Escaping the Great Vampire Squid

Sometimes songs just lose their potency – like Take This Job and Shove It – the big Johnny Paycheck hit from 1977 that was later made into a movie – but not a very good one. But it was the first movie to feature monster trucks, for what that’s worth. Still the general rule holds – don’t make a movie based on a popular song. That’s not enough to work with.

But even the song doesn’t get any airplay now. The world changed, and this redneck fantasy, of telling your boss to take his stupid job and shove it, depended on two premises – first, that you actually had a job, and second, that there was something better you could be doing, that there were lots of jobs out there and you’d be fine, one way or another. Neither is true now. You’re lucky to have a job at all, if you do, and you dare not challenge your boss about anything. You need the money, even if it’s not much, and you really need the health plan, if there is one – because Obamacare isn’t really universal healthcare, and anyway what there is of it doesn’t really get going for a few more years, and the Republicans will probably repeal all of it anyway. So if your job is dirty and dangerous, and stupid and pointless, and your boss is a jerk and you feel your soul is being ripped out, day after day – well, you say nothing. You dare not say a word. There are no alternatives for you – no other jobs out there at all. And you forget you ever heard that Johnny Paycheck tune. It was a bit of a fantasy back in 1977 and now it’s bizarre and meaningless, and dangerous. What song? You never heard of it.

And that’s what made the hot story of the day so interesting:

Some day, when they write the definitive history of Goldman Sachs (GS), Wall Street’s 143-year-old warehouser of brass rings, the date March 14, 2012, will stand in infamy. If you haven’t already heard, that’s when Greg Smith, an executive with the bank in London, resigned with guns a-blazing, in a corporate revenge fantasy worthy of a sequel to Office Space. The 12-year veteran – he started as a summer intern during college – penned an op-ed in the New York Times that wasted zero time to cut to the damning chase:

“Today is my last day at Goldman Sachs. … And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.”

That’s Roben Farzad in Bloomberg-BusinessWeek and here’s part of what Greg Smith said in his New York Times piece:

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients – some of whom are sophisticated, and some of whom aren’t – to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym. …

It makes me ill how callously people talk about ripping their clients off… Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

This isn’t exactly Johnny Paycheck, but Roben Farzad says it’s a big deal:

In Wall Street terms, the Smith Manifesto (note to self: trademark last two words) will go down like the Emancipation Proclamation, Declaration of Independence, Articles of Confederation, and Magna Carta all rolled into one stinging little letter. Smith will no doubt recoup all/more of his lost hush-bonus in a monster book deal. He’ll be on 60 Minutes and The Daily Show, extending the echo chamber of Goldman criticism that the firm surely thought had died down over the past year and change. A whistleblower whistling to his heart’s content – to the bilious heartburn of Chief Executive Lloyd Blankfein and Goldman’s board. Screenplay fodder, to boot.

And Farzad sees chickens coming home to roost, at Goldman Sachs:

It’s a nightmare scenario for what was long Wall Street’s most storied and secretive partnership. Ultimately, the events of March 14 will be inextricably linked to another landmark day in Goldman Sachs history: May 4, 1999. That’s when Goldman went public – eschewing the need for partners to constantly risk their own capital and maintain superconservative risk controls on traders and department heads. True, Goldman would reap a windfall from shareholders, but at the great cultural cost of opening itself to the never-ending demands of transparency and quarterly earnings competition. Which then put the firm on a glide path to an MO of profit-at-any-cost, first with the tech bubble and Spitzer-era scandals and then through so much subprime counterparty alchemy, which so destabilized the whole system that it nearly went down – taking Goldman and its long-since-forgotten IPO riches with it.

And that calls for some background in just who these folks are, which Matt Taibbi provided in the July 9, 2009 issue of Rolling Stone with The Great American Bubble Machine – “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression, and they’re about to do it again.”

Taibbi opens with this:

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York – which, incidentally, is now in charge of overseeing Goldman – not to mention …

But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

And then Taibbi really gets going – the exposé is long and detailed, and fiery. And the great vampire squid wrapped around the face of humanity is an image that has made its way into the street art you find in most major American cities, and on a lot of Occupy Wall Street placards. Many were waiting for just the right image. And now maybe the Johnny Paycheck tune will be back – but probably not. Greg Smith made many tens of millions of dollars for himself and he’s still pretty employable. He’s a special case.

Of course there was the internal Goldman Sachs memo from the head of the whole squid, Lloyd Blankfein:

By now, many of you have read the submission in today’s New York Times by a former employee of the firm. Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.

In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people. Everyone is entitled to his or her opinion. But, it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.

While I expect you find the words you read today foreign from your own day-to-day experiences, we wanted to remind you what we, as a firm – individually and collectively – think about Goldman Sachs and our client-driven culture.

Blankfein goes on to buck up the troops, remind them they’re fine folks working in a fine place, doing the right thing for each and every client, and throwing in this:

We are far from perfect, but where the firm has seen a problem, we’ve responded to it seriously and substantively. And we have demonstrated that fact.

It is unfortunate that all of you who worked so hard through a difficult environment over the last few years now have to respond to this. But, our response is best demonstrated in how we really work with and help our clients through our commitment to their long-term interests. That priority has distinguished us in the past, through the financial crisis and today.

Yeah, yeah – and Santa Claus is real too.

But Kevin Drum is puzzled by what Greg Smith has done:

If this were someone who started working for Goldman in the 60s, it would be easier to find him believable. But Smith started out at Goldman in 2000. He was a senior member of the firm during the height of the housing/derivatives bubble. This was not a period of time famous for its integrity and client-centered focus. So what, exactly, has changed in the past four or five years compared to then? Smith is maddeningly unclear about this.

So it’s a little hard to know what to make of this. Is Greg Smith a disgruntled employee? A genuinely outraged man of honor? Hopelessly naive? Angling for a job at the SEC? Planning to open his own boutique firm and hoping to gain a reputation for unusual probity? It is a mystery.

But Reuters’ Felix Salmon is less puzzled:

When Smith joined, Goldman was transitioning from a partnership model to being publicly-traded. And I suppose it’s possible that Smith has such deep nostalgia for the partnership he never really knew that he’s willing to hurt his entire current team – everybody who helped him make his millions – in an attempt to goad Goldman into returning to those halcyon days.

But it certainly doesn’t seem that way. Smith says that Goldman is currently “toxic and destructive”. He goes on to say that “It makes me ill how callously people talk about ripping their clients off,” and that “the morally bankrupt people” need to be weeded out – how, he doesn’t say – by the board of directors. It’s much easier to see the disgruntled ex-employee here, quitting in a huff, than it is to see someone genuinely trying to do his part to reconstitute the Goldman Sachs of Gus Levy and John Whitehead.

To a certain extent, time will tell. If Smith ends up founding or joining a rival company, his decision to harm Goldman as deeply as possible will end up looking rather self-serving. On the other hand, if he goes to, say, join his former colleague Gary Gensler at the CFTC [the Commodities Futures Trading Commission], working to regulate all investment banks from the outside and to try to level the playing field between the buy-side and the sell-side as much as possible, then we might start taking him a bit more seriously. Smith has declared a serious moral purpose today; that’s not something you can wear for just one news cycle before moving on to the next thing, and so I hope and trust that he’s going to spend the proceeds of his ill-gotten final bonus check in the service of that moral purpose. After all, it was the work of those morally bankrupt traders in the ripping-eyeballs-out business which got him all that money in the first place.

But reality is reality:

Smith’s clients thought they knew where Goldman was making its money when it sold them equity derivatives. Nine times out of ten, they were wrong. I can guarantee you that every single one of the clients referred to as “muppets” within Goldman consider themselves to be a sophisticated investor. Mainly because they have Goldman employees phoning them up on a regular basis and flattering them with tales of how sophisticated they are.

That’s seductive but they really could not have known better:

Clients know in principle that every time they do a trade with Goldman, Goldman makes money. But they don’t know how much money Goldman makes on those trades. And Goldman is extremely good at structuring deals which can’t easily be replicated by combining various liquid derivatives. In turn, that gives Goldman pricing power – so much power, indeed, that in some instances the bank will go so far as to insist that if the client attempts to get independent pricing for the contract in question, then the whole deal is off.

And Smith has to share some blame:

Smith has been in this business for 12 years, and he’s done extremely well by it. And to a certain extent, if the people who work for him are constantly asking how good a deal is for Goldman, rather than how good the deal is for Goldman’s clients, then that’s because of the example he set. What’s missing in his op-ed is any sense of mea culpa, any sense that he was at all part of the problem.

So let’s not pretend to be shocked that the most successful bankers are the ones who make the most money off their clients. And let’s not try to imply that the solution to this problem lies at the Goldman Sachs board level. It doesn’t. The real muppets, in this story, are Goldman’s board members, who have never had any real control over how the company is run. And, frankly, never will. The most remunerative skill, at Goldman, is the ability to flatter someone into believing that they’re incredibly important and clever and sophisticated, even as you’re getting that person to do exactly what’s in your own best interest. No one rises to lead Goldman Sachs who doesn’t have that skill. And you can be sure that Lloyd Blankfein uses it on the board every time he meets with them.

And that led Neil Rafferty to pen Why I am leaving the Empire, by Darth Vader – lame, but on target. But at least Matt Taibbi is now happy:

The resignation will have an effect on Goldman’s business. The firm’s share price opened this morning at 124.52; it’s down to 120.72 as of this writing (it dropped two percent while I was writing this blog), and it will probably dive further. Why? Because you can stack all the exposés on Goldman you want by degenerates like me and the McClatchy group, and you can even have a Senate subcommittee call for your executives to be tried for perjury, but that doesn’t necessarily move the Street.

But when one of the firm’s own partners is saying out loud that his company liked to “rip the eyeballs out” of “muppets” like you, then you start to wonder if maybe this firm is the best choice for managing your money.

Taibbi thinks this resignation is rather significant:

This always had to be the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.

Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren’t just arrogant sleazebags; they’re also not terribly good at managing your money. …

This is a crack in a very big wall:

Banking, and finance, is a business that has to be first and foremost about trust. The reason you’re paying your broker/money manager such exorbitant sums is because that’s the value of integrity and honesty: You’re paying for the comfort of knowing he has your best interests at heart.

But what we’ve found out in the last years is that these Too-Big-To-Fail megabanks like Goldman no longer see the margin in being truly trustworthy. The game now is about getting paid as much as possible and as quickly as possible, and if your client doesn’t like the way you managed his money, well, fuck him – let him try to find someone else on the market to deal him straight.

These guys have lost the fear of going out of business, because they can’t go out of business. After all, our government won’t let them. Beyond the bailouts, they’re all subsisting daily on massive loads of free cash from the Fed. No one can touch them, and sadly, most of the biggest institutional clients see getting clipped for a few points by Goldman or Chase as the cost of doing business.

So maybe the fear of going out of business could return. This is a start, something Johnny Paycheck never imagined. But Pat Garofalo at ThinkProgress reports the inevitable – Goldman Sachs Mobilizes Rapid Smear Campaign Against Whistleblower – which includes, among others, these two items:

The Wall Street Journal reported that “people familiar with the matter” said that Smith is just miffed that his bonus was small: “The circumstances of Mr. Smith’s departure aren’t entirely clear. When Goldman doled out annual bonuses earlier this year, Mr. Smith’s small payment became a point of friction, according to people familiar with the matter.”

Forbes’ Nathan Vardi wrote that Smith is just “having a midlife crisis” – “Smith is not the first person who wants to tell his former bosses to shove it. He is also not a whistleblower.”

There’s much more. There was a lot of scoffing over at CNBC of course. But in the New York Times there was Nelson Schwartz’s reporting:

Behind closed doors, it is a conversation that has been taking place with increasing urgency on Wall Street in recent years: making money is good, but is making more money always better, even if it comes at the expense of clients? That question is now out in the open…

Things are catching up with the squid-people:

Mr. Smith’s criticism, much more than stories about bonuses or brickbats from the likes of Occupy Wall Street, could be especially painful for Wall Street now. Memories are still fresh of the Securities and Exchange Commission lawsuit filed in April 2010 accusing Goldman of fraud, after it sold clients complicated mortgage backed securities that later soured, and never mentioned that it had bet against them.

The parade of senior Goldman executives who testified before Congress after the case arose seemed to put a public face on what had been a broader sense of distrust of Wall Street in the aftermath of the financial crisis, focusing ever more attention on a firm whose patriarchs have always been adamant about having high standards.

And the squid-people are doing a bit of soul-searching, if squids have souls:

To be sure, longtime bankers say, it is not as if short-term greed was absent in the past. It has been around since traders gathered under a buttonwood tree and founded the New York Stock Exchange in 1792. But the astounding size of Wall Street’s biggest firms – and the fortunes to be made – have altered the calculus.

“When you’ve been around 40 years, you always say things were better back then,” said David Dreman, a longtime money manager who oversees $5 billion in assets. “But it is different now. There have been enormous changes on Wall Street.

“It doesn’t matter which bank – they sell the client what they make the most money on,” said Mr. Dreman. “There’s always been some of it but it’s much more prevalent than it ever was. Unless the client is very sophisticated, the client gets clipped.”

The other view is that this is the client’s problem:

Other Wall Street insiders insisted Mr. Smith had it wrong, arguing that conflicts have always been part of the landscape, and that clients should be sophisticated enough to know that. “These aren’t dumb people,” said one billionaire hedge fund manager who insisted on anonymity because he didn’t want to draw public attention.

Of course he insisted on anonymity – his job is to screw people over and grab their money, while telling them he’ll make them rich, or keep them rich. And the smart ones will know better, so he’s keeping quiet. It’s just business.

Or maybe it won’t be. Johnny Paycheck is back, in a new guise – as a Goldman Sachs guy who sang that old redneck fantasy song once again. Only this time it turned into a critique of modern capitalism itself. Cool.

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
This entry was posted in Capitalism's Inherent Flaws, Ethics, Goldman Sachs, Wall Street and tagged , , , , , , , , , , , , . Bookmark the permalink.

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