Goldman Sachs joins the chorus of fools

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YOU CAN never be sure why anything happens in a large company, even if you work on the inside, but the recent moves by Goldman Sachs send clearer signals to the outside world than most big corporate shakeups.

On 11 January Jon Corzine and Henry Paulson, co-chairmen of Goldman Sachs, sent a memo to employees informing them of "transition plans at the most senior levels of the firm''. They wrote: "We have constituted a new Management Committee, succeeding the Executive Committee which will cease to exist.''

The new management committee was a promotion for two bankers, John Thain and John Thornton, and a demotion for Mr Corzine, a bond trader, who, as the memo delicately put it, "has decided to relinquish the CEO title''. As Mr Paulson, a banker, remained alone at the top, the memo represented a gain in power for him, too.

The memo makes two things clear. First, the bankers at Goldman have taken their firm back from the bond traders, who lost more than $400m (pounds 241m) in September. And second, the men at the top of Goldman remain determined to sell themselves to the public and become just like every other Wall Street firm. By implication, bond trading will from now on be less important to Goldman.

The memo does not explain why the changes were made, but that is not difficult to guess. In the market rout of last August and September Goldman got clobbered in bond arbitrage. Those losses, in turn, made it more difficult for Goldman to explain itself to the investment public.

Last July Salomon Smith Barney, then part of Travelers Group, announced huge trading losses and got out of the bond arbitrage business, saying that such trading was too volatile to occur in a public company, in which you have to explain your ups and downs to outside investors. The Goldman bankers are now as much as conceding the point.

Anyone who thinks twice about this move can see the folly in it. The convergence trades in which Goldman lost a fortune now present a bigger opportunity than they have in a decade, precisely because everyone else on Wall Street is running scared of them. All of the players who leapt into bond arbitrage during the 1990s have now leapt out. After the market panic of last autumn, large investors can no longer be seen giving money to Long-Term Capital Management limited partnership-style firms.

The CEOs of trading houses such as Salomon (now part of Citigroup), that are public companies already, don't care to explain the ups and downs of bond arbitrage to their investors.

As a result any trades smacking of unusual, complicated risk beckon to be made.

There are almost certainly billions of dollars waiting to be collected by a big, well-capitalised, well-informed investment bank that doesn't have to answer to anyone but itself. And there is only one such firm left on the planet, Goldman.

But rather than see that it is uniquely positioned to exploit the fear in the marketplace, Goldman has elected to keep up appearances.

Uniquely positioned to exploit the largest money-making opportunity of the decade, it decides instead to turn the other way, and join a chorus of fools. It is the sort of stupid, politically driven, poll-sensitive behaviour one expects from large public companies rather than a shrewd private partnership.

But Goldman, in its own mind, already is a large public company. People who have made what they consider an embarrassing mistake are often so intent to prove to themselves and to others they have learned from it that they will take any lesson that is handy, even if it is the wrong one.

There should be a psychological term for this inexorable leaping from one big screw-up to the next, as it is such common behaviour.

The right lesson to take from last autumn's market panic was not that bond arbitrage was bad business. It was that taking Goldman public was bad business.

In markets, as in life, it is hard to be different from everyone else, especially when everyone else is laughing at you. That is why being different often pays as well as it does.

Michael Lewis is the author of `Liar's Poker' and `The Money Culture', and is a columnist for Bloomberg News.