I was pleasantly surprised this morning to read in the New York Times an op-ed piece by Greg Smith, a senior derivatives executive at my old employer, Goldman Sachs, who had decided to leave the firm on moral grounds.
I wanted to tell Greg that he is not alone in his feelings. There are many Goldman alumni who feel like I do that the firm is headed in the wrong direction. Here is an excerpt from the preface to my new book, Survival Investing: How to Prosper Amid Thieving Banks and Corrupt Governments.
I wake each morning to a world that feels progressively more surreal, and I wonder how this can be the same America I grew up in. Every day there are new announcements of unethical behavior by bankers and politicians, and every day it goes unpunished. I'm talking about thousands of incidents over decades that have ended up costing Americans -- and people around the world their jobs, incomes, and life savings.
In the interest of full disclosure I must tell you I was once an investment banker at Goldman Sachs. It's funny, because getting the job was one of the proudest moments of my life. Goldman Sachs in the 1980s had established itself as the premier investment bank in the world. Investment bankers were regarded as some of the brightest, most hardworking, and most dedicated people in business. Now when I am asked for a short bio, I often leave out mention of Goldman Sachs. I find it stereotypes me as supportive of a corrupt system that, in reality, I have worked much of my adult life to overturn.
Goldman Sachs was not always as it is today. We weren't saints back in the 1980s, but most of us were highly ethical people. We knew we were conducting business, not "God's work". We were seeking profitable transactions, but we understood that we had clients that were issuing securities and clients that were investing in those securities and both had to be happy with each transaction. And we understood that our reputation was everything, and that if we didn't keep our clients happy on both sides of a transaction, we risked damage to our franchise.
We had a trading operation at the time, and the beginnings of a principal investment business in which we invested our own money, but they were relatively small compared with our investment banking division, which provided advice to corporations about public offerings of securities and mergers.
Two big changes occurred over time. The first was that the firm went public and began to play with other people's money. When the firm was a private partnership, it acted conservatively. This changed. Partners took out a great majority of their capital and replaced it with public monies.
I remember giving a presentation to John Weinberg, our senior partner back in the 1980's, and the management committee and telling them, "If the transaction is successful, we'll get our money back in four years." So Weinberg asked, "Why do I want my money back in four years? I've got my money now." Weinberg was so conservative with partners' capital that when we presented to him one of the first leveraged buyouts ever completed, he refused to buy any of the equity, thinking it was enormously risky, even though the very reason to do leveraged buyouts is to create highly leveraged equity that has enormous upside and limited downside.
The second major change came when the principal‑investing business and the trading business became the most important parts of the firm. Investment banking was still successful, but its profits were dwarfed by the trading business and the principal‑investing business, and Goldman Sachs has always been oriented to the bottom line. And so it rewarded these trading and principal‑investing partners with more senior management positions. Eventually most of the executive suite came from the trading side of the business.
The current CEO, Lloyd Blankfein, comes out of the commodities trading business, and it shows. In his testimony before Congress, he tried to present all of Goldman Sachs's business as just a matter of trades in which Goldman had no responsibility or fiduciary duty to its clients. He argued that Goldman's clients were sophisticated people, and that the firm's job was to maximize profits regardless of what it meant to the profitability of its investing clients. This is how traders think. When traders rip off clients for $1 million, it is met with whoops and cheers across the trading floor. Investment bankers spend a great deal of time trying to find loopholes in the tax laws and accounting regulations so as to maximize cash flows and reported earnings for their clients, so they are not completely without sin, but what traders do every day is much more egregious.
And there is very little value in it, other than to the trader himself. When an investment banker takes a small firm public, the banker raises capital for the firm, which creates jobs and new products and services. When a trader packages a bunch of worthless mortgages and lies to investors about their creditworthiness -- he's created no value for society. The client is worse off by exactly the amount that Goldman Sachs profits. It's a zero-sum game.
Academics like to argue that trading increases liquidity, thus reducing the friction, or costs, at which trades and economic transactions occur. This is partly true, but it's hardly a justification for the liberties traders take. Look at the damage done to the global economy in this latest crisis. Could all the despair of hundreds of millions of people across the planet possibly be worth slightly lower bid‑ask spreads?
So for the last 12 years, I've been writing books explaining what I think is the greatest crisis facing our country and the world -- that big banks and corporations have taken over the US government with campaign contributions and lobbying. People think that banks and corporations lobby the government to get tax breaks and minor government subsidies. No, they lobby to write regulations that help them and to remove regulations that they find cumbersome. And they lobby to obtain trillions of dollars in government contracts, especially the defense companies who push weapons systems we don't really need. The problems of the United States are myriad, yet almost all can be traced to the corporate and banking stranglehold over our government and its politicians.
John R. Talbott, previously a Goldman Sachs investment banker, is a best selling author and economic consultant to families whose books predicted the economic crisis. You can read more about his books, the accuracy of his predictions and his financial consulting activities at www.stopthelying.com