These days, we’re all disgruntled workers
The average Goldman Sachs employee earns in excess of $350,000 per year, and we’re assured Greg Smith, who most visibly quit his job there last week, was paid substantially more.
And, in leaving his long-time employer, Smith didn’t abandon just a fat salary. To regain his career freedom, he knowingly forfeited a considerable sum in deferred compensation as well.
Most people in the world, of course, can only dream of being so highly paid for their work, so it’s a good assumption that a very large percentage of the working population has summarily judged Smith’s resignation as an act of complete insanity.
If they could coach him, they would say: “Go back to Goldman, Greg! You have a terrific deal! Subordinate your concerns about a declining corporate culture and profit-at-any-cost leadership. You have a penthouse to go home to at night!”
But this scenario is a complete fantasy. Regardless how little or much they are making, U.S. workers have begun to quit their jobs – in droves – to go in search of organizations, and leaders, they feel will better support their needs. As Smith’s actions show us, pay no longer is the driver of engagement or job satisfaction it once was.
Last year, a MetLife study published in USA Today showed that at least one in three U.S. workers was quietly planning their departure and already had begun looking for a new job. Stunningly, the report noted that most bosses were oblivious to how unhappy and inherently disengaged their employees had become, and would be caught flat-footed when their workers walked out.
Right after Thanksgiving, Time Magazine reported the first evidence that MetLife’s predictions might be right: “With 14 million people still unable to find work and job prospects seemingly bleak … in September, 2 million people gave notice.” Extreme unhappiness on the job was cited as the reason so many workers would take such a risk. Inherently clear was that a lot of people had lost faith in the leaders for whom they worked.
Goldman’s capitalistic monoculture
Greg Smith doesn’t have any new criticism of Goldman Sachs in his New York Times op-ed today. Nor are his points as detailed and documented as the SEC’s allegations in the ABACUS case.
Instead, Smith is selling a warm, self-congratulatory glow to anyone who thinks that Wall Street used to be great. In some halcyon era, according to this view, Wall Street’s success was great news for employees, for customers and of course for the economy as a whole. And it was great because it was built of great things: “teamwork, integrity, a spirit of humility, and always doing right by our clients … It wasn’t just about making money.”
In Smith’s moralistic telling, Goldman’s success was the result of its culture. And as TED has pointed out, that’s a vision of its business that has been sold for a long time, at least since the days of Sidney Weinberg.
There are many ways to describe what “culture” is at Goldman Sachs: a patina, a justification, a means, a way to turn bright, hardworking college grads into profit-generating managing directors. But the key is that this culture was always an ideal that Goldman actively sold to clients and pressed into employees. Having gone through a month of analyst orientation, I can tell you that it is effective and takes a while to wear off.
But when it does wear off, and for me it was sometime after my second year, you realize the extent to which these values are pushed on you — and who benefits from their sale. The culture of Goldman Sachs is sold for the reasons that anything else is sold. It’s the result, money, that makes any bank tick. Goldman Sachs is no exception.
Smith is far from the first Goldman employee to think that clients weren’t valued. In 2006, a few days after Lloyd Blankfein was announced as the new CEO, I was getting a sandwich at a now-gone lunch spot near 85 Broad Street, then the firm’s headquarters. Waiting in line, I overheard a conversation between two bankers talking about how, with a trader running the firm, the client franchise was doomed. It was not a new argument then, and I heard it repeated afterwards from other bankers. That was six years before Smith decided things were so bad that he couldn’t look fresh-faced college kids in the eye while handing them his GS business card.
Smith never seems to have understood that the very powerful and very wealthy people he counted as colleagues might be less than what they said they were. Now, 12 years, three promotions, two recessions and one financial crisis later, Smith is devastated when he realizes that the place he used to work is nothing like what the “Human Capital Management” manual said it would be. It’s only now that he realizes that the three ways to become a leader at Goldman Sachs revolve around making money? That is not a tough conclusion to come to. And certainly not one that takes 12 years.
But your premise assumes screwing over clients maximizes profits.
from Stories I’d like to see:
Crash winners, the litigation world series, and Defense budget boondoggles
1. Crash Winners
Here’s a new entry for the lists of winners and losers that get published this time of year: The ten lawyers, bankers, consultants or accountants who reaped the most from the financial disaster of the last three years.
The poster-boy would likely be Irving Picard, a partner at the Cleveland-based international law firm of Baker & Hostetler. Picard is the court-appointed trustee responsible for recovering money for Bernie Madoff’s victims. From the sketchy clips I’ve seen, it appears that Picard and his firm have already received more than $200 million in fees for their work from the court overseeing the cases. Is that true?
Then there are the lawyers involved in bringing and defending all those multi-hundred million-dollar and billion-dollar claims against the banks that packaged and re-sold troubled mortgages and other securities. Or the accountants, lawyers and bankers sorting out the assets and liabilities in the wake of the Lehman Brothers bankruptcy and and other implosions.
A really good story would check property records and other sources to pinpoint changes in life style enjoyed by these winners. Did someone buy a fabulous New York co-op, or a house in the south of France? Or fund a new charter school? The point isn’t to villainize these masters of disaster; many people – such as whoever invented Lipitor or other statins to help people avoid heart disease, or the trial lawyers responsible for winning recoveries for victims of corporate environmental pillage or other misconduct – deserve what they get for hard, honest, effective work that stems from others’ misfortune. But at a time when income inequality is the topic of the day, the details here would make great reading and raise all the right questions.
2. The Litigators’ World Series
Which reminds me: Every time I read Alison Frankel’s fabulous “On The Case” Reuters blog about pending litigation, I wonder when someone is going to do the ultimate article about the ins and outs and the who’s who of the world series of litigation inaugurated last September with the filing of a suit against 17 – yes, 17 – big banks and other financial institutions (such as GE Capital) by the Federal Housing Finance Agency.
How big banks can fix their leadership blindspots
By Katrina Pugh The opinions expressed are her own.
In the jitteriness over the stock market’s worst quarter in two years, a racing volatility index, and protests spreading across the nation’s major cities, all bank leadership (and perhaps all corporate leadership) needs to ask a fundamentally new question: “What blindspots are dogging us?” This hardly seems like a radical question. After all, most arbitrators make their money off of other people’s blindspots by seeing around corners where others can’t.
But often, leaders are unaware of blindspots in their own organizations. And they are unaware that they are unaware.
At UBS, blindspots led to $2.3 billion in undetected rogue trading losses, and the ouster of CEO Oswald Gruebel. Analysts have widely criticized UBS’s lax accountability, and oblique, easily-gamed bank systems. Corporate insider Sergio Ermotti brings a strong track record to UBS’s post of interim CEO. Entering this maelstrom, however, will put his leadership to the test.
UBS is far from alone. Many other banks have disclosed the unhappy results of ignoring blindspots, such as Bank of America’s Countrywide loan portfolio, Citibank-Japan’s clumsy disclosure process, and the French banks’ Greek loan portfolios.
We, the investors and consumers need a new cry: “These banks are too big to go stale!” They all need a good air flow. Knowledge flow, that is.
We can learn from UBS’s example. Regardless of whether Ermotti’s destiny is from interim to permanent CEO, he must start on the pathway toward greater transparency at the bank. He needs to act like an outsider in an insider’s clothing. Acting like an insider, he needs to quickly map out how knowledge has failed to reach across the vast network of traders, investment groups, and risk managers. Acting like an outsider, Ermotti needs to stride across the room and open a window. He needs to seize this moment to launch a knowledge overhaul.
I agree with the last comment that “transparency culture is obviously not what banks want to create.” Banks are kicking and screaming (privately), but publicly they are showing some readiness. Do you think these two postures will come into alignment, if they can see transparency as a sign of leadership?
from MacroScope:
Emerging markets: Soft patch or recession?
Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets. One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries. On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk. Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies. "The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting," Goldman says, adding: "The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn."
from Summit Notebook:
Does Germany need Europe?
Jim O'Neill, the new Goldman Sachs Asset Management chairman who is famous for coining the term BRICs for the world's new emerging economic giants, reckons he knows why Germany might not be rushing to bail out all the euro zone debt that is under pressure. Europe is not as important to Berlin as it was.
Speaking at the Reuters 2011 Investment Outlook Summit being held in London and New York, O'Neill pointed out that in the not very distant future Germany will have more trade with China than it does with France.
"It's a different global environment. That's why maybe Germany (ties) itself to a rules-based game with the rest of Europe because economically it doesn't mean so much to them now. What goes on in China is more important than what goes on in France and that's puts a different economic (spin) on the situation for the Germans."
O' Neill also drew parallels between the current situation which sees Germany being asked to stump up for ill-disciplined southern euro zone economies and the problems faced in 1990 when West Germany had to do something similar for East Germany.
"Fast forward 20 years and this time (they are saying) it's not even our own people. I think the Germans will stay pro-European , but it's a different set of circumstances."
The idea that Germany and others will eventually sort out the euro zone debt problem because of a desire for political unity underlies much of the long-term expectations for euro zone survival. But it is a new world, in many ways.
from Jeremy Gaunt:
The rule of three
It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier, Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.
Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:
1) How deep will the U.S. economic slowdown be and what will the policy response be? (That's two questions, actually, but let's not nitpick).
2) How much decoupling is possible between the U.S. economy and others, notably China?
3) Will sovereign and systemic risks intensify again or settle?
For what it is worth, Goldman reckons none of the three should be too damaging:
"Our own forecasts envisage a period of some muddiness in the near-term that ultimately resolves towards a more positive global view. But given the fragilities in the system, we will be watching our various proprietary tooks ... and trying to stay open-minded."
Goldman anger is misplaced
The following is a guest post by Dana Radcliffe, a senior lecturer of business ethics at the Johnson Graduate School of Management at Cornell University. The opinions expressed are his own.
The day after the Securities and Exchange Commission announced its $550 million settlement with Goldman Sachs, three noted business journalists appeared on a popular current affairs TV show. They concurred that the deal was a win for Goldman since the dollar amount was surprisingly low — equal to what the firm earns in just a few weeks. They felt the SEC’s case was weak and that, legally, Goldman had done nothing wrong and would have prevailed in court.
They also agreed that people were understandably appalled by some of the firm’s conduct in the subprime mortgage crisis in light of the flood of emails and other internal company documents released by Congress and Goldman. Grasping for a way to express what was repellent about such actions, one of the writers described them as “icky.” Another airily noted that they might be seen as wrong “in some ethical, moral, or philosophical sense.”
What is remarkable is while all three pundits shared the common view that Goldman had behaved offensively, they would not say that Goldman’s behavior was “unethical” or “morally wrong.”
This reminded me of the most notorious article ever published in the Harvard Business Review — a 1968 piece by Albert Carr, a former advisor to President Truman. In it, Carr argued that business is akin to poker, where bluffing is often legal and expected. While allowing that deception in one’s personal life violates “private morality,” Carr contended that business and poker are strategic competitions whose rules permit participants to profit from misrepresentations. Indeed, he wrote, being a skilled practitioner in either endeavor requires occasional bluffing.
Carr has been rightly faulted for ignoring crucial differences between poker and most commercial interactions, where asymmetries of power and information typically give executives a distinct advantage over customers, employees, and other stakeholders. However, what about business activities that do resemble those of players in a poker game in which sophisticated investors bet against each other? Could it be that when a type of business activity is truly analogous to poker some artful moves that don’t break any laws qualify as bluffs?
Well done Dana Radcliffe. It’s not a sarcasm. Contrary to the hotheads you have analysed the Abacus deal set in a (despicable) gambling environment where a zero sum transaction was executed.
A looser and a winner would emerge from transacting synthetic securities. No ‘serious’ cards were hidden under the table, i.e. as the long parties to the transaction would need to see or analyse before closing.
Talking about gangster-like methods indicate little, if any knowledge of previous gambling attitudes in the market. GS had no fiduciary duty to ACA and IKW Bank (the long parties) – two opportunistic and badly managed players, eventually loosing their shirts…. one of which led to mayhem for German tax payers and investors, but not for US tax payers.
This is not to say that GS are saints and without any negative impact on the former bubbling housing market and US pension funds’ wealth, but in other transactions. All up, GS had a very limited negative impact on the MBS market, while the big players such as Countrywide, Fannie, Freddie, Citi, Bear, Lehman and Washington Mutual, were the front runners in this bizarre circus fully supported by Alan Greenspan, Ben Bernanke, Democrats (for promoting home ownership for more people), some Republicans and indeed, by the SEC through this regulator’s lack of competence, (maybe integrity) and interest in the what they should regulate.
The Abacus case was merely a political stunt as the White House was in dire need for a case on which its current masters could build their case for new financial regulation initiatives. President Obama was scheduled to open the financial show case in New York only four days after the SEC announced the fraud case against GS.
Have a look at how out-of-money GS option puts traded the day before disclosure. Not even mad investor parties such as the ACA representatives would have bought such puts one day before expiry without some info of what was coming up the next day. Who was in possession of such info? Reportedly not the GS camp, but only people from the SEC environment. The profits made were in the thousands of per cent, while the put sellers were left with equivalent losses.
I encourage everyone to analyse the trades themselves. So, why didn’t the SEC and the NYSE launch an investigation? The answer appears to be obvious.
SEC’s fraud case was not a zero sum ‘transaction’, possessing the characteristics of a scenario where none of the parties could afford to loose the case. As such, an out of court settlement was required, all of which was evident from the outset.
The SEC would have had significant problems winning this Mickey Mouse initiative, so getting some money to the treasury without loosing face became a must.
Same for GS, as it’s loss of reputation was (and still is) significant, but unbearable for management and board should such a court ruling (in 2011 or 2012) not be heading their way…. without any distractions as to daily routines. This would have been a poker game to continue such a case in court all of which the SEC would have understood.
My business partners and I believe that GS was the best managed financial institution reducing their housing risk significantly by hedging initiatives. However, it appears that they did not hedge their exposure to AIG sufficiently, riding towards significant losses if AIG went into Chapter 11 or final bankruptcy.
We believe that the previous government made a significant error of judgement when the former GS executive Hank Paulson was left in charge in the September / October days of 2008 because of his potential conflicts of interest. Potentially, this cost the tax payers dearly and equally bad, has led to America’s declining financial market superiority in Europe and in emerging markets in Asia.
Blankfein performed in late 2008 a brilliant job from the perspective of GS’ shareholders by eliminating GS’ exposure to AIG. Who should or could blame him for doing so?
Goldman slashes risk-taking in commodities
John Kemp is a Reuters market analyst. The views expressed are his own
Goldman Sachs cut the amount of risk it staked on commodity trading during Q2 2010 by almost 35 percent, part of a broad-based reduction in risk across the bank’s trading book. Value-at-risk (VaR) linked to commodity prices fell to an average of just $32 million per day between April and June, down from $49 million in the prior quarter and $40 million in the same period a year earlier, according to the firm’s earnings release. Cuts in VaR allocated to commodities were in line with reductions elsewhere, including interest rate risk (down just over 20 percent) and equities (down just over 30 percent). Only currency trading saw a slight increase in risk taking (up 3 percent). Commodity VaR was reduced to its lowest level since the three months ended September 2009, and before that November 2007.
Goldman has been reducing firm-wide VaR (net of diversification) since the middle of 2009 — shortly after the firm converted to Bank Holding Company (BHC) status regulated by the Federal Reserve, subsequently changed to Financial Holding Company (FHC) status, rather than its previous incarnation as a securities firm. Gross VaR (excluding diversification) started dropping after Q3 2009 (when it peaked at a massive $416 million). Gross VaR now stands at a more modest $272 million (down 35 percent). The firm’s massive interest rate risk (which peaked at $218 million in Q1 2009) has been cut to less than half that ($87 million in Q2 2010). But the April-June quarter was the first time the de-risking process had extending to commodities.To some extent, VaR is endogenous. Unless position limits are changed to offset it, VaR naturally rises and falls with market volatility. But firms can always over-ride fixed limits to keep VaR “budgets” unchanged despite changes in volatility if managers decide it is worthwhile.
What is notable is that market volatility rose during Q2 2010 in most asset classes (including commodities) after a quiet Q1. Yet Goldman’s VaR measures declined almost across the board, suggesting a deliberate policy to cut risk. Opportunities to generate revenue by taking market risk appear to be declining across the company’s trading operations. One crude measure of the firm’s “trading efficiency” is the amount of dollars it generates in net revenue for every $1 put at risk (VaR). Trading efficiency peaked at $46 for every $1 risked at the start of 2007 and has never recovered to the same level. Efficiency in Q2 2010 was just 24:1, down from 32:1 in the prior quarter, and less than half the peak (Charts 4 and 5).
While efficiency has improved since the dark days of the crisis, it is nowhere near the levels achieved prior to 2007, even though management has started to dial back risk-taking. The company’s earnings releases indicate management has been gradually cutting VaR and tightening risk budgets as profitable opportunities have become scarce. The general retrenchment or consolidation finally reached commodity desks in Q2.
Shorting the SEC’s case against Goldman Sachs
— Charles K. Whitehead is an Associate Professor of Law at Cornell Law School. He practiced in the United States, Europe, and Asia as outside counsel and general counsel of several multinational financial institutions, including as an associate in a law firm representing Goldman, Sachs & Co. The opinions expressed are his own —
The civil action brought by the SEC against Goldman, Sachs & Co. has placed it squarely in the cross-hairs of those who argue, in the debate over new financial regulation, that Wall Street needs a new moral compass. But it’s important, I think, to separate our frustration with Wall Street from the strength of the SEC’s case. The case for reform is relatively easy to make. After all, who needs smoke when we have just put out the fire? The case against Goldman Sachs, I argue, is not nearly as convincing. And, while there is – and, no doubt, will continue to be – a he-said, she-said quality to some important facts, it may be useful to consider the core case the SEC has brought.
The SEC’s charge, if proved, is fairly straightforward: Goldman Sachs defrauded investors in notes whose value was based on a portfolio of assets selected by a hedge fund, Paulson & Co., first, by failing to disclose Paulson’s involvement in the selection process, and second, knowing that Paulson had placed bets on the portfolio declining in value. To prevail, the SEC must show a substantial likelihood that the failure to disclose Paulson’s involvement and its short position was significant to a reasonable investor, considered within the total mix of information available at the time the purchase was made. That may be difficult to do in light of what was being sold.
The notes here were issued in a structured transaction known as a synthetic collateralized debt obligation (CDO). In a typical CDO, the proceeds are used to purchase a portfolio of assets whose value, whether up or down, determines the value of the notes. Not so in a synthetic deal. The notes continue to be tied to a portfolio of assets. But, instead of buying them, the issuer enters into a credit derivative with someone else (ultimately Paulson in this case) in order to replicate the credit quality of that same portfolio. If the portfolio does well, Paulson pays a premium to the CDO issuer that it uses to pay interest on the notes. If it tanks (as in this case), the CDO issuer must pay Paulson an amount that reflects the write-down in value.
What this means is that every investor in a synthetic CDO – and, certainly, the sophisticated investors in the Goldman Sachs deal – knows there is someone else taking the opposite bet on the portfolio they invested in. In fact, very often these deals are driven, not by the note investors, but by the short-seller, who is looking to the synthetic CDO as one means to bet against a portfolio of assets.
Was the fact it was Paulson material to investors? Others have argued that Paulson was not nearly as well known in early 2007, when the notes were sold, as the fund is today. More troubling, however, is the suggestion that – regardless of how well known – Goldman Sachs was obligated to disclose Paulson’s short position to the note investors.
It’s not uncommon for clients to have opposite views about the same asset. It happens daily. If, instead of sponsoring a synthetic CDO, Paulson decided to sell the identical assets to Goldman Sachs, and Goldman Sachs then sold the portfolio to the note investors, would Goldman Sachs be obligated to disclose that Paulson was the seller? No – in fact, doing so would be a breach of confidentiality under the SEC’s own rules. But that is a key element of the fraud alleged to have occurred here.
Wow, I do apologize for the mess of comments here from myself. The test post was put up before all of the secondary postings, so that is just wrong! It seems that long postings are checked after short ones, which is ridiculous. Moderators should check in sequence.
Also, if you have moderation, why is it I report 2 to 3 spam messages for dating sites daily.
“As Smith’s actions show us, pay no longer is the driver of engagement or job satisfaction it once was”
It’s called a Hygiene-factor by Frederick Herzberg and the research is about 40 years old. Maybe after driving WaMu off a cliff the management team could have found time to read a book.