Thursday, March 15, 2012

Hypocrisy as a Business Model

You can't have your reputation and eat it too
Dear Employees of Goldman Sachs:

Words, words, words.

The world is full of words this morning, words that have spilled out furiously from every quarter in reaction and response to your former colleague’s very public and very inflammatory resignation letter. I will not add to your burden—those few of you who are reading me—by dilating at my usual length about your troubles. Instead, let me explain something to you.

I’m sure you have many questions. We all do. I very much doubt the public relations pablum your fearless leaders pulled off the shelf yesterday did much to answer these questions or assuage your concerns. It is hardly persuasive to respond to criticisms of your treatment of clients by replying “But we think we do a great job for our clients!” Of course you believe that. You are Goldman Sachs. Most of us just no longer agree.

Chief among your questions must be “Why do so many people hate us so much? Why does everybody pick on Goldman Sachs?” Surely part of the reason is due to the fact that you are a rich and powerful organization. Wealth and power attract envy and spite. This is just human nature. Another important element is that, whether you or your leaders believe it or not, many of us outside the shimmering walls of 200 West Street believe you have done or been deeply involved with some very naughty things: AIG, ABACUS, Greece, self-dealing, tortuous (and tortious) conflicts of interest, and the like. You have not been alone among financial institutions in being connected with misbehavior; far from it. And you have not been involved in every naughty episode of financial malfeasance, either. But you must admit that, to the outside observer, the fact that smoke keeps breaking out so frequently in your vicinity is highly suggestive of the presence of fire.

And it is not, as some muppets in the financial media would have you believe, that the general public has confused your firm’s mission with that of a nonprofit. Of course your bloody objective is to make money. You’re a bloody investment bank, for pete’s sake. We’re not stupid.

No, the real problem is that you’re special.

* * *

No, really, I’m not pulling your leg: you are special. You have been the most successful investment bank in the world for decades because you have been able to reinvent yourself as markets changed, to lead from the front, and to maintain a share of mind among your clients and customers far in excess of either your native abilities or actual market share. In part, you are special because you have been proclaiming yourself to be such ever since Gus Levy encouraged your predecessors to be “Long-term greedy.” And dedication to client service—putting your client’s needs above your own—has been absolutely central to your value proposition and mystique. There it is: enshrined in your business principles, parroted on every page of your annual report. Client service is Goldman’s brand.

But we no longer believe you. The slide from “client first” to ripping the faces off muppets has been a gradual, slow one, but it has been happening for a long time. There was a time when Goldman Sachs would not advise aggressors in hostile takeovers. There was a time when Goldman would not use its own private equity funds to compete for deals with its private equity clients. There was a time when Goldman Sachs would turn down transactions which it did not feel were in its clients’ best interests. All those times are long past. And yet your firm still pretends that you put your clients’ interests first. Bullshit. You are a giant fucking hedge fund which has been trading for its own account for years. The rot has even extended into one of the last presumed bastions of client service left at your organization: M&A advisory. You don’t have clients anymore; all you have are counterparties.

And hey, bully for you. That’s where the money is. Proprietary trading, structured products, and principal investment have been the engines of growth and profitability for investment banks for over a decade. Dusty old client advisory and agency underwriting have shrunk to pimples on the ass of modern finance. Since you consider yourself the best investment bank, why shouldn’t you have transformed yourself in this way? It is a measure of your success and cleverness that you have succeeded so well.

But here’s the rub: Continuing to paint yourselves as client centric when you are the opposite rankles. It is rank hypocrisy. It is bad public relations, because sooner or later people figure out you have not been telling the truth. Certainly there is nobody among your counterparties in the trading world who is under any misapprehension as to whose interests you put first. And increasingly, there are fewer and fewer muppets left elsewhere who believe the old line. It may in fact have the highest currency and belief among your own junior employees, whom you entice to join you in God’s work.

And there is a darker side to this hypocrisy. It serves the purposes of the great proprietary profit engines of your firm to ensure a steady supply of muppets and saps into the meat grinder. Trading with big, sophisticated hedge funds is hard work. More often than not, they’ll rip your face off instead of the reverse. So what could be better than a smooth-talking salesman, spouting client service and trusted advisor platitudes into the unsuspecting ear of a chicken ripe for the plucking as he leads him into the lions’ den? How else do you think you were able to book a complex trade with the Greek government with over $600 million of embedded profit without having them check the market for competing bids? Everyone knows there are sophisticated clients and “sophisticated clients.” Your client trust shtick is tailor made to fleece the latter.

So, why doesn’t your top management just come clean? Because that would defeat the purpose of maintaining your client service fiction in the first place: it makes money for your firm.

Just not in the way you claim it does.

© 2012 The Epicurean Dealmaker. All rights reserved.