Friday, July 17, 2009

Goldman Sachs Reports Great Earnings and Paul Krugman Attacks!

Warning this is a bit of a rant and not an OPED that I have taken hours writing.. but here it is.

There was a time when saying you worked at Goldman Sachs was perceived as a good thing. There was a time when most people would want their children to aspire to work in financial services, on Wall Street, at a firm like Goldman. There was a time when people felt that financial intermediaries played an important role in society, and improved the standard of living for all. There was a time when it was felt that what was good for Wall Street was good for Main Street, but I guess those times are over.

Though their have been many negative articles on Goldman over the past while the piece in the current issue of Rolling Stone and now this piece by Paul Krugman in the New York Times, are certainly about as finger-pointing and negative as it gets. As a past GS employee of 14 years and a former partner of the firm I have to take a stand. I do understand where they are coming from, at least I think I do, but their point of view is most definitely extremely biased and in the Rolling Stones piece, downright twisted and damaging.

I am generally a big fan of Mr. Krugman and I am somewhat shocked this is how he truly feels about Goldman. Goldman Sachs, like every other for profit business that I know of, is in the business of serving clients WHILE making money. They have been very good at it for a very, very long time. If they were not good at it they would likely be out of business, and sadly I could now name a list of firms that are gone. Last time I checked people buy the stock of public companies because they make money. The higher the earnings over the long term, the higher the value of the stock. It is THE JOB of the employees and the management, to maximize profit over both the short and long term. It is not their job to be 'socially responsible' , though actually GS is somewhat so through the GS Foundation, their commitment to Community Team works, and the 10,000 Women Initiative. As per my blog entry below, Generosity is in, so let's hope they act even more socially responsible going forward because it is good business! Further, if GS only did what was in the best interest of GS and not their clients, one would think they would not have clients for long.

What a ridiculous statement to say Mr. Krugman, that what Goldman does is 'bad for America'. For me this is where your credibility with me took a big tumble. In this article you show and share little understanding of what Goldman, or any other complex financial intermediary actually does to make money. Yes the business of money did get too big, but having a sophisticated money system is generally speaking a very good thing for the economy. Look at economies that do not have it. Without a credible and trustworthy banking system their is no velocity to money which inhibits growth. We need firms like Goldman who put capital at risk, in size, and do it well. Your article is very damaging to having a credible banking system which is damaging to the US recovery. If people do not trust that their money is safe, they will not put it there, which what was happening last fall. That is a very big problem indeed.

I agree with you that dicing cruddy cash flows ended up bad for America, but if you are going to play the blame game it was for the most part 'sophisticated' investors who bought them looking for incremental returns because interest rates were so low and large players, like Fannie and Freddie ( government sponsored entities) crowded out other investors. If you want to be troubled by how public companies cost the taxpayers money I suggest you look there. Also I doubt anyone was holding a gun to anyone's head to buy these toxic securtities. They chose to. Yes some people, including GS made money when the losses started to hit, but so did a lot of other folks. Yes it was their job to be market makers for this stuff on the way out, and if they did not do that for their clients then their clients should think about doing business elsewhere. But remember this is the business all these folks are in and generally it is big boys and girls that play in it.

Because your attack focused on poor quality loans how could you not mention the rating agencies as I feel they were much more at fault then Wall Street. THEY are responsible for looking at the quality of the underlying loans and giving them a risk measure!!!! That is what they are paid a fee to do. Where is your article about them?

GS is in the business of taking risk, deploying capital to make a positive return, and providing financial advisory services. They are good at it. In a world where a lot of firms and people have failed because they were not good at it and did it anyways, Goldman outperforms. They made a lot of money this quarter for a lot of reasons. They certainly were given some cheap money from the government but as they have said, they did not really need it and have since paid it back on the terms given. I do believe the powers that be had to step in or the system would have failed. In my opinion Lehman should not have been allowed to fail. That was a mistake and unfair. Bear is a different issue. As for AIG that is much more complicated and I don't know the details but my understanding is that all counter parties were treated the same. Did the administration stand behind the trades BECAUSE GS stood to lose too much? That is for an inquiry to figure out. Was AIG too big to fail? I think so but honestly.. not sure. I counter party of that size has never failed and it most certainly would have been a mess.

Further on how GS made money this party. You can call in to their earnings report remarks at Net earnings $3.4 billion. Yes in a moment where so many are struggling that is a shocking and perhaps offensive number, but, it is better for America that this number is positive, then negative. I have listened to the call and they said their diversified business model is why they had such a strong quarter. That number did include a $426 mm payment to the government related to the repayment of TARP money ( that remember they said they did not need!). Mr. Krugman, you should have mentioned this fact. Did you listen to the call? I believe the main reason they are doing so much better then others is because they are not a traditional bank and thus do not have as much exposure to the retail consumer business. Again, this is a good thing. They did report hundreds of millions of losses related to real estate like everyone else. Does that make you feel better?

As it relates to compensation what is more offensive? An investment banker who has worked 70 hours a week for 15 years after performing top of her class as an undergrad and an MBA making a million dollars, or a baseball player who never graduated from high school making the same amount? What about hedge fund manager ( not a GS one ) who charges 2 and 20 when times are good and gives none of it back when the fund is down? And if you are going there what about the Facebook dude who is worth $1 billion or was it $4 billion because he conceived and built a company that so far makes little revenue but is really cool? Last time I checked this was America. Last time I checked this is more than any other country I know of one of opportunity where hard work, opportunity, choices, talent and sometimes luck can get you somewhere. Who are you Mr. Krugman to judge anyone's paycheck? Additionally, Goldman is a public company and the Board of Directors and Shareholders need to hold management accountable for compensation. Also I assume GS will be paying a nice tax bill to the government, and so will the employees, and last time I checked the government needed the money.

I am sure you are aware Mr. Krugman that the real estate market is not doing to well. Thousands of people getting big pay checks at the end of the year means that they have money to spend including possibly buying apartments and homes. Without Wall Street doing well, the real estate market in the NY area has no hope to bounce back. In this case what is good for Wall Street is good for the general economy and specifically good for government tax receipts. Recovery has to start somewhere, and you may not like that it is starting at Goldman, but be happy it is starting.

What you are really saying is that you do not like that relatively few people are doing well while others are hurting. I hear you. I am sorry for that too. I wish things were different. Goldman will be a leader out of this recession but we need to get out of the recession and some firms will lead. Is that fair? Tell me what fair looks like for you? Last time I checked life was not fair but you still do the best you can and work to make it more just.

With respect to reforming the system, YES it needs reforming, but that does not happen in a quarter. If you want to keep pointing the finger anywhere with respect to this mess point it to the regulatory system, or should I say lack there of, why don't you write an article that looks at the number of people and amount of money spent to regulate the financial system, which failed, and write an article about that? It is not Goldman's responsibility to make the rules that are in the best interest of the public, it is their job to play by them, and as far as I know, they do. If they broke the law, arrest them. If they cheated, if they stole, if they were dishonest in their dealings fine.... but to hang them out to dry for making money, come on. Again, this is America, right?

If you are a regular reader of this blog you know that I do not always take the side of GS. Read my HUFFPO Opeds on the right for proof. I do try to hold them accountable because frankly I expect a lot of the firm and the people that work there. I expect them to be the leaders. Did they show strong leadership as it relates to this crisis? In terms of how they managed the firm it seems yes. (they survived and made money) In terms of how they helped the system as a whole? Not really. But no other firm did either. It begs the question should we expect them to show their leadership with respect to how to make the system better? I think yes. Should that be part of the regulatory reform? I think yes.

But in reflecting and playing the blame game as it relates to the crisis what should they have been accountable for? They should have been accountable for playing within the rules set by the powers that be, and being accountable for their business practices to their shareholders and board of directors. Should we expect them to try to make less money in what they do? Tell me how they are suppose to do that and why that makes sense for a public company. And if you are going to argue for government involvement please take a look again and Freddie and Fannie to see how well that worked out for American taxpayers. Healthy competition is what regulates how much money firms make. That will happen with time.

The real question perhaps is did GS use their influence and power to secure special deals for the firm? Again I will leave that up to the folks doing the inquires to figure it out. GS, like many other firms at the time, were too big to fail and they could have because of fear and panic in ths system not because they were financially unsound.

The Rolling Stone piece went on and on about GS alumni being everywhere and it being some sort of conspiracy. Goldman people, men and WOMEN, are SOME of the smartest on the planet, and that is in part why they are everywhere with respect to positions of influence. BUT BUT BUT I can understand why there is concern given recent events. (please read "Why Goldman Sachs Women Partners are Invisible" - right) I have written endlessly that there is too much of a 'like-minded boys club' as it relates to power seats in this country. We need to look more broadly and deeply for leaders and be VERY mindful about diversity. In the recent paper by the National Council for Research on Women we call for the adoption of a critical mass principal which if adopted I believe would do much to prevent the possibility of group think and this clubby system. I strongly believe that greater diversity in power seats, public and private, could have prevented this crisis. I firmly believe it.

I will end with this. I believe that a capitalistic system, with a moral and ethical overlay, is the best system. I believe that we got way too capitalistic, way too selfish, way too greedy, and this is the outcome. This however goes beyond Wall Street and it is time to stop the attacks and focus on reforming the system in a way that leads to long term, sustainable, growth and prosperity for the masses. Everyone needs to be accountable for the decisions they make and for what they put out in to the world. I believe that "to those to which much is given much is expected." I expect our government to be accountable for building a regulatory system that protects the people. I expect corporate America to play by the rules set for them. I expect a firm like Goldman, to show tremedous leadership and accountability at this time of crisis. I expect a brilliant man like Mr. Krugman to use his platform responsibly. I expect us all to see the world better and work to make it that way. Enough said.


Gloria Feldt said...

I wondered what you'd think when I read Krugman's column. Thanks for writing about it in such detail.It is helpful for non-financial types like me.

Enjoy the summer!

Ellen Maidman-Tanner said...

Dear Jacki,

Thanks so much for this blog. Krugman's work of late demonstrates the unfortunate result of ideology over statistics and economic reality. Emotional sound bites do not change the federal governments involvement in the housing crisis due to a lack of regulatory enforcement or its semi-hold on entities like Freddie and Fannie. Tinkering with the market can have, as we have seen, devastating results. The objectives of any smart enterprise is to make money, generate profits and thereby employ Americans. Each legislative blow, each new, unfunded, bureaucratized mandate, slows our economy, builds our national debt and moves us further away from those unique and hard won aspects of this country that many of us value - innovation, creativity, and a fluidity that rewards hard work and initiative. Todays debate is ridden with falsehoods and a zealous goal of taking choice and freedom way from the individual. It is chilling and the price tag and the restraints will fall most heavily on those who come after us.

Thanks for being a voice of experienced reason in this debate.

Jacki Zehner said...

Some comments have come in to my email... I copied this one over from one of the smartest and most informed people I know.........

I am irritated at all the populist demagoguery.

Goldman pays back TARP with interest, creates huge value in the options owned by the US, and generates profits and compensation that will generate gigantic tax receipts at the federal,state and local levels, and people are incensed.

CIT fails, wiping out 2.4 billion of tarp investment. CIT's options are worthless. It's workers are likely to become recipients of unemployment assistance, and yet people are clamoring to help it.

It makes no sense.

Preston Tsao said...

The most annoying thing about Paul Krugman’s NY Times article on Goldman Sachs is that it is factually inaccurate. And the factual inaccuracies make the populist issues more upsetting.

He writes:

“Goldman’s role in the finacialization of America was similar to that of other players . . .”

The fact is that Goldman was somewhat of a laggard. CS First Boston and UBS were much more active in the creation of CDOs, and JP Morgan invented the credit default swap.

“ . . . except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large.”

First of all, derivatives were never sold by any bank to the public at large. They were purely institutional products. You never heard your doorman brag that he just bought a great BBB tranche of subprime mortgages. Moreover, the reason the banks held on to these securities had more to do with greed than fiduciary responsibility. The banks actually thought that the buying institutions were the suckers and that they could make more money as principal abandoning their usual agency role.

“Goldman, famously, made a lot of money selling securities backed by subprime mortgages – then made a more money mortgage-backed securities short, just before their value crashed.”

In late 2006, sensing trouble in the home mortgage markets, Goldman sold their mortgage positions, sometimes at a loss. Goldman was the first to move, though Jamie Dimon at JP Morgan had concerns. Merrill and Citigroup were still bullish. But when Goldman took its position in the ABX (in essence a short on subprime), it was at least 6 months before the crash, and the ABX credit default swaps were trading at par! And again, Goldman was not trading against the public but the likes of AIG, Merrill, Citibank and the big institutions.

Wall Street is not perfect, but the recovery of the US and the world will require the drive and imagination of the young men and women on the Street. And at appropriate levels of compensation to attract and retain the talent (unfortunately at levels incomprehensible on Main Street).

For example, one of the key elements of the recovery will be the revival of the shadow banking system. And what is that? The derivative and structured finance system created by Wall Street and demonized by Krugman.

Preston Tsao