Tag Archives: Goldman-Sachs

Liars, Gamblers, and Suckers.

I just finished reading a piece by Goldman Sachs urging investors to charge into the housing market.

Here is what they said back in March of 2012:

Headline reads: The housing recovery will have to wait a little bit longer. Goldman Sachs just pushed back its estimated date of the bottom.

In December 2011 G-Sax published a new house price model for 147 metro areas that pointed to a decline of around 3% from mid-2011 through mid-2012 before stabilizing in the year thereafter. Since publication of the model–which was based on Case-Shiller house price data up to 2011Q2–the decline in house prices has reaccelerated slightly. In today’s (February 29) comment they updated their forecast in light of this and also used the opportunity to make a couple of technical changes to the model.

They now project that house prices will decline by around 3% from 2011Q3 until 2012Q3, and by an additional 1% in the year thereafter. As a result, the expected bottom in house prices is pushed out from end-2012 to mid-2013. Although the house price outlook has weakened very slightly, they go on to say that they believe that the house price bottom remains in sight.

That was in March, after predicting that we would hit the “bottom” in 3Q12. Here is what they said on Monday of this week. Headline: Goldman Sachs predicting ‘strong’ U.S. housing recovery. Construction up, existing home sale supply down.

Article goes on to say that U.S. home builders are an attractive investment as the housing market starts a “strong” recovery that may drive a surge in new-home sales, Goldman Sachs Group Inc. said in a report Monday.

Housing has a “long list of positives,” including rising prices, job growth, supportive government policies and a decline in the so-called shadow inventory of homes, Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients. They raised their rating on the homebuilding industry to attractive from neutral.

As a gentle reminder, these are the same people (different suits) who urged investors to buy Collateral Default Obligations and Credit Default Swaps back in 2007. Anything sound familiar here?

For those not punch-drunk on Wall Street’s propaganda, here is what is actually going to happen:

Housing will not hit bottom until somewhere north of 2015. Why? Banks are holding a ton of shadow inventory that they dare not release to the market for fear of creating insane downward pressure on pricing. In addition, there are still tons (millions) of homes crawling their way through the foreclosure process. Are there pockets of good news? Of course. Just like the fact that not everybody lost their asses in the real estate or stock markets since 2008, there are real estate markets like Pebble Beach and San Francisco and Long Island that are still holding prices up. But, the real real estate market is in the crapper and will stay that way or get worse in the coming months.

Until the November U.S. presidential elections of this year, there will be a deceptive calm before the storm, as every major economy plagued with severe fiscal problems continues to kick the can down the road. Come 2013, there will be a convergence of several major negative metrics.

These include the worsening Eurozone debt crisis, leading to the exit of Greece from the monetary union. China will face a hard economic landing, and the United States — its economic growth and job creation performance already anemic — will face a very high probability of a renewed economic recession, particularly in a political environment favoring austerity.

In addition to those economic factors, there is one other element in the turbulent brew that comprises my prediction of a perfect economic storm in 2013: Iran. If the Iranian nuclear issue is not resolved peacefully, which at present seems highly doubtful, there is a high probability of a military conflict occurring in the region, which will add further strains upon the global economy, particularly if oil prices spike to highly elevated levels.

I am not alone in this view. A guy who got it right the last time has the exact same predictions for 2013. Nouriel Roubini, or Dr. Doom, has issued a characteristically gloom-laden warning about likely economic trends for 2013. Unlike the pontificators among the politicians, Wall Street glad-handlers and central bankers, Roubini’s analysis of future economic trends does have the virtue of reasoned logic as opposed to overly-optimistic rhetoric. Nouriel Roubini’s record in predicting future trends impacting the global economy and financial system has been inherently more reliable than the forecasts offered by the U.S. Federal Reserve, as well as by the policymakers in America and Europe.

He emerged in the months prior to the global financial and economic crisis that erupted in the fall of 2008, warning of a deadly convergence of troubling economic and financial dangers.

Roubini’s prediction that the contraction in housing prices in the U.S. housing market would metastasize into a devastating financial hurricane seemed so incomprehensively dire, the pundits and eternal optimists on Wall Street wrote him off. Was it because they insist on driving markets in spite of the realities before them? Do they care, as long as they are betting on the right side of the dice? Don’t forget, those traders who touted CDOs and CDSs were making a killing on insuring against their performance.

Will you listen to Goldman Sachs or Nouriel Roubini?

 

 

 


Classic Case of Fraud in U.S. Regulatory Oversight. Futures Trader Trust is Gone.

PFG (Peregrine Financial Group) follows MFG (MF Global) into bankruptcy. MFG filed 6 months ago in December of 2011. Both companies were Commodity Futures Traders and both were regulated by the U.S. Commodity Futures Trading Commission (CFTC).

It seems like this is the logical and dispirited ending to every fraud: liquidation; and a very sad ending for the 10,000 – 25,000 creditors who will get nothing as a result of this liquidation proceeding.

MF Global, as you might recall, was John Corzine’s (former U. S. Senator, former New Jersey Governor, and former CEO of Goldman-Sachs) company about which he famously said, “I am stunned that we couldn’t find the money”, (hundreds of millions of dollars in client money mysteriously disappeared in the days before the firm’s collapse), and “I have no idea where it’s gone.” And, by the way, Mr. Corzine has not served any prison time nor has he been formally accused of or prosecuted for fraud.

MF Global filed for bankruptcy protection in December of 2011, becoming the first American financial casualty of the European debt crisis. The firm took a gamble in buying the troubled bonds of Italy, Portugal, Spain and Ireland last year, gambling (with other people’s money) that they would soon recover. Bad gamble. $1.6 billion in missing client cash has yet to be recovered by trustees overseeing the liquidation of the firm.

Peregrine Financial Group Inc., on Tuesday filed to liquidate under Chapter 7 of the U.S. bankruptcy code. Missing this time? Over $300 million in customers’ funds.

Russell Wasendorf Sr attempted suicide Monday, July 9. Wasendorf was found in his car with a note, the contents of which the sheriff declined to divulge. A hose ran from the vehicle’s exhaust pipe into the passenger compartment.

“A note was found in the vehicle that indicated possible discrepancies with accounts at Peregrine Financial Group,” according to the sheriff’s report.

Here’s where this story gets interesting: It turns out that Russell Wasendorf Sr. intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation testified for the record.

Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. And while crime happens all the time, what is truly stunning is that the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group. That’s 6 months ago. The CFTC, as a reminder, was it regulator. The entity, whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG failed to do so for at least the past two years. And somehow, the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that, 2 months later, it pronounced PFG clean.

Gary S. Gensler is the chairman of the CFTC.

Gensler was Undersecretary of the Treasury (1999-2001) and Assistant Secretary of the Treasury (1997-1999) in the United States. Barack Obama selected him to lead the Commodity Futures Trading Commission, which has jurisdiction over $5 trillion in trades. Gensler was sworn in on May 26, 2009.

In March 2009, Senator Bernie Sanders (I-VT) attempted to block his nomination to head the Commodity Futures Trading Commission. A statement from Sanders’ office said that Gensler “had worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history.” He also accused Gensler of working to deregulate electronic energy trading, which led to the downfall of Enron, and supporting the Gramm-Leach-Bliley Act, which allowed American banks to become “too big to fail.”

In early November, 2011, Gensler stepped aside from the CFTC’s investigation of the giant derivatives broker MF Global because of his longstanding ties to Jon Corzine, the CEO of MF Global, for whom Gensler had worked while both were at Goldman Sachs.

For the PFG fiasco, and for the failure to adequately investigate MF Global, Gensler has to be fired immediately, with prejudice, and never allowed to serve anywhere in the U.S. government again. Unfortunately, this is only the tip of the iceberg as we will see during the rest of 2012 and all of 2013. 


Facebook’s IPO, The JOBS Act, and Why You Should Care.

This great post by my buddy, Dara Albright, founder of NowStreet LLC, really distills the essence of the JOBS act and its potential impact on fat cat investor domination of our capital markets.

I am dismayed by the number of pundits, legislators and organizations, claiming to be “small investor advocates”, who misrepresent the JOBS Act as another piece of legislation favoring the Wall Street establishment.

The truth is the JOBS Act invites competition from both smaller financial service firms and investors which will in turn de-monopolize our capital markets and take control away from the self-serving supersized financial conglomerates.

I feel compelled to set the record straight, for the people of this nation deserve to know who really has their best interests at heart.

First of all, the JOBS Act is not a bill to appease Goldman Sachs or to help the rich get richer. It is a bill that serves regular hardworking Americans who, for nearly 80 years, have not had the same investing liberties as wealthy Americans. Deemed by the Government as not sophisticated enough to understand private company investing, small retail investors have been legally prohibited from putting their money into some of today’s hottest growth companies.

Instead, they are forced to sit on the sidelines and wait until these companies complete their IPO. Unfortunately, because companies are no longer going public in the earlier stages of their growth cycle, smaller investors can do nothing but watch these companies increase in value from afar. All the while angels, VCs and accredited (aka rich) investors reap all of the appreciation during a company’s climb to the public markets. Maybe someone can explain to me the logic behind laws that permit average citizens to purchase stocks only when “sophisticated” investors are ready to dump them.

Personally, I think it is an abuse of power for Government to dictate how we deploy the money that we earned through our own labors. Unless Government gave us that money, it should not have any discretion over how we spend it. We should have the freedom to invest our money in a risky start-up or use it to buy 64 ounces of a diabetes-inducing soft drink. Hell, we should be able to burn it if we so desire. Why is it only acceptable for the Government to squander our money?

Fortunately the JOBS Act has been signed into law and will soon democratize the investing process. But for some inexplicable reason, big government enthusiasts are pointing to Facebook’s unsuccessful IPO as an excuse to disparage this legislation. This is not only dangerously irresponsible, but appallingly disingenuous. The hypocrisy is simply shameless. Case in point, I recently learned that the same organization insisting it fights for fairness in the financial system is actually campaigning to have the net worth and income minimums for accredited investors increased. This will do nothing but widen the level of inequality.

I agree that Facebook’s IPO epitomizes the great injustice in our capital markets, but more importantly, it demonstrates just how disgusted smaller investors have become with it. Facebook (NASDAQ: FB) is down nearly 30% off its IPO price of $38 mainly because smaller investors have refused to support it. The crowd is telling us loud and clear that they are no longer willing to be the “exit strategy” for the privileged. Until smaller investors are afforded equal growth opportunities, our capital markets will continue to deteriorate.

The chart below should serve as the “poster child” for investor discrimination: 

Investor Independence Day cannot come soon enough.

About NowStreet, a truly great organization with our interests at heart:

Symbolizing the capital markets of tomorrow and the hope for a more prosperous economic future, NowStreet is known in various financial circles for its commitment to repairing a damaged capital markets system with the inclusion of a private company marketplace (PCM) that encourages long-term growth investing while facilitating capital formation, small business expansion, innovation and job creation. Through its media, event production and consulting divisions, NowStreet continues to pioneer a number of cutting-edge products, services and event platforms designed to enlighten the financial and business communities and help them capitalize in a new markets paradigm. NowStreet is a leading provider of analysis and insight into the private company marketplace, including the legislation and innovation fueling it. Based on an original hypothesis that directly correlates advancements in mass communications with stock market growth, NowStreet highlights the dynamic economic impact of a purely growth marketplace rising during the most ground-breaking period of mass media and regulatory reform. For additional information, please visit http://nowstreetjournal.com.


The End of the Euro Nears.

As we watch the growing deterioration of the Greek and Spanish banking systems, I thought it might be interesting to take a closer look at the major U.S. banks’ overseas positions and exposures.

Citigroup has the largest net exposure to non-U.S. sovereign governments, with a little more than €14 billion ($17.5 billion) on their balance sheet.  JPMorgan Chase comes in second, with about €8 billion ($10 billion), while Morgan Stanley is third with €5 billion ($6.2 billion), and Goldman Sachs holding the smallest position of the four big banks with €4 billion ($5 billion) in non-U.S. sovereign debt. Remember how Wall Street reacted when JPMorgan lost $2 billon in derivative exposure a couple of weeks ago? Now, imagine a $39 billion loss. As Senator Everett Dirksen famously declared, “A billion here, a billion there, pretty soon it adds up to real money.”

This is an important data point because the U.S. banks are completely exposed to the growing European banking disaster. Europe’s entire banking sector has the potential to collapse completely if the contagion catches and runs completely amok. With the current run on Greek and Spanish banks, the possibility is slowly becoming a probability. Without an EU-wide deposit guarantee, depositors will withdraw all of their funds and move them to their mattresses.

In addition, the bigger of the PIIGS, Spain and Italy, have their debt spread out across Europe, putting them in the unenviable position of causing systemic ignition to just such a contagion.  As one example, French banks (Credit Agricole and Societe Generale) hold a substantial portion of their credit portfolio in Italian sovereign debt. Which we know is worthless.

Europe as a whole is in deep trouble as this latest iteration of the never-ending sovereign debt crisis could finally result in at least a partial breakup of the EU.  The actual likelihood is that Greece, then Spain, followed by Portugal, Italy and Ireland will drop out of the EU.

If that happens, Germany’s most rational choice would be to withdraw as well. After all, why should they continue their exposure to more poorly managed countries who will only default on what remains of their sovereign debt?  France, Sweden, Belgium, the Netherlands and the U.K. would be quick to follow in Germany’s footsteps, leaving behind, a handful of countries like Cyprus, Estonia, and Latvia to sort out the remaining arguments for remaining in the Union and supporting a single currency.

It doesn’t take much of a mental stretch to imagine what would happen next.


Mad As Hell! And, See You In Court.

That didn’t take long.

Facebook Inc and Morgan Stanley, the lead underwriter of social networking company’s IPO, were sued by shareholders who claimed the defendants hid Facebook’s weakened growth forecasts ahead of its $16 billion initial public offering.

The lawsuit also names underwriters JPMorgan Chase and Goldman Sachs among others, and follows quickly on the heels of Facebook’s May 18 stock market debut, which was plagued by technical glitches.

Facebook shares fell 18.4 percent from their $38 IPO price in the first three trading days. In early afternoon trade today, Facebook shares were up 2.1 percent at $29.51.

Hey, I just lost $2 Billion. Don’t bug me with your problems!

The legal action accused the defendants, including Facebook Chief Executive Mark Zuckerberg, of concealing “a severe and pronounced reduction” in revenue growth forecasts resulting from increased use of Facebook’s app or website through mobile devices.

Facebook was also accused in the lawsuit of telling its bank underwriters to “materially lower” forecasts for the company.

“The main underwriters in the middle of the road show reduced their estimates and didn’t tell everyone,” said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit. “I don’t think any investor in Facebook wouldn’t have wanted to know that information.”

Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin have begun looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter. Busy, busy, busy. Let no self-respecting agency appear as though they aren’t busy looking into things. Problem: Horses are already gone. 

“The SEC has since the 1990s broadly condemned the trickling out of material non-public information, which would include that savvy, well-paid analysts are lowering estimates,” said Elizabeth Nowicki, an associate professor at Tulane University Law School and a former SEC lawyer. Condemned? Or, is it actually against the law?

Syndicate banks “are on the hook in terms of liability by not making accurate, complete disclosure,” she added. “Selective disclosure of analyst outlook changes is not acceptable.” Not acceptable? Or, against the law?

Andrew Noyes, a Facebook spokesman, said: “We believe the lawsuit is without merit and will defend ourselves vigorously.”

Andrew Noyse.

Morgan Stanley had no comment. It said on Tuesday that Facebook IPO procedures complied with all applicable regulations, and were the same as in any initial offering.

The shareholders said the disclosures about Facebook’s business risks were inadequate, and that the company should have told everyone, not just “preferred” investors, that analysts knew those risks and cut their business outlooks accordingly.

Should have? Or, were they bound under the law to disclose to everyone?

 


Mad As Hell!

I have been around the technology markets for a really long time, and I have never seen this happen before:

It appears that that Facebook‘s lead underwriters, Morgan Stanley, JP Morgan, and Goldman Sachs, all cut their earnings forecasts for the company in the middle of their IPO roadshow.

Worse, if possible, is the fact that the revised earnings forecasts were only passed along to a small group of major (important) investor clients, and not made public.

This is a huge problem.

As you might imagine, the lead underwriters are the most privileged insiders on any deal that is preparing to go public, and they have the best insight into the financial data and associated facts about the health of their client’s business. The earnings forecasts are material information and are prepared by these same analysts employed by the lead underwriters, and as such, are the foundational facts upon which the investing public places their trust. If it turns out that these analysts lied and their employers endorsed these lies, then what does that mean about the system upon which tens of millions of investors have depended for accuracy and integrity?

So, now the apparent truth about Facebook’s lackluster IPO would seem to suggest that news of these estimate cuts dampened interest in the IPO among those who heard about them. (Reuters reported exactly this—that some institutions were “freaked out” by the estimate cuts, as anyone would have been.)

During the road show that was selling (sorry, that’s what it is) the Facebook IPO, investors who didn’t hear about these estimate cuts were placed at a serious and critical information disadvantage. What they didn’t know cost them hundreds of millions of dollars.

Yes. This is a direct violation of securities laws. Privileged information selectively disseminated is a major league no-no. I assume the SEC is on this like, well you know.

What might have actually happened?

One possibility is that the underwriter analysts cut their estimates after a late amendment filing to Facebook’s IPO prospectus, in which a vaguely worded mention that indicated users were growing faster than revenue was a trend, and it appeared to be continuing into the company’s second quarter.

This language freaks out people who are used to reading filing documents, because it could easily have been taken to mean that Facebook’s revenue in the second quarter wasn’t coming in as strong as Facebook had hoped (why else would the language have suddenly been added at the 11th hour?)

Another possibility is that Facebook told the underwriters to cut their estimates—either by directly telling them to, or, more likely, by “suggesting” that the analysts might want to revisit their estimates in light of the new disclosures in the prospectus.

If there was any communication at all between Facebook and its underwriters regarding the analysts’ estimates, Facebook will have to answer for this.

Based on the actual language, it seems highly unlikely to me it would have prompted all three underwriter analysts to immediately cut estimates without some sort of nod and wink from someone who knew how Facebook’s second quarter was progressing. (To get this message from the language, you really have to read between the lines).

At the end of the day, privileged information was known to the lead underwriters and only disclosed to a few, important clients. As a direct result, Facebook’s IPO performed poorly and a lot of investors lost a lot of money, including Mark Zuckerberg, who is $2 Billion lighter today. This practice should be against the law and the lead underwriters should be severely punished. The SEC must regain control of this process and enforce strict oversight rules. The investment community should be outraged. Mary Schapiro should be fired!

Yes, Mary, it’s THAT big.

We’ll soon see how the SEC reacts, and what Congress has to say about all this. Maybe we’ll finally get to see who on Wall Street owns whom in Washington, and what the American people are actually made of.


Greg Smith’s Resignation: Are Wall Street Traders Psychopathic?

When a Goldman Sachs executive director, Greg Smith, resigned on Wednesday, he left in his wake a scathing op-ed in the New York Times excoriating the firm for its greedy values. The op-ed shook Goldman “like a bomb,” according to another story on the front page the following day. Smith claimed that Goldman’s current leadership had let the firm’s values disintegrate. Where once the Goldman culture encouraged employees to serve their clients for mutual benefit, now, Smith said, the driving force was rapacious avarice. The firm promotes “ripping their clients off,” he wrote.

To the average 99-percenter, this hardly seems like a revelation. Unethical behavior and Wall Street go hand in hand — especially at the top, right? Goldman supporters might say this perspective reflects sheer jealousy and resentment; however, a growing body of research suggests that there’s more to it than that.

One 2010 study looked directly at the prevalence of psychopathic traits in a sample of 203 executives at seven companies who had been chosen for their leadership potential to participate in additional management training. (The researchers did not reveal the nature of the businesses that employed the managers, so the results here don’t apply only to financial firms.)

Just over 5% of the trainees in the study met the full criteria for psychopathy — a rate five times higher than that seen in general public. Many of those who qualified were already in high-level senior management positions. So, the snakes are indeed overrepresented at the top.

Psychopathic traits include being highly manipulative and callous, lacking empathy and remorse, having little concern about consequences, being willing to use deceit or threats to get what you want and caring little for others except in terms of what you can get from them. Although the stereotype of a psychopath is a serial killer, they are actually more likely to be con artists or shady business people.

While no available research includes only financial firms, it’s not implausible to think that those whose primary values are materialistic and power-driven would be especially attracted to the business that currently fuels many of America’s biggest fortunes. Indeed, a psychologist whose practice is focused on Wall Street recently told [paywall] CFA magazine that he thinks that, at minimum, 10% of workers in financial services are outright psychopaths.

Like other personality traits and disorders, however, psychopathy lies on a spectrum. As with autism and schizophrenia, there are far more people who have related traits that do not cause disability than there are those with the full conditions themselves. In fact, in the 2010 study of managers, 4% of executives were found to score abnormally high on psychopathic traits, but not over the cutoff point that defines psychopathy.

As Dr. Ronald Schouten, who is writing a book about people who are psychopathic but don’t quite meet the full criteria, put it on the Harvard Business Review blog:

Psychopathy is mistakenly regarded as an all or nothing affair: you either are a psychopath or you aren’t. If that were the case, saying that 10% of people on Wall Street are psychopaths could actually be somewhat comforting, since it implies that the remaining 90% are not and so shouldn’t cause us any concern.

That yes-or-no approach dangerously ignores the fact that psychopathic behavior exists on a continuum. A great deal of damage can be done by individuals who fall in between folks who are “normal” and true psychopaths. These are individuals who would never be diagnosed as a psychopath, but whose behavior to varying degrees can be just as deceptive, dangerous, and remorseless as that of a full-blown psychopath.

And unfortunately, there’s even more reason for concern than this. Additional research suggests that rich people in general tend to behave less ethically than those who are not at the top of the financial heap. Several studies have found that wealthy people are typically less empathetic than poor people, both in terms of being able to read other people’s emotions and in terms of sharing or caring for others.

BMW M3 2012 black

In a recent set of experiments, researchers observed drivers at an intersection and found that people driving fancy cars — a stand-in for high economic status — were more likely than those driving beaters to cut off other drivers and to fail to stop for pedestrians at crosswalks. Really? The researchers also found in subsequent experiments that wealthier people were more likely to cheat at a gambling game and to take candy that would otherwise be given to children.

The same research revealed that unethical behavior wasn’t linked directly to being wealthy but rather to how much people believed that greed was good — a view that correlated highly with wealth. But even poor people behaved just as badly as the rich when they were primed to believe that selfish, greedy behavior was acceptable. Indeed, according to some research, just being in the physical presence of visible wealth reduces sharing. And, of course, simply working in a financial district is likely to provide an abundance of such cues.

All of this suggests that Wall Street offers a perfect storm of an environment that is not only likely to attract psychopaths and to promote them to the top, but also to encourage them to behave in antisocial ways. There are many exceptions to the rule, of course, and these studies, which only hint at tendencies, shouldn’t be seen as condemning everyone in finance. But the findings do raise troubling questions.

Smith claims that Goldman Sachs previously went to great lengths to create a culture in which service to the client was the highest value. The overall idea was to make money, certainly, but in a mutually beneficial way. Now, he says:

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. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets” [a derogatory term for clients], “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

The thing about psychopathic values is that they’re contagious. We pick up the values of our leaders and often mirror their behavior. But determining what to do about it is a lot harder than making the diagnosis. Unless, of course, you are the 99%.


Why I Am Leaving Goldman Sachs.

This is an article written by GREG SMITH in today’s New York Times.
goldman sachs logo

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

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. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

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.

Blankfein     Gary Cohn

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. 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. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

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.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

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 LevinVampire 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.

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. It doesn’t matter how smart you are.

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. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. 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.

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.


Al Gore Takes Aim at “Unsustainable” Capitalism

Former Vice President and Current TV Chairman and co-founder Al Gore speaks during the panel for Current TV's ''Politically Direct'' at the Television Critics Association winter press tour in Pasadena, California January 13, 2012.  REUTERS/Mario Anzuoni

Former Vice President and Current TV Chairman and co-founder Al Gore speaks during the panel for Current TV’s ”Politically Direct” at the Television Critics Association winter press tour in Pasadena, California January 13, 2012.

Former U.S. Vice President Al Gore wants to end the default practice of quarterly earnings guidance and explore issuing loyalty-driven securities as part of an overhaul of capitalism which he says has turned many of the world’s largest economies into hotbeds of irresponsible short-term investment.

Together with David Blood, senior partner of  ‘green’ fund firm Generation Investment Management, the environmental activist has crafted a blueprint for “sustainable capitalism” he wants the financial industry to adopt to support lasting economic growth.

“While we believe that capitalism is fundamentally superior to any other system for organizing economic activity, it is also clear that some of the ways in which it is now practiced do not incorporate sufficient regard for its impact on people, society and the planet,” Gore said.

At a briefing ahead of Thursday’s launch, David Blood said capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis.

The former CEO of Goldman Sachs Asset Management put forward five key actions which he hoped would revive the discussion on how to clean up capitalism and put companies, investors and stakeholders on the path towards long-term, sustainable profit.

These include ending quarterly earnings guidance from companies, which the authors said incentivized executives and investors to base decisions on short-term factors at the expense of longer-term objectives.

Companies have also been encouraged to integrate financial reporting with insight on environmental, social and governance policy so investors can clearly see how performance in the latter can contribute to the former.

“This is a direct appeal, dare I say, attack on short-termism in business,” Blood said.

“Today the average mutual fund in the U.S. turns over its entire portfolio every 7 months; 20 years ago (in 1992) it was every 7 years. Something has fundamentally changed and the problem with that is it means we’re not making good investing decisions… and not delivering proper and efficient wealth creation.”

After hitting mainstream consciousness in the early part of the last decade, the 2008 financial crisis brought efforts to make global business more environmentally and economically sound to a virtual halt.

But with so many roots to that crisis found in skewed asset valuations and irrational short-term trading, the authors want to restate the case for change while the pain of the credit crunch was still fresh in the memory.

“We went down this path because we fundamentally believe this is relevant to business. This has always been about value creation and this whole conversation about sustainable capitalism is not a new movement,” Blood said.

“While governments and civil society will need to be part of the solution to these challenges, ultimately it will be companies and investors that will mobilize the capital needed to overcome them.”

COMPENSATION AND LOYALTY

To offset the disproportional influence of short-term traders like hedge funds on global markets, Generation has proposed the issuance of loyalty-driven securities to reward investors who nurture real business growth by holding a company’s shares for a number of years.

The blueprint also recommends significant changes in corporate compensation structures, putting more emphasis on bonuses linked to multi-year performance instead of individual fiscal years.

Gore said pension funds had a vital role to play in coaxing their managers to make longer-term investment decisions, which by extension, could result in a healthier society and planet.

“(They) have a fiduciary obligation to maximize the long-term performance of their assets to the maturation of their long term liabilities,” Gore said.

“If pension funds turn to managers of their assets and compensate them with a structure that incentivizes them to maximize performance on an annual basis, they should not be surprised if that is what their managers end up doing.”

Blood said the campaign for sustainable investment had been hit by worries that change would cost more than it would ultimately deliver, but many businesses were still to grasp how value-destructive some elements of modern capitalism had become.

“…in America, as soon as you say the word ‘sustainability’ people think of socially-responsible investing, tree-hugging and we don’t believe that at all. We think sustainability is just best practice in business,” he said.


Legislation To Help Startups Raise Funds.

It seems a bit odd that a background in lobbying could be a key strategy in launching a technology startup.

Former lobbyist and current start-up founder Candace Klein is garnering political support for a newly-proposed U.S. House of Representatives bill (HR2930) that would allow any business in the United States to use crowdfunding to raise funds. The Republican-sponsored bill, called the Entrepreneur Access to Capital Act, passed the House 407-17 a few weeks ago. It also has the endorsement of President Barack Obama.

If passed in the Senate and signed into law by President Obama, the bill would help Klein take her new startup company, SoMoLend, and several others, including iSellerFINANCE.com, nationwide.

The online platform, launched this week, allows any small business to use social media sites like Twitter, Facebook and Linked In to raise small amounts of money for their business. Those could range from restaurants and jewelry stores to landscapers and accountancies.

But current laws require that borrowers be licensed with the U.S. Securities and Exchange Commission (a $20,000 filing fee per state, aka $1,000,000) in order to accept funds from sources other than traditional banks, accredited lenders or friends and family. That adds significant cost to any of  the P2P lending site borrowers who’d like to accept funds from strangers.

“The law was meant for businesses raising millions in capital, and for wealthy investment banks like Goldman-Sachs” says Klein, also founder of Bad Girl Ventures. “It doesn’t make sense if the business is raising $1,000 or $50,000.”

For Klein, the bill’s passage is the difference between SoMoLend completing 10,000 loans in a year and a million.

“We could still operate, but it would be so cumbersome and expensive that very few people will ever utilize the technology,” she says.

Klein met with Ohio Congresswoman Jean Schmidt in recent weeks and asked her to sponsor the bill. Next week, Klein visits Washington D.C. to appear before the U.S. Senate’s banking and finance committee, where the bill lands next. Ohio Congressman Sherrod Brown is a member. She’s also scheduled meetings with Ohio Congressman Rob Portman and Congressman Patrick McHenry of North Carolina, who introduced the House bill.

“For one Cincinnati business, this is the difference between success and failure,” Klein says.


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