Why Do Business with GS, JPM, etc. ?
By Barry Ritholtz - April 26th, 2010, 5:30PM
Quote of the Day:
“In our experience, Buy Side investors today don’t do business with GS or the other major Sell Side firms because they trust them. They do business with firms like GS because they believe that the firm has better access to information than do the other dealers in the marketplace.
The sad fact is that the trust that once made firms like GS and the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains a hideous, barbaric place that is bereft of honor — and a source of infinite risk to the participants.”
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April 26th, 2010 at 5:51 pm
Best quotes:
If Goldman Sachs settles or loses at trial, “people are going to ask, ‘Am I one of the clients who Goldman does deals for, or am I one of the clients Goldman does deals against?’ ” Dombalagian said. “There’s the saying that if you don’t know who the mark at the table is, you’re probably the mark.”
Analysts say Goldman Sachs should settle
http://www.northjersey.com/news/business/92033704_Analysts_say_Goldman_Sachs_should_settle.html
April 26th, 2010 at 6:06 pm
yes, quite, contrary to cracks about ‘the moral fibre of Bankers’, this observation: “..the trust that once made firms like GS and the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains a hideous, barbaric place that is bereft of honor — and a source of infinite risk to the participants.”, of Whalen’s, is spot-on.
yet, Dodd, & chums, want to enshrine that degradation as the new standard..
Senator Dodd’s Regulation Plan: 14 Fatal FlawsPublished on April 22, 2010 by James Gattuso
http://www.heritage.org/research/reports/2010/04/senator%20dodds%20regulation%20plan%2014%20fatal%20flaws
April 26th, 2010 at 6:08 pm
The GS attitude toward their clients brings to mind Animal House where Otter (I think) said, “You f’ed up; You trusted us.”
April 26th, 2010 at 6:11 pm
Sounds kinda like Madoff. From what I understand, some clients knew he was a crook, but thought he was their crook…
April 26th, 2010 at 6:21 pm
Birds of a feather flock together…
April 26th, 2010 at 6:26 pm
Having done considerable business with the Squid in the past, I can say with no hesitation that they will not be getting the phone calls in the future.
Trust is totally gone.
April 26th, 2010 at 6:31 pm
I believe that others are likely asking that VERY question to themselves and their colleagues right now.
April 26th, 2010 at 6:31 pm
They are likely to become as toxic as the crap they were peddling to their clients and betting against.
April 26th, 2010 at 6:34 pm
The GS crowd reminded me of a bit of Roman history. Crassus was one the 1st Triumvirate.
From wikipedia:
Most notorious was his acquisition of burning houses: when Crassus received word that a house was on fire, he would arrive and purchase the doomed property along with surrounding buildings for a modest sum, and then employ his army of 500 clients to put the fire out before much damage had been done. Crassus’ clients employed the Roman method of firefighting—destroying the burning building to curtail the spread of the flames.
April 26th, 2010 at 6:40 pm
Manny – that would depend on whether or not the bulk of GS’s “clients” are themselves trustworthy though right?
April 26th, 2010 at 6:53 pm
I am not trading this, but.. Is GS being unworthy of trust really a revelation? This too shall pass. Gee, I havent heard MSM burying Toyota once since this story broke. Something else will be orchastrated to get all hot and bothered about. It may take a litle longer, but the well timed hue and cry shall pass. The bill will pass and everyone will move on. Interesting that the SEC incompetence and malfeasanece story lasted a nanosecond. Prosecute those SEC bastards for theft by getting paid for surfing porn all day long while the country went to hell. It is becoming all too common now for the self serving investigations and prosecutions being initiated. Chris Christie discovers corruption just in time to be elected. Cuomo miraculously gets the goods to make Paterson go away. Give me a break, this crap has been, and will continue to go on forever. The selective enforcement is almost as bad as the offfences.
April 26th, 2010 at 6:53 pm
Ah, the good old days.
April 26th, 2010 at 6:56 pm
The intrguing part of the quote for me is the final section “leaving the marketplace that remains a hideous, barbaric place that is bereft of honor — and a source of infinite risk to the participants.” That has been the biggest/scariest revelation for a “small fish” like myself. How much more volatility this current secular bear market has in store for us keeps me up at night, so to speak.
April 26th, 2010 at 7:00 pm
I think I disagree with Walen’s diagnosis. It is quite possible to argue that the exposure of GS, JPM et al helps restore the rationality of a market which has too long suffered from an inadequate appreciation of risk. The argument is here at http://tinyurl.com/2dfyubo (ht Robert’s Stochastic thoughts and Brad DeLong). The money quote:
“Goldman Sachs has damaged its reputation as a fair broker with this scam. I think that is an excellent thing, because that reputation caused people to trade if they thought they were smarter than average. Fear of being cheated by Goldman Sachs makes up for irrational over confidence and will lead the economy towards where it would be if everyone were rational. To put it briefly, what’s bad for Goldman Sachs is good for the world.”
April 26th, 2010 at 7:31 pm
So people like Fritzkelly, who says “they wont be getting calls in the future”… Hmm, this makes no sense. This seems like a comment from someone NOT in this business.
I have $1B of product, like keep it simple and call it a “stock”, I want to buy… do I call Goldman? Why not… I just want the best price. I call 4 dealers and ask them to make markets in $1B lots of QCOM. Each gives me a buy/sell price. Say 37.50/38.50.
Someone on this board wants to give away your money and your clients money to some other firm because they dont like Goldman? Personally… I take the best price. Its commoditized.
Thing is… what GS is good at…. is being the best buyer when THEY want to be and being the best seller when THEY want to be. But bid/offer that is hit/lifted is just the BEST PRICE for each client. Why complain if GS gave you the best price?
I have NEVER worked with an institutional client that didnt get 3-5 markets made in most trades. Some clients hit every dealer (bc they want even more size). This basic “lack of honor” works both ways. Clients used to be clubby with firms and hand them constant deals with no price checking. It used to be an “honor” filled club of 10x the fees and 10x the liquidity spreads. Its a GOOD thing that this is gone.
April 26th, 2010 at 7:33 pm
Goldman works for Goldman, always has and always will. All else is commentary.
April 26th, 2010 at 7:51 pm
I’m wondering how much of this lack of honour has to do with the “arrogance of specialized knowledge”?
I was struck by a comment made by a wall street type when being interviewed by NPR about the president’s recent finacial speech. With an obvious air of disdain the broker stated that (paraphrased) the president should stick to “talking about things he understands”. The expertise of the president is immaterial and off-topic, what was striking and material was how apparent it was that the broker felt like he and those like him were superior in some fashion because he knew more about a specialized topic than someone else.
This is not unique to wall street, I’ve found it quite common in my profession (computers). When I was an IT Director a number of years ago, I had to deal with an arrogant tech who had very strong opinions about what programs a particular doctor should be able to access. His premise was that the doctor wasn’t able to use the particular program, and that only someone that “was smart enough” should be able to access it.
The point was that the tech had specialized knowledge that the doctor didn’t, so the tech’s premise was that the doctor wasn’t as smart as him. Of course this is ridiculous, knowledge and intelligence are different things. I doubt anyone would think a computer tech could step in and do surgery, but think of how many times we hear of people being called stupid, or idiots because they didn’t understand something.
I can’t tell you how many times I’ve seen this behaviour, it is quite common. What I have also seen is as people become more knowledgeable, the power of those those with specialized knowledge diminishes. The more transparent the knowledge, and the better those who don’t understand become knowledgeable, the less arrogant those holding specialised knowledge are.
April 26th, 2010 at 7:56 pm
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
His entire post today is about trust.
Reputational Risk: In Goldman We Trust
“We all seem to suffer a common, self-inflicted wound that can be summed up simply as a lack of trust. The lack of trust, in our view, stems from the breakdown in the rules which once governed and also limited the actors in the world of finance, particularly the rules regarding the creation and sale of securities. Banks, funds and the rating agencies all share the blame, but none more than the politicians in Washington and the Congress who enabled this mess. Remember that as you watch the hearings before the Senate Permanent Subcommittee on Investigations this week.”
April 26th, 2010 at 8:01 pm
I have just 3 words to offer in response this post:
Brown Brothers Harriman.
.
April 26th, 2010 at 8:54 pm
Hammer…. go try and trade $10B/wk in product with BBH. Doesnt exist. They dont have it, cant support it.
Lots of clients in this world run $100-500B portfolios. Insurance companies, large banks, foreign sovereigns, etc. These clients put $1-10B PER WEEK to work. This is why they trade things like “structured synthetic CDOs”.
April 26th, 2010 at 9:21 pm
How it is possible that anybody in their right mind could actually trust anybody in financial services?
April 26th, 2010 at 9:35 pm
Ah, yes, the “good old honorable days.”
Gentlemen:
You have undertaken to cheat me. I will not site you, for law takes too long. I will ruin you.
Sincerely yours,
Cornelius Vanderbilt.
———————————–
Old Daniel [Drew]pulled out his proverbial red bandanna handkerchief to mop his brow before sitting down with some fellow speculators. A slip of paper bearing a ‘point,’ or tip, fell to the floor; a bystander put his foot on it. As Drew left, apparently not noticing the incident, the others pounced upon the piece of paper, which proved to be an order. They bought Erie stock in large quantities, and were soon gulled.
———————————–
http://www.time.com/time/magazine/article/0,9171,747147-3,00.html
———————————–
Whatever exists has already been named,
and what man is has been known;
no man can contend
with one who is stronger than he.
The more the words,
the less the meaning,
and how does that profit anyone?
Lloyd really needs to brush up on his Ecclesiastes.
April 26th, 2010 at 9:39 pm
If you read some history, the thing that jumps out at you about the situation leading up to the Great Depression is that Wall Street and the financial industry were totally amoral, with attitudes like cognos’ being the rule instead of the exception. As things came apart, all the convoluted beggar-thy-neighbor deals came apart and the entire economy collapsed into a jumble of distrust.
Trust is the necessary ingredient that makes economic transactions possible. If neither side in an economic transaction trusts the other, if fear overcomes greed, the transaction does not get made.
THAT, in a nutshell, is the thing that destroyed the economy in the 1930s. And when there is enough pain, evenly distributed over all the world, we will walk that path again, until people who are fearful and distrustful enough bond together and form a framework of protection, not out of trust, but out of distrust and fear.
We have some distance to go in that journey, but I have no doubt that we will get there. I don’t know what the nature of the next fraud will be, whether it will be an individual fraud, some “rogue trader” or a con man like Madoff, or some corporate monster that sees only its own betterment, and ignores any rules that might get in the way. As we progress to the inevitable end point, more and more of the players (including the public at large) will join in the get-mine-while-the-gettin-is-good mentality. With a huge demographic bubble of boomers fast approaching retirement with their meager savings decimated, they will be the front-line troops, eager to do whatever it takes to “get well”.
In the end, all there will be is failed frauds. Enjoy the ride.
April 26th, 2010 at 9:53 pm
http://survivingthecrash.blogspot.com/2006/09/housing-bubble-vs-great-depression.html
http://www.gold-eagle.com/editorials_01/seymour062001.html
April 26th, 2010 at 9:57 pm
@constant: Correct x10. Simple and direct. But it’s more like gangrene or diabetes than H1N1. A long slow process.
Great book a few years back “Trust” by Fukuyama (SP?). Made that point in great historical detail.
April 26th, 2010 at 10:14 pm
“They do business with firms like GS because they believe that the firm has better access to information than do the other dealers in the marketplace.”
What kinds of information? Are they insider information? Clients will not consider where the information comes from. The clients’ main objectives are to invest to have returns. They should also recognize that the investment banks’ benefit is always in a higher place than their own benefits.
There are analysts, own trading desks, brokers, dealers, money management etc in an investment bank. Large chunk of money earned are from own trading(in the expense of shareholder & taxpayer), commissions(sometimes selling products seems to be AAA), management fees(regardless of performance)……
It is naive to believe that there are not conflicts of interest, client/client or bank/client.
The IBs are the financial armies of USA. They are essentials to US companies and federal government. Through them, the money from all over the world flows into government debts, corporate debts/funds. They are the heart and the blood vessels of USA.
In coming eras, government will even more depends on the help of the banks. As many regional banks and some large investment banks collapsed in the past years. The banks remained will even earns more money while the federal debts balloon.
The banks are greedy. However, I think the most immoral group of the Wall Street are the rating agencies!
April 26th, 2010 at 10:17 pm
“Why complain if GS gave you the best price?”
This is the exact same argument that brought Bernie Madoff so much business — people suspected that he was doing something unsavory, front-running, whatever, they didn’t care, so long as they got a “better deal”. In fact, I suspect that many of the victims didn’t want to know the details, but took some secret pleasure at getting some “unfair advantage” themselves. This is how it spreads.
Where they lacked imagination was in the ability to conceive that THEY might be the ones providing the consistent superior returns.
“Why complain”, indeed? Go ahead and give an amoral monster your business, it’s all good, right?
April 26th, 2010 at 10:18 pm
You guys need to re-read your history… what caused the Great Depression was poor policy responses by the govt and central bank (many of which you guys seem to recommend regularly).
Specifically — interest rates too high, allowing banks to fail broadly, worrying about prices/inflation/gold.
So then a genius of a guy named Keynes wrote a book. Today we follow many of his best inventions and generally, they keep us from Great Depressions (pretty regular in the 1800s as well).
Its really easy to “witch hunt” on Wall Street after they sold people products THAT THEY WANTED! They did the same thing in the late 90s with dot coms. What about realtors? And real-estate developers? They seem like the real culprits. But who cares? People are adults. You guys are shocked, SHOCKED! that sometimes (especially right before a big economic crisis) Goldman Sachs and others sell products that perform poorly. Really?
Its ignorance of the most dangerous kind.
April 26th, 2010 at 10:21 pm
Goldman sold plenty of “toxic assets” (as even BR still calls them) … 1 yr ago in early 2009… to clients who are up 300%, 500%, 1000% on the purchase.
I bet you can find emails saying certain companies and assets are “dogs” or “shitty deals” that are up 5-10x over the past year.
The difference is not Goldman… the different is NOT the quality of the deal… the difference is the timing in the cycle. Duh! Welcome to financial markets.
April 26th, 2010 at 10:49 pm
I think banks like GS have to be broken into smaller independent companies.
Regulations are also needed to cope with the products which the banks sells. Toxic assets are like drugs. Government entities have responsibilities to regulate them or even prohibit them.
The Obama’s administration is in right direction to regulate not only the financial intermediaries but also the self-claimed independent credit agencies.
Personally, I think the reputation damage to the credit agencies are more severe than that of banks. Hey, who didn’t know that bankers’ reputation before they deal with them? They gets what they expected but at the same time, sadly, what they unexpected – risks which are understated by the bank itself and by the credit agencies.
April 26th, 2010 at 10:51 pm
“…what caused the Great Depression was poor policy responses by the govt and central bank …”
This is circular and specious: What were the govt and central bank responding to in the first place? A functional financial sector and an economy that is providing do not need “responses” so what was it? Just a matter of timing or a matter of the Ponzi finance boil bursting into its crescendo of pus and blood?
Timing is relevant to the game of musical chairs but economy is the structure of livelihood; best to learn the difference if only to fully understand GS et al’s marginal relevance to the latter.
April 26th, 2010 at 10:53 pm
It’s Robin Hood in reverse. The banks want your money for profits. The government wants the banks money for contributions. And we are the schleps that grease the wheels which make it all happen. As long as it remains that way the banks and the government will do whatever is in their power to maintain that status quo. Pure and simple.
April 26th, 2010 at 11:45 pm
Levin is going to skewer them tomorrow:
http://www.bloomberg.com/avp/avp.htm?N=video&T=Levin+News+Conference+on+Goldman+Hearings+&clipSRC=mms://media2.bloomberg.com/cache/vyFK36UsG3xk.asf
I love this guy!
April 27th, 2010 at 12:09 am
Quote in the New York Times:
Mr. Blankfein said. “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”
Goldman Faces New Mortgage Allegations
http://www.nytimes.com/2010/04/27/business/27goldman.html
April 27th, 2010 at 6:30 am
I was lucky to get out of high school but with that said i have been watching and reading and i have been trying to “think” and not just repeat the thoughts of others……..We have LEH. We have AIG . We have Enron and now we have the most revered Goldman Sachs. …..We are in a state of anarchy yet we are to dumb and stupid to know it…..Its much like a “bubble” that we can’t detect until it bursts. We need a TV special , maybe a PBS series modeled after the show ” Meeting of the Minds ” . We don’t need a Senator Dodd or a Chris Cox…..We need the Einhorns and the Bill Flecks of the world. We need the small group , the correct group, that were warning all along…The business schools are lost, the law schools are lost. CNBC is lost and our government is lost . 60 minutes is lost…Ritholtz was the brains , energy and demeanor to act as host …just as Steve Allen acted as host of the PBS series ” Meeting of the Minds”
April 27th, 2010 at 7:46 am
Troubled T –
Nah, were not “all lost” as you say.
Most people have a highly cyclical reaction function. 3 years ago they thought everything was great. Today everything is lost (federal debt, banks, housing, jobs). Thing is its already over and the next boom is on the way.
Get out of thinking like everyone else and you’ll see opportunity in life and business just about everywhere.
April 27th, 2010 at 8:04 am
Most people just repeat what they heard last…Most people vote party line…Most people watch stupid TV…Most look for leaders who use the same line ” Follow me, accept my word. join my flock and i will show you never ending happiness and joy “..Wall street does that….Government does that…The church does that…Ali did that….They ALL do that… …….The next boom ? Oh i see, more spending of other peoples money on crap you don’t need……
April 27th, 2010 at 9:48 am
“cleargulf Says:
April 26th, 2010 at 6:34 pm
The GS crowd reminded me of a bit of Roman history. Crassus was one the 1st Triumvirate.
From wikipedia:
Most notorious was his acquisition of burning houses: when Crassus received word that a house was on fire, he would arrive and purchase the doomed property along with surrounding buildings for a modest sum, and then employ his army of 500 clients to put the fire out before much damage had been done. Crassus’ clients employed the Roman method of firefighting—destroying the burning building to curtail the spread of the flames.”
don’t forget how Crassus met his end – he over-reached and took on the Parthians and lost. They decided to tailor his punishment and poured molten gold down his throat.
April 27th, 2010 at 9:56 am
nobetanofun …….I believe that is the origin of the word crass
April 28th, 2010 at 7:25 am
Watched Blankfein struggle to comprehend the rudiments of honesty. The very first blog – bsneath – sums it up entirely.
Let’s not lose sight of the fact that the instruments were synthetic = created by GS. So, it’s not like placing an order for 100k shares of GE where getting the best price from GS is the entire story.
Reminds me of someone selling a klunker car they own which they know is dangerously defective and then take out life insurance on the buyer. In this case the car was purposely made even more defective. And then we say there is no conflict of interest??
“Confidence Man” begins with gaining confidence. It’s something one earns, or loses.