. This is good sport, of course. It promptly called to mind the response of Rupert Murdoch, to whom Black’s slide in financial fortunes can be traced, when Rupe was labelled a “schlockmeister” by Ted Turner. “I’m reminded of something Disraeli once said to a colleague in Parliament,” Murdoch said. “Honourable sir, it’s true that I am a low, mean snake. But you, sir, could walk beneath me wearing a top hat.”
Original Article
Source: Star
Author: David Olive
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