I just did a phoner on Bloomberg TV on Goldie, and I suspect this meme has just about run its viral course.

To me, the key takeaways are as follows:

Publicly Traded Banks: When firms shifted from Partnerships to publicly traded banks, their priorities changed.
Profits First: Meeting quarterly profit estimates became job 1; everything else, including the corporate culture, was secondary.
Not Just Goldman: GS may have lost $3b in cap yesterday, but I doubt they will lose many clients. Where are they going to go, to the choirboys who work at Morgan Stanley, or to the philanthropic organization known as Deutsche Bank?
Derivatives are Opaque: The issue with complex products is lack of transparency. Derivative fees are opaque, the products are complex, and muppets clients do not understand how much margin is built in.
Counter-Party vs Fiduciary:  The complexity of these products often leads to clients relying on their salesman. They shouldn’t — they are not your adviser, they are your counterparty.

This is the last I plan on discussing this topic for the foreseeable future . . .

Category: Corporate Management, Derivatives, Media

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Final Thoughts on GS Controversy”

  1. Tarkus says:

    Profits, yes. The problem is that not all profits are created equal.

    When Mr. Smith speaks about “ripping-off” clients, that is not the same kind of profit as providing higher value goods or services to customers.

    That some commentators have failed to make the distinction speaks to their own standards, more than anything.

    However, I would say that Mr. Blankfein and Cohn were put in charge of GS by the board, and seeing as how their experience was from the trading side, it would appear that it may have been a plan to alter the culture from that point forward. It would theoretically then be the public/customers that misconstrued that GS was still functioning as an IB (behind the curve on a major shift again). If so, it was a great headfake on customers.

  2. Stuart says:

    Goldman client = cattle, dumb cattle in denial.

  3. llandson2000 says:

    If GS clients begin to believe that the shift from partnership to publicly-traded is what caused the breakdown in priorities, why couldn’t they move to private banks/managers? I happen to believe that the responsibility to shareholders is a big part of the problem. I’m pleased that law firms still aren’t allowed to go public.

  4. on the Tangent..

    “Sign seen over the door where the stress test results were collected.”

    http://3.bp.blogspot.com/-dAIDVL3t5sI/T2EgVS2-xrI/AAAAAAAAVW0/H6MpXq8R9y4/s1600/see%2Bno%2Bevil%2Bskeletons.jpg

  5. Through the Looking Glass says:

    Let me get this straight. The whole stock market system is based on lies to meet quarterly projections and those projections are lies sent out as a challenge for Wall Street to conform to?
    And if you are good enough to make the lies look feasible you get a 8 figure bonus?
    Then why does the market ever go down?

    Next they will bundle up groups of Muppet client lists and trade them on the derivitive markets.

    Face it though all you people that work around it are promoting it and are derivatives of a massive scam and you need to gang up on the scammers or you are all COMPLICIT.

  6. ByteMe says:

    They shouldn’t — they are not your adviser, they are your counterparty.

    This sounds like a Sunday column topic.

  7. pintelho says:

    wait? why kill this discussion at such an early time?

    I bet half the clients at GS or other big banks don’t know the half of it…and I think that the muppets removing their funds from the Jim Henson banks and into the more boutique hedge funds or independent partnership type banks would teach a lesson to the big banks and perhaps force them to change their ways.

    leave the derrivative products to intra bank trading instead of getting clients to be the counterpartys…

    screw that…keep this meme alive as much as possible. I think the only way the banks will reform themselves is if their muppet clients shuffle their trillions over to the nearest independent banker.

    BR you and your business stand to benefit from such a move. so the fact that you are killing this meme is not very self serving.

  8. econimonium says:

    They shouldn’t — they are not your adviser, they are your counterparty.

    I remember when I was young a privy to a conversation between my dad and his broker (who was also a personal friend). My dad wanted him to do some things, the broker was against it, and my dad finally said “this isn’t a request” and his transactions were completed. After he left my dad said to me “when he’s here for this he’s not my friend, he’s a salesman. Period.”

    In other words my dad knew that no matter what, this guy was motivated by his own perks and commission, not his overall undying interest in my dad’s finances. That lesson was never lost on me. It shouldn’t be lost on GS muppets….errr…clients either. From the word “muppet” I take it as a message to clients to remove Goldman’s fist from your ass. Too bad many will keep shoveling money at them.

  9. JohnnyVee says:

    I think your financial advisor is your fiduciary not counterparty.

  10. Arequipa01 says:

    Tipped your hand.

  11. AtlasRocked says:

    http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=57019&SearchText

    Hello, I am a current JPMorgan Chase employee. This is an open letter to all commissioners and regulators. I am emailing you today b/c I know of insider information that will be damning at best for JPMorgan Chase.

  12. Sechel says:

    William Cohan just did a piece and brought up the conflicts on El Paso. How can one firm have so many perceived conflicts and claim it’s policy is to put clients first.

  13. adid says:

    “When firms shifted from Partnerships to publicly traded banks, their priorities changed.”

    This is true for all listed companies.

  14. tradethisway says:

    BR, you absolutely should tackle this topic in a Sunday column in the WP.

    A title like that (“They are not your adviser, they are your counterparty”) would be another reminder that corporates and investors out there need to be very careful when dealing (i.e. trading) with any bank, particularly big institutions that have both the knowledge (the more exotic the derivative product the more they can bake in hidden profits) and the trading book (a product to sell, thus their “sales” teams).

    I know I am preaching to the choir here, but let’s continue to shed light on the fundamental conflict of interest that exists in investment banks, particularly their derivatives trading desks.

  15. DeDude says:

    “Conflict of interest” is a big f…ing deal in the public sector. Why is it considered not only acceptable but “normal” in the private sector?

  16. bear_in_mind says:

    “Counter-Party vs. Fiduciary” = excellent point!!!!

    The question is what fiduciary responsibility, if any, do brokers and financial advisors have to their muppets? From this perch, it appears the answer is ZERO, ZILCH, NADA. And until that changes, anyone who has money in the market via these broker/advisors is being held hostage without ransom.

    What a putrid mess of an “industry” this has become: outright lies, deceit, theft, fraud, embezzlement, and enough quid pro quo’s amongst regulators and law enforcement to make it all “legal.”

    Those of us old enough to have seen and read enough history know how this play ends, but the band plays on for now…

  17. formerlawyer says:

    @llandson2000 Says:

    Lawyers can be incorporated (in the UK) and the limited partnership model (which most law firms have adopted) will also likely lead to problems in the future.

    http://en.wikipedia.org/wiki/Limited_partnership#United_States
    http://en.wikipedia.org/wiki/Limited_liability_partnership
    http://biztaxlaw.about.com/od/glossaryl/g/limliabpart.htm

  18. Lyle says:

    Re: counterparty versus adviser, yes indeed. Note how the industry has fought the idea of making brokers fiduciaries tooth and nail, in their hearts they know that as fiduciaries they would not make the big bucks. But of course the folks that deal with GS are big boys as well, and should know this. (Note if you read F.I.A.S.C.O. on Morgan Stanley essentially the same ethics apply rip the other guy off if you get half a chance). If you don’t understand something just say no, and tell the salesmen where to put his toxic trash (where the sun does not shine…).
    It seems to me that the brokerage function should be reduced to order taking and fulfilling only, nothing more. If advice is needed it should come from paid advisers on an hourly basis (none of this percentage of assets basis) or a flat fee to analyze and recommend.

  19. DeL-

    with..”…“Conflict of interest” is a big f…ing deal in the public sector…”

    YGTBFK(Me/Us) with that, Right?

    Can you give (Me/Us) One, actual, Example?

  20. northendmatt says:

    • Not Just Goldman: GS may have lost $3b in cap yesterday, but I doubt they will lose many clients. Where are they going to go, to the choirboys who work at Morgan Stanley, or to the philanthropic organization known as Deutsche Bank?

    You know, in another time that would have been considered a market failure and grounds for antitrust action.

  21. Through the Looking Glass says:

    I see some attitude in some of these responses and ignorance of how and why middle America uses the markets. Of course they are fiduciaries .Most people hand their money over to a broker because they trust him ,not because they are stupid . They are busy running a gas station or hair parlor and it was never their intent to to learn the how the market works or understand what what a broker does, that’s why they hired a broker. Yet some people promote the idea that’s where they cross the stupid line and should have know better.
    Go ask a granny somewhere that was Wall Street ripped off what an ETF is then call her stupid.

  22. sbcharo says:

    BR,

    Agreed, it’s not just about Goldie…they just “do it” better than the rest for many reasons. The type of smart, aggressive, focused individual that is attracted to the potential for huge financial gain and power is so focused on the goal at hand, they are not typically biologically wired to consider the macro consequences of their behavior. (Though some have expressed remorse later). With the exception of egregious or illegal wrong doing, I don’t fault the corporations or the individuals that brought us to this point. Wall Street, as it is today, will net the same results as putting a big bowl full of candy in a room with five year old’s. One or two might resist the temptation but the rest will scarf up that candy like there’s no tomorrow.

    John Reed, former Citi Chairman, has acknowledged that “they” all got it wrong; That there’s no one minding the hen house. It’s far worse now than it was at the height of the crisis. The problem is systemic and it’s getting worse, not better. Wall Street (or any other industry) cannot self regulate. It’s totally naive to think otherwise.

    But it’s not just Wall Street, until we have complete electoral reform; public financing of elections and all politicians have to live under the same laws, health plans, pensions, schools that the rest of us do, we’ll continue to have the same outcomes…

    It’s not time to let this issue go…but it’s ok to stop pointing the finger at Goldie…we don’t want them to feel bad :)

  23. mathman says:

    http://www.propublica.org/article/13-reasons-goldmans-quitting-exec-may-have-a-point

    “We decided to look at just one aspect of their record: SEC charges levied against Goldman and its employees over the past decade.

    April 2003: SEC charges Goldman Sachs over conflicts of interest [3] among its research analysts. The company eventually settled [4] for $110 million in fines and disgorgements.

    November 2003: Former Goldman economist John Youngdahl pleads guilty to insider trading [5]. The firm had to pay the SEC $4.2 million [6] over profits it gained from the illegal dealings.

    July 2004: Goldman settles with the SEC [7] for $10 million over charges it improperly promoted a stock sale involving PetroChina [8].

    January 2005: Goldman settles with the SEC for $40 million over charges that it violated securities law [9] in promoting initial public offerings.

    April 2006: Two former Goldman employees are charged with running an international insider-trading ring [10] while they were at the firm. Eugene Plotkin and David Pajcin, both in their 20s, paid off insiders at other firms and stole early copies of Business Week to get an edge [11]. They also tried (unsuccessfully) to use strippers to get information. Both eventually served jail time [12].

    March 2007: A Goldman subsidiary, Goldman Execution and Clearing, settles with the SEC for $2 million over allegations that faulty oversight that allowed customers to make illegal trades [13].

    March 2009: Goldman Execution and Clearing settles with the SEC for $1.2 million over improper proprietary trading [14] by employees.

    July 2009: The SEC charges a former Goldman Sachs trader Anthony Perez and his brother with insider trading [15] based on information Anthony Perez obtained through his job at Goldman Sachs. He was fined $25,000 and his brother more than $150,000.

    May 2010: The SEC hits Goldman Execution and Clearing with a $225,000 fine [16] for violating a rule aimed at regulating short selling [17].

    July 2010: Goldman settles with the SEC [18] for $553 million over allegations that it misled investors about the collateralized debt obligation ABACUS 2007-AC1 by not disclosing the involvement of a hedge fund in its creation, or the fact that the hedge fund stood to benefit if the CDO failed. Goldman executive Fabrice Tourre [19] was also charged.

    March 2011: The SEC charges Goldman board member [20] Rajat Gupta with insider trading. Gupta allegedly passed on information [21] he learned as a board member to the hedge fund Galleon Group. In October, 2011, he was arrested and hit with criminal charges by the FBI. The case is pending [22].

    September 2011: The SEC charges a Goldman employee [23], Spencer Midlin, and his father for insider trading based on information Spencer Midlin gained from his position at Goldman Sachs. The two men were ordered to pay $92,000 [24].

    February 2012: Goldman Sachs receives notice from the SEC that the agency may bring charges [25] related to mortgage backed-securities.”

  24. [...] Thoughts on the Goldman controversy. I agree with the points Barry made. Huge change in corporate culture and focus that happened after 1999. Regulation changes also gave different economic incentives to change the system. [...]