Kirk's Book Reviews
Kirk's Book Reviews
|Posted on May 25, 2016 at 7:30 PM|
My rating: 4 of 5 stars
If History is written by winners, then memories are also biased towards its survivors. In a hundred years from now, Bear Stearns, Merrill Lynch, Washington Mutual and Wachovia will cease to exist in the footnotes to the history of the 2008 banking crisis. Instead, people will remember Goldman Sachs as the bank that profited while other Wall Street titans perished. Indeed, the evidence eight years after the near-implosion of western capitalism suggests the process has already begun. So why does the most successful and envied investment bank of all time have an image problem?
William D. Cohan tries to answer this unique question while not forgetting this is an unusual conundrum for one of the most consistent winners over the last one hundred years. The toughest, smartest and most successful agents of history are often remembered with fondness, yet Goldman appears to be the exception.
A chronicle of any financial institution will have its ups and downs, but Goldman Sachs has a knack for getting under the skin of the SEC. As Cohan shows throughout the 610 pages of his excellent study, this process has been ongoing since 1947, when Goldman Sachs (along with sixteen other investment banks), came under investigation in an Anti-Trust Lawsuit. Allegations of maintaining a closed shop to new entrants and infiltrating the boards of America’s biggest industrial companies caught the public imagination, but resulted in no fines or reprimands. Nonetheless, people were less forgiving in 1970 when the firm encountered its first existential crisis since the Great Depression as the lead underwriter of Penn Central’s default on $87 million worth of commercial paper. A $23 million federal lawsuit from embittered investors could have been the end, but is the best example of how Goldman claimed no responsibility for wider events beyond their control and escaped the worst of it.
Numerous examples of this instinct to dump losses on investors crop up time and again and make depressing reading throughout the book. This is not exceptional behaviour and is widespread across the finance sector, even to the point where people accept banks will always put their own interests above the customer. But from its inception Goldman Sachs has been different. Ever since John Whitehead instituted a 14-point Code of Conduct in the 1960s, the bank has been indoctrinating its staff in the wisdom of being client-focused and remembering that ‘our assets are our people, capital and reputation.’ This may sound good on paper and there’s no doubt Goldman’s loyal employees believe in the rhetoric, but Cohan shows this to be an honourable yet unachievable aim. In reality, Goldman Sachs is like all other banks – they will never pass up an opportunity to make a quick buck, even when it’s unethical to do so.
The list of misdemeanours in the last four decades is too extensive for the holier-than-though delusion to continue, and it’s easy for the reader to lose perspective and get caught up in the excesses. Goldman’s dubious behaviour during the Dot.com bubble in the early twenty-first century can be seen a microcosm of what is wrong with investment banking these days. Allegations of ‘spinning’ (selling hot IPO stock offerings to 21 of the bank’s most profitable fee-paying CEOs) and ‘laddering’ (favouring investors with sought-after Dot.com stock on the condition they agree to buy more block shares on the first day) are symptomatic of the tendency to act like a cartel. But the alleged existence of a ‘good behaviour’ list of hedge funds and wealthy investors that had access to the over-subscribed Dot-com stocks in return for attending Goldman roadshows and paying various commissions leads Cohan to an even more alarming thought. Did Goldman Sachs help to push up the IPO stock prices and contribute to the Dot.com crash? The $40 million settlement with the SEC in 2005 for charges of laddering does nothing to assuage the guilt, neither does the $110 million fine Goldman Sachs paid for allowing its investment banking division to influence the firm’s research analysts’ views on lucrative IPO prospects during the Dot.com boom.
Amongst this litany of sins it would be easy to forget the individuals that created and turned this mammoth bank into the giant of today. Fortunately, Cohan remembers his duty as a historian is to the academic, not the polemic, and furnishes the reader with extensive biographies of the firm’s legendary leaders. And like all powerful institutions with an impressive heritage, Goldman Sachs has its pantheon of heroes and iconic figures that loom large over each generation – none more so than Sydney Weinberg and Gus Levy. The former is the ultimate example of meritocracy, the ex-porter who became Senior Partner three decades later and earned Franklin Roosevelt’s trust as the most important voice on Wall Street. Levy is portrayed as the most innovative arbitrageur of his era, dragging Goldman Sachs into the cut-throat world of Proprietary Trading in the 1960s and away from the gentleman’s club of underwriting IPOs and company bonds. And of course there’s the diligent and entrepreneurial Marcus Goldman, the firm’s founder who started the business in 1869 buying up discounted commercial paper and pocketing the difference at the maturity date. His son, Henry Goldman, is credited with turning the bank into a force to be reckoned with on the eve of the First World War only to be ostracised for his pro-German views.
Cohan’s writing achieves its most vivid style in these biographical interludes; the big-screen is on his mind and penetrates the reader’s imagination. But perhaps the most intriguing person throughout the book is Hank Paulson, one of the few non-Jewish leaders of the firm before he took up George W. Bush’s offer to become Treasury Secretary in 2006. Cohan paints an image of a man who never doubted his ability, but sometimes questioned his own ambitions to become leader. As the most successful Investment Banker in Goldman’s Chicago office, Paulson had little knowledge of the trading desk, but few equals in the world of Mergers & Acquisitions (M&A). The Machiavellian way he ousted John Corzine (the joint successor to Steve Friedman in 1994) is as intriguing as his success in building diplomatic relations with China. This last point is something Barack Obama might regret in his haste to put distance between the White House and Goldman Sachs; no other American is as well-connected and influential in the Sino sphere as Hank Paulson. Comparisons with the British East India Company’s reach in South Asia in the eighteenth century are striking, but Cohan chooses not to join the dots for fear of succumbing to the ‘giant vampire squid’ stereotype immortalised in the July 2009 issue of Rolling Stone.
Though a dispassionate account is impossible (and unmarketable), one gets the impression Cohan is trying to counter the scandal and controversy by looking away from the noise and into other areas where Goldman Sachs has escaped opprobrium. For instance, he is explicit the firm should take more blame for the firestorm that raged in the mortgage-backed security market in 2007 when it marked down estimates of the securities on its balance sheet. Goldman knew this would have a negative impact on the averages reported by other investment houses and its decision to mark its securities at 50 cents to the dollar in May 2007 when other firms were reporting no lower than 98 cents played a direct role in bringing down Bear Stearns and capsizing the entire finance sector. But why doesn’t the author have the courage to accuse Goldman of crashing the market to benefit its huge short positions against the US housing market? It’s one thing to blame the institution that brought the madness to an end, but is it criminal to give an honest assessment of the securities on your balance sheet when every other bank is stewing in false optimism and financial neurosis?
Another instance of Cohan’s admirable but gung-ho narrative is the $550 million fine Goldman paid in 2010 for misleading investors in its controversial Synthetic CDO offering of 2007. After a whole chapter of extraordinary email correspondence and implications of clear mendacity in selling products that are designed to fail, the author devotes only one paragraph to the recklessness of the Goldman customers that betted on the continued strength of the US housing market. And it turns out Goldman did not lie and reassure investors Hedge Fund Manager, John Paulson, was taking the long-side of its ABACUS CDOs even though they knew he was doing the exact opposite. Yet this is buried amongst the moral outrage and obscured by John Paulson’s subsequent profit of $1 billion on the greatest short-selling bet ever placed.
The fact Goldman earned a net profit of $11.4 billion in 2007 and offset its losses on writing down mortgage-backed securities with a $4 billion profit on its own short position is the real reason the US Government, the SEC and the ‘99 percent’ aimed their anger at the bank. Here is the only Wall Street institution that profited while others took their eye off the ball and allowed their superficial Return on Equity mark-ups to give the illusion of lucrative earnings. Indeed, one comes away marvelling at the efficacy of Goldman’s Risk Management culture and its super-efficient decision-making procedures. You might even acknowledge the bank’s plucky decision to disassociate itself from the herd if it wasn’t so complicit in blurring the lines of insider trading.
In its present structure, Goldman Sachs is a financial powerhouse like no other bank in modern history. Cohan does a good job of explaining this evolution and highlights the dangers Goldman might encounter in the near future. Their disruption of Société Générale’s $17 billion bid for Paribas Banque in February 1999 is a telling illustration of their unhealthy market dominance. Enraged at being left out of the advisory team preparing the bid, Goldman spearheaded BNP’s successful counter-offer in May 2000. Though not illegal or even frowned upon in the industry, it’s astonishing that Goldman was allowed to continue as the lead consultant reviewing Société Générale’s investment banking business and strategic initiatives while playing for the other side. The message was clear then and still rings true today: leave us out of a lucrative Acquisition and we will lead your rivals in a counter-bid. A more crude analogy is allowing a servant to cook your dinner and then eat it off your wife’s porcelain plate.
Much is made of the ‘Chinese Walls’ that keep the conflicting interests apart at Goldman Sachs, but the worry is the M&A bankers advising on company takeovers may abuse their access to confidential information and pass it to their own Trading Department. This is not ‘God’s Work’ but insider trading.
As Cohan states one two occasions in this book, no financial company has ever survived a criminal indictment. And though hard to envisage due to its profitability and influence on governments around the world, this might come to haunt Goldman Sachs one day.