Margareta Pagano: Goldman has lost power to scare clients into deals
Broadside will hit more than the bank's share price
Margareta Pagano is a former business editor of the Independent on Sunday who now writes columns and business interviews for a range of publications, including the Independent, Independent on Sunday and London Evening Standard.
Sunday 18 March 2012
There's one stinging rebuke in Greg Smith's damning article about his former employer, Goldman Sachs, which could do more damage to the firm's reputation than even he may have anticipated and, indeed, hasten the long-term decline of the robber barons on Wall Street and the City.
In his piece published in The New York Times last week, on the day he resigned, Smith wrote: "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."
Traders understood the significance, marking Goldman's shares down by a massive 3.4 per cent after the article went viral, and so wiping more than $2bn from Goldman's value. By Friday's close, the shares had clawed back a little to $122, valuing the investment bank at $64bn.
It's this sharp share price fall that will have got the goat of Lloyd Blankfein, the chief executive and Gary D Cohn, the president, because it shows, better than any amount of hostile press comment, the fragility of Goldman's reputation. Usually, a resignation letter like this from a former employee, who may well bear a grudge because his bonus wasn't big enough or he wasn't promoted to managing director – would be laughed off.
It should have been easy to dismiss Smith's ravings as the work of a disgruntled employee, but this equity derivatives trader worked at Goldman for 12 years and, by all accounts, had been highly successful. He had also enjoyed working there, so it was all the more sensational that he wrote that he could no longer look new recruits in the eye and say it was a great place to work.
More pertinently, it's because he'd been there so long that his criticisms that Goldman's culture – whether it be calling clients "muppets" or "ripping out their eyeballs" – has changed dramatically over the past few years had authenticity.
The truth is that Smith's criticism hit a nerve; one which has been fraying for years. He has also articulated what many Goldman's clients and would-be clients have been expressing behind closed doors. What I hear is that the most compelling reason why they do business with Goldman is that they don't dare risk not to do so.
They claim they must have it on-side, whether it be for a takeover bid, a listing or any other capital-raising transaction as not to do so is too risky because of Goldman's sheer market dominance and its power to influence such events. But fear is never a good reason for doing business; and it certainly doesn't create a relationship built on trust – which is Smith's main point.
It's a pattern of doing business which permeates Wall Street and the City – most corporate activity is dominated by Goldman and the other five big investment banks that work as a financial oligopoly in the way they charge fees and provide services. If a company is planning a stock market launch, then the chief executive wants the most powerful houses on his side, the capital markets team to distribute the stock, the analysts to recommend it at the highest price possible, and the institutional funds to buy them.
It's the same in a bid – you want the most dangerous enemy on your side. This oligopoly has worsened since the crash as the cost of entry into investment banking has become even more expensive because of higher capital ratios, but also because the competition has shrunk; Lehmans and Bear Stearns have disappeared, to name two.
To suggest that Smith's allegations only apply to Goldman is superficial; it's just that it has been better than its rivals at making money out of clients and selling them questionable products, as it did with mortgages ahead of the crash.
That's why Jamie Dimon of JP Morgan was the first on the street to tell his employees not to knock Goldman while it's down; if Goldman gets too badly hurt, the spotlight will turn on other rivals such as Morgan Stanley or Bank of America.
The toxic derivatives sold to "muppet" clients were not unique to Goldman – all Wall Street was doing it. Selling such products goes back to when former US Treasury secretary, Robert Rubin, was in charge and recommended that Goldman take proprietary positions, even though these might be betting against clients.
It's from this culture that Blankfein, and the London head, Michael "Woody" Sherwood have made their fortunes. Critics claim it's this switch to trading – especially now there is so little merger and acquisition work – that has so badly coloured Goldman's reputation.
Blankfein's reputation is now at rock-bottom, but the big question is: will clients still be too frightened not to have Goldman onside? If an employee is brave enough to break ranks, then why wouldn't clients? If one client goes there will be a ripple effect, which is why shares fell so sharply upon Smith's broadside and why Blankfein has to go. He could say he's doing God's work.
Our peacock premiers should rethink policy on Iran, not plunder oil reserves
Now we know why President Barack Obama and David Cameron have been dancing around each other all week like a couple of peacocks in the mating season: it's oil, stupid.
They are hatching plans to force down the price of petrol by releasing oil reserves to boost global supply. Under the plan, the US is going to sell some of the 700 million barrels of oil it holds in reserve. Since the UK doesn't have any significant reserves, all we can offer is to reduce the level of minimum reserves that the oil companies are told to hold.
You can see, politically, why they want to do this – petrol prices are toxic in both countries. But it's a stupid policy economically and both should know better.
Obama wants to keep the price of oil down as he heads for his election campaign. He fears that when Iranian sanctions bite, prices will soar again, and, as he knows all too well, low oil prices are as sacred to Americans as the Fifth Amendment.
UK petrol prices are just as controversial. We've already seen a 3.5p-a-litre rise over the past month to a record 138.5p. Talking to New York University students, Cameron said he couldn't tell them the price of petrol in the UK because "it would probably make you faint". This was disingenuous. As it's the Treasury that gobbles up about 60 per cent of the price in taxes, it is daft of the PM to blame anyone other than his government. He must fear that if fuel duty rises again in Wednesday's Budget, there'll be another round of fuel protests.
But this plan isn't going to work; oil expert David Strahan says that when the International Energy Agency tried it last year, oil prices were higher than before the release.
Oil is high because Saudi Arabia does not have any spare capacity – if it releases more now, there won't be enough should the Iranian spat turn nasty. If these peacocks want to keep their publics sweet they should take another look at their policy towards Iran. That's what they have got wrong.
Obama, who has made much of his winning-hearts-over-fighting approach, should perhaps re-read the speech he gave in Cairo four years ago, shortly after becoming President.
Diving in at the deep end is no excuse for shirking the style stakes
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