How big banks got this way

PUBLISHED : Tuesday, 20 March, 2012, 12:00am
UPDATED : Tuesday, 20 March, 2012, 12:00am


What a way to go!

Greg Smith got more than his allotted 15 minutes of fame when he found a new way to resign from Goldman Sachs - via an op-ed article in The New York Times, in which he blasted his employers as 'toxic' and 'morally bankrupt', accusing them of ripping off clients and calling them 'muppets', British slang for stupid.

It remains to be seen what impact the article will have on Goldman Sachs' behaviour - or on Smith's job prospects.

But Smith's charges are worth looking at in the context of the contribution of banking and finance to the modern capitalist world.

Smith's article went viral, and US$2.15 billion was wiped off the value of Goldman Sachs shares. The op-ed inspired several items on the infantile Twitter feed 'GS Elevator Gossip'. Example: '#1: I wish I invested in poverty. It's up 60% since 2001. #2: We did.'

Goldman itself predictably denied Smith's accusations and tried to present itself as warm and cuddly to customers. Other commentators yawned and said that it had all been said before; one accused Smith of being 'faux-naive'.

In a classic Rolling Stone article, Matt Taibbi had surely already damned Goldman to hell for all eternity, describing the firm as 'a great vampire squid wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money'.

But although other people had said similar things before, Smith was a Goldman insider and backed up his accusations by quitting his US$500,000 job. As an executive director in London, equivalent to a vice-president in the US, he was only halfway up the totem pole. He waited until after bonus payouts had been made, and who knows what frustrations and arguments may have halted his journey up the greasy pole.

Nevertheless, Taibbi himself praised Smith as 'a brave and courageous soul' for speaking out.

Taibbi argued that having an insider blast the culture of Goldman is 'the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped.

'Nor would the Occupy protests or even a monster wave of civil lawsuits hope to change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.'

Naked Capitalism blogger Yves Smith, who in her day job as Susan Webber, head of a management consultancy, knows something about the slippery financial world, reminded Greg Smith that not everything was rosy and sweet-smelling in Goldman's garden of the 1990s.

She said there was a culture change when chairman Lloyd Blankfein and his crew took over and put current profits above everything else.

Barry Ritholtz, head of research firm Fusion IQ, said in his blog, The Big Picture, that the transformation of big financial firms from partnerships to publicly traded banks was a watershed: 'Their priorities changed. Profits first: meeting quarterly profit estimates became Job 1; everything else, including corporate culture, was secondary.'

He said Goldman was hardly alone and is unlikely to suffer a massive defection of clients. Where and to whom should unhappy clients run, 'to the choirboys who work at Morgan Stanley, or to the philanthropic organisation known as Deutsche Bank?' he asked, tongue clearly in cheek.

Goldman's defenders included New York's mayor Michael Bloomberg, who said it was 'beyond me' why The New York Times had published the article.

Blankfein was 'trying to lead this firm at a time when God couldn't lead it without being criticised', Bloomberg said. It was not clear whether this was a conscious reference to Blankfein's claim in 2009, which he later withdrew, that he was 'doing God's work'.

Bloomberg echoed others who claimed the clients of Goldman and other investment banks are not little old ladies but professionals who should be aware of the maxim caveat emptor (let the buyer beware).

But there are wider issues concerning the role of finance and financiers in the modern capitalist economy. In the blogosphere, a common name for the top bankers is now 'banksters', a portmanteau word apparently combining 'bankers' and 'gangsters'.

Previously the financial system was regarded as the heart of the capitalist system, pumping blood - also known as money - through the system so the capitalist body could stay healthy and grow. Now finance has taken on a life of its own.

The blogger Sell on News, writing on the MacroBusiness website in Australia, makes some interesting distinctions and claims that although global capital is seen as a homogeneous development, it has recently been largely an English-speaking phenomenon, as the huge transaction volumes from London and New York demonstrate.

Ronald Reagan and Margaret Thatcher promoted a logical absurdity, he asserts: 'That money, which is rules, can be deregulated. Capital can 'flow freely' as if it is water. This liquid should not be impeded by barriers if it is to reach its equilibrium point of maximum efficiency. It is rubbish, of course, but metaphors are extremely powerful, especially bad metaphors.'

Even more damagingly, Sell on News says: 'The whole thing was scientised: the rules were manipulated by highly numerate rocket scientists (often literally out of Nasa) who took the basic rules of money and created a massive edifice of meta rules: rules based on rules based on rules. CDOs, CDSs, interest rate swaps, volatility indexes and now microsecond high-speed trading. It is this folly that is at the source of the recent crisis.'

Such meta money can only survive through massive leverage, because the margins are so small, and those margins can be killed by small taxes, which is why Britain is so opposed to them.

Sell on News sees three different approaches to money, each based on a powerful currency, each with flaws.

There is the US dollar-based 'English-speaking method of making returns from returns from returns'. There is the European approach, based on conventional banking and conventional bonds, meeting the cost of capital by making returns from debt, which now risks being mired in low growth because the demographics are poor.

And there is the Asian approach, as seen in Japan and more recently in China, which doesn't believe in the cost of capital or the discipline of capitalism, with massive investment and risks of cycles of excess and correction. Sell on News concludes, correctly, that the Asian way 'is not much of a prospect, but perhaps preferable to letting the purveyors of meta money run rampant playing Russian roulette with the world financial system, as has been the case of the last decade and a half'.