Thursday, January 22, 2009

The Dirt Bag Chronicles

'N every gimmick-hungry yob digging gold from rock 'n roll
Grabs the mike to tell us, he'll die before he's sold.
But I believe in this—and it's been tested by research—
he who fucks nuns, will later join the Church.

— The Clash, "Death or Glory"

Seriously, now, can we all just agree to put a stake once and for all in this Goldman Sachs reputation-thingy?

I have repeatedly shaken my head in wonder over the years at Goldman Sachs' apparently preternatural ability to maintain an absolutely spotless public image while simultaneously soiling itself in full view of everyone in the most miserable and abject manner possible.

The white shoe investment bank has slip-streamed for years on its hoary reputation as the industry's premiere, incorruptible bastion of unbiased advice for corporate clients, even as it has led the industry in self-dealing and unprecedentedly egregious conflicts of interest, like the famous example of being on all three sides of the NYSE/Archipelago transaction. Its proprietary trading operations continue to awe and terrify spectators and participants alike in the capital markets, even as its internal hedge funds have tripped over their own genitalia more times than can be recounted in a family newspaper. And, most impressively of all, the storied house has developed a reputation for grooming leaders and senior executives for high position in industry, academia, and government which even David Halberstam's Best and Brightest would envy.

Unfortunately for its boosters and acolytes, however, the wheels seem to be rapidly coming off the last carriage in this juggernaut. Henry Paulson, who looked like he stepped right out of Central Casting on his way to Treasury, proved himself not only tongue-tied and inarticulate in his role as chief spokesman for the American financial system but also shortsighted, ill-prepared, and inept in dealing with its burgeoning collapse. Robert Rubin, who has been walking on water for, oh, the last ten years or so, not only tripped and fell headfirst into the soup but also made a fool of himself by arguing indignantly that he is not even damp. Today, we get the spectacle of former Golden Boy and Christopher-Reeves lookalike John Thain getting frogmarched out of Bank of America on the back of an $87,000 rug.

How far the mighty have fallen.

* * *

There was a day, I grant you, not too long ago, when Goldman's reputation was frustratingly well-earned. Speaking from my long experience as a competitor and collaborator with GS on many deals, I rarely met anyone from its investment bank who ranked better than a B+ player in terms of intelligence, transaction skills, or client management capabilities, no matter what his or her resumé might lead you to believe.1 But those boys (and girls) were disciplined, and they communicated the hell out of each other all the time. They were fierce about protecting and burnishing their firm's reputation, and they arguably spent more time managing and massaging their clients' perceptions about Goldman's performance than they did actually serving them. This, plus the firm's no-star culture, gave most clients a tremendous sense of security and institutional competence that assuaged any doubts they might have had about the individual bankers on their own deal.

As for themselves, Goldman Sachs bankers below the level of Partner were famous on the Street for being both significantly underpaid (and sometimes even overworked) relative to their peers at other firms. The firm did not hire or tolerate prima donnas. Before the firm's IPO, the prestige and set-for-life wealth which accompanied a Goldman partnership were what kept most of the rank and file slaving away in relative obscurity. Its employees had tremendous esprit de corps, and top management did an outstanding job both harnessing and preserving that resource. Goldman bankers were like the Borg, and that's who most clients wanted in their corner.

But it has been some time now since Goldman's reputation has outstripped both its capabilities and its intentions. Gus Levy's brilliant strategy that GS should be "long term greedy" is clearly a dusty relic honored in name only within the confines of 85 Broad Street. More than a year and a half ago, before Wall Street and the rest of the global economy decided to skydive without a parachute, a grizzled veteran of the ancien régime, John Whitehead, launched an unprecedented broadside at his former colleagues and mentees. His basic criticism: in a futile attempt to keep up with pay levels at hedge funds and other principal investing firms, Goldman executives were gutting the institutional culture of their firm by stoking the destructive fires of personal greed.

Nineteen months later, I find it hard to argue with Mr. Whitehead's analysis or predictions.

* * *

I don't know about you, Dear Readers, but I find the spectacle of Mr. Thain spending over $1.2 million to redecorate his already palatial office at Merrill Lynch at the same time he was cutting back on employees' use of car service, business travel, and client entertainment—expenses normally made in the service of revenue generation—a wee bit tasteless. Certainly, the sense of entitlement implicit in such behavior seems of a piece with the fat signing bonus Mr. Thain negotiated for himself when he jumped to head Merrill and the packages he arranged for chief lieutenants as well.2 (Capital markets head Thomas Montag, another Goldman alum shitcanned today, will walk away with the tidy sum of $39.4 million in cash for less than six months' work, plus accelerated vesting, also in cash, of the restricted Merrill stock he received for the Goldman shares and options he gave up when he joined the Thundering Herd.)

Some people might ask what's the big deal. Surely Bank of America negotiated these employment packages at arm's length, and Thain and Montag simply demonstrated their excellent banker skills by negotiating great packages for themselves, no? And, in the context of Merrill Lynch's then-monstrous income statement, a $1.2 million redecoration expense cannot have even risen to the level of a rounding error. The CEO of a global investment bank needs an impressive office to wow clients and cow subordinates, doesn't he?

Yes, but.

* * *

Thain is certainly not alone in exploiting his position atop a gigantic global investment bank to indulge his personal pleasures at shareholder expense. During his empire-building phase at Citigroup, Sandy Weill installed wood-burning fireplaces in both his Midtown and Tribeca offices for a rumored cost of several hundred thousand dollars apiece, continuing a tradition he had begun all the way back to his stint at Shearson.

During good times, no-one seems to notice or mind such extravagances, because they are so small in the scheme of things. When the worm turns, however, as it is doing now, the long knives come out, and it is an entirely different matter.

Perhaps Mr. Thain is simply unlucky, someone who rose to power at the best-reputed investment bank on Wall Street during a time when shareholders, lenders, and prime brokers could not wait to throw their money at the money spinners of 85 Broad Street and who now does not know how to behave in these straitened times. Perhaps Goldman itself is an institution whose time has come and gone, and whose reputation now faces a long, hard decline from the pantheon of banking greats. Messrs. Thain, Paulson, and Rubin certainly rode Goldman's coattails into positions of wealth, power, and reknown. It does not seem unreasonable to expect Goldman's own reputation will wither as its former demigod alumni crash and burn all around it.

In any event, I think it fair to let everyone at Goldman in on a secret the rest of us have known for quite some time: Your shit does stink, after all.

1 Lest my Patient Readers suspect an unalloyed case of sour grapes in their Dedicated Correspondent, be it known that I claim no special gifts in these areas either, just the ability to judge them in others, which is not that difficult. Also, for full disclosure, I admit that I too tried to get into Goldman Sachs as a wee bairn fresh from business school, but I tested too high for independence and insubordination, which were not viewed kindly by the firm at the time.
2 And of a piece, as well, with the approximately $115 million Bob Rubin siphoned out of Citigroup since 1999, in recompense for performing an advisory job with no explicit duties, responsibilities, or even—as he currently insists—accountability, all the while helping persuade the Board and CEOs to steer the company into a ditch.

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