The Vampire Squid’s Problems

Greg Smith, a now former Goldman Sachs derivatives executive slams his former employer in the NYT:

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.

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.

What are three quick ways to become a leader?

a) 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) 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.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

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.

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.

Smith’s sentiments are appreciated, but actually he is wrong about a fundamental point, at least in today’s business environment. Goldman doesn’t have to give a damn about its clients because the vampire squid has found a much more lucrative way of insuring their bottom line: government largesse.

Let’s be clear: the bailout of AIG was not solely a bailout of AIG. It was also bailout of Goldman Sachs, to whom AIG were a counter-party. AIG’s failure would have meant Goldman’s balance sheet — already stuffed with derivatives dynamite — blew up. Goldman — along with a whole slew of other firms who created and invested in these dynamite products — would have been bankrupt.

And so the real problem is not Goldman’s rapaciousness. It’s the fact that systemic rapacity is being subsidised and protected by the government. Malpractice and malinvestment — such as the current global derivatives mesh which spreads risk around balance sheets like a pandemic — will in nature always eventually be punished by failure. That’s precisely what we saw in 2008, and that’s precisely what governments around the world crystallised and condoned through their bailout programs. Goldman have no incentive to change their business practices under the present conditions, and they won’t.

What’s the point of running a good business when you can run a rapacious and badly-run one and continue to thrive on government welfare? Bailouts destroy the market mechanism, and allow immoral and stupid firms (and systems) to prosper at the expense of better-run ones.

I wish Smith had the moral courage to approach the real problem — the arrogant and deluded central planners who allow the vampire squid to thrive and prosper.

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32 thoughts on “The Vampire Squid’s Problems

  1. Pingback: Guest Post: The Vampire Squid’s Problems » A Taoistmonk's Life

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  3. This has been obvious for a while, but it is making me love Goldman Sachs, because they really are doing god’s work: They are robbing the greedy idiots who invest with Goldman Sachs. In a fight between the vampire squid and the hand that feeds it, let’s root for the squid as that would destroy them both.

    • Yes there is a terrible irony to this: the people getting ripped off directly kind of deserve it.

      It is the people getting ripped off indirectly via government who do not deserve it.

  4. Excellent point, Aziz.

    I’d add that Goldman is more than just a company. It’s kind of the Elite of the elites. they attract promising and/or influential people and make them part of their little society. there’s nothing wrong with that of course but when those people leave Goldman for their gov carieers, they still bear “loyality” and connection to that society (they feel part of it) and that creates conflict of interests. Goldman “dispatches” their men into influential desicion-making positions, look no further than Treasury Dept. it is unfortunate that it’s so widely accepted that decision makers come from one quite monolitic society, this uber-estabilishment, the modern House of Habsburg.

    a former Prime Minister of Poland who served not more than a few months got his position in British Goldman outpost immidiately after he’d left gov. he had no skills in financials, it was only his contact book that Goldman desired (directly acknoledged by WikiLeak cables :D), soon after they opened outpost in Warsaw and took some lucrative IPO-arrangement deals to bring state-owned companies to local stock exchange.

    favourism, nepotism, group thinking, House of Fatal Conceit…

    • Excellent points. The same is happening in Ukraine. Vertical integration of state companies, a slick marketing campaign, and good wages, dodgy deals to insiders with International Financing, IPO. Wham! , national wealth stolen in the light of day.

  5. “I wish Smith had the moral courage to approach the real problem — the arrogant and deluded central planners who allow the vampire squid to thrive and prosper.”

    The problem with this piece of libertarian wishfull thinking should be apparent.

    Goldman suchs were just as rapacious, possibly more so, before the bailout as after it.

    There’s a reason your brand of sub-paultard analysis has so few UK fans. Despite our trashy news and TV culture, we still have a highly intellectually rigourous blogosphere, on both left and right, that can see throught he obvious nonsense that libertarians spout.

    • The problem with this piece of libertarian wishfull [sic] thinking should be apparent.

      Do you work for Goldman Sachs? Smith did, and guess what? He says they’ve been more rapacious post-bailout. His word against yours, and I imagine he knows their business pretty damn well.

      Also, I don’t really consider myself to be a libertarian. You don’t seem to have much of a palate for nuance, but whatever. You want powerful central government to work? The onus is on you (and your friends in the “intellectually rigourous [sic] blogosphere”) to prove that you can effectively address the problems of:

      a) Regulatory capture (this is the most relevant problem here)
      b) Iatrogenesis (i.e. creating more problems via interventionism)

      It is those problems that lead to the deleterious problems of bailouts, etc.

      My personal prescription to these problems is a less interventionist central government. I do not really have much faith in the current authorities being able to deliver such a thing, but there is a big irony here. My friend the philosopher Nassim Nicholas Taleb — another sceptic of interventionism (i.e. someone you might erroneously refer to as a libertarian) has been invited to the heart of government as an adviser to David Cameron . Yes: liberty getting a outlet at the highest level of government. So while I don’t always agree with Cameron, it seems as if my movement is influential in ways your “rigourous [sic] blogosphere” is not.

      • Taleb isn’t a libertarian.
        And if you think that reducing government regulation will make the problem of regulatory capture less serious, you’ve clearly drunk the libertarian Kool aid.

        • I don’t call myself libertarian, but you seem to think I am.

          And Taleb just endorsed Ron Paul for President, which by most people’s standards (yours?) makes him libertarian.

          On this issue, though, I think Taleb’s thoughts are relevant (this comes from Taleb’s forum):

          Taleb:

          One reason I don’t call myself libertarian is that I don’t see the difference between large corporations and governments . But libertarians hold that big corporations are the product of large govenments.

          Another commenter added:

          Yes, big or small, a corporation is, at its root, a creation of the state — a state-issued limited liability license…

          This is my opinion, too. Corporations and states are completely intermeshed to the point of indistinguishability. And corporations, of course, are legal fictions born by government fiat. To challenge corporate power (and thus avoid regulatory capture) we need to eliminate the power to grant limited liability, which is of course a limit on state power.

    • The problem with THIS piece of sloppy statist thinking is that you seem to think that pre-2008 Goldman Sachs and the rest of the shadow banking system existed in a free market and were not getting support, bail-outs and hand-outs from the government and the Fed.

      This, of course, is typical of deluded statists like yourself who cling on to the fantasy that your government is actually out there working for your good, but might occasionally mess up.

      The reality is that from the 1980′s, and in particular since Greenspan came into the Fed, monetary policy had itself functioned as a bail-out mechanism for the shadow banking system. Ever heard of the term ‘Greenspan’s Put’? Greenspan basically told his buddies in the shadow banking system that any drop in the market will be met with accommodating monetary policy that gives them cheaper and cheaper money. In the real world, this is called a bail-out, regardless of what it’s called in Keynesian obscurantist gobbly-gook.

      The real significance of this form of subsidy to banks is not just in the transfer of wealth to the richest which Keynesianism has conditioned you to accept as a good thing; the real problem is that it was precisely this endless subsidizing and guaranteeing of shadow banking that allowed these banks to take such enormous risks leading up to 2008, causing the crash, which necessitated the mass bail-outs.

  6. Yes, i am one of those deluded statists which believe governments can and frequently do do good things on behalf those they govern. Correct. You’re more than welcome to go and live in Somalia if you want a state-free existence. Off you pop.

    “transfer of wealth to the richest which Keynesianism has conditioned you to accept as a good thing”
    Wow, you’ve got me there. if only the Austrian school was in charge, then economic inequality would be a thing of the past.

    • Governments sometimes do good things. So too do corporations. But that doesn’t change the fact that both such things do a lot of ill — and the relevant point in this discussion is that Goldman’s excesses have been aided, abetted and bailed-out by government. I don’t really differentiate very much between the two (they are both centralising and managerialist), but one key difference germane to this discussion is that government edicts are backed by the threat of violence. If I don’t want to bail out Goldman Sachs, they can’t force me to. But they can get the government to force me to (if I refuse to pay my taxes to bail out Goldman, I go to jail) and that’s a problem we really need to address.

      Also, while I do not fully endorse everything that comes out of Austrian economics, I’d like to see you debunk the fact that income inequality really started taking off in America after 1971, when America was taken off the gold standard. This, of course, amounted to printing a lot of new money and handing it to people like Mitt Romney (i.e. insiders).

  7. Governments don’t do good things. They buy votes by sayong what they do will be good for the voter.

    I advise a not for profit organisation, that cares for the elderly. The organisation is facing growing amounts of red tape. Before Government intervention, the civic minded people ensured the best care based on common dignity and respect for the elderly. Now the administrators are so burdened with red tape, they don’t have the time to sit and chat with elderly residents.

    And a perfectly solid brick building built with community donations faces a wrecking ball as it does not meet “Statist “code. Destruction is a waste. I am sure the building lobby made sure that buildings must meet “code”.

    If a Party can seek Donations from Corporations or wealthy individuals, then Government can be corrupted through its Party base.

    The old saying of a “brown paper bag of money under the table is not a loss but an investment” rings true.

    Goldman Sachs is as corrupt as the Government and Central Bank its former members now occupy.

    Politicians used to enter Politics after an esteemed and respected career, now they are born into it or elected by the Party machine to run as candidates.

    That is not good. The elderly deserve our time and focus.

  8. Pingback: Economics for the Muppet Generation « azizonomics

  9. Pingback: Economics for the Muppet Generation | Sort Out The Real Felons

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