What’s Good for Goldman?
Posted on April 19, 2010
It used to be said that what is good for General Motors is good for America.And for much of the last century, that assertion was basically true. Economic policies that helped make General Motors the number one car maker in the world were also good for the country.
That wasn’t just because of some broad economic theories on taxes, regulation and labor management either. GM itself played a central and stabilizing role in American society. It provided health care and economic security for hundreds of thousands of American workers, many of whom were blue-collar workers and didn’t have too many other job prospects outside of the auto industry. GM also promoted American power and American ingenuity across the globe, spreading the myth of American supremacy in far-reaches of the earth.
As we all know, General Motors fell on hard times, as it had trouble competing with foreign automakers. Things got so bad, GM last year was actually taken over the by the U.S. government, giving a new spin to the idea that what is good for GM is good for America.
I thought of GM as I read a fascinating passage from Hank Paulson’s book “On the Brink.” Paulson clearly believes that another GM is now the central player in the American economy. But that GM is not a car-maker, but rather an investment house, called Goldman Sachs.
“On Tuesday morning, the consequences of Lehman’s failure were becoming more and more apparent. I received an astounding call from Goldman CEO Lloyd Blankfein. He informed me that Lehman’s U.K. bankruptcy administrator, PricewaterhouseCoopers, had frozen the firm’s assets in the U.K., seizing its trading collateral and third-party collateral. This was completely unexpected – and a potentially devastating jolt…. Just about all the hedge funds in London and New York, whether or not they had any relationship with the bankrupt securities firm, became unnerved and leaped to a frightening conclusion: they should avoid doing business with any firm that could end up like Lehman. This was bad news for Morgan Stanley and for Goldman, the leading prime brokers….Lloyd was afraid that if something wasn’t done, Morgan Stanley would fail, as clients began to run and hedge funds pulled their prime brokerage accounts. And even though Goldman had plenty of liquidity and cast, it could be next…
“Hank, it is worse than any of us imagined,” Lloyd said. If hedge funds couldn’t count on the safety of their broker-dealer accounts, he went on, “no one will want to do business with us.”
That in a nutshell seems to sum up why the federal government decided to bail out the financial services industry. Because nobody wanted to do business with Goldman Sachs.
Now, I am a big fan of Hank Paulson. I think he is an honest and earnest human being. And I think he was doing what he thought was in the best interest of the country when he proceeded with his bailout of the financial services industry, so that somebody would eventually start doing business with Goldman Sachs again.
But Paulson’s world view is obviously colored by one assumption. That what is good for Goldman is good for America. And perhaps from a macro-economic view, that is true. I just wish Goldman acted with some sort of corporate responsibility in return.
Goldman could make the strong case that it provides the necessary capitol to create millions of jobs. It could specifically invest in American manufacturers to create jobs for people who aren’t smart enough to work for Goldman Sachs.
It could put a limit on how much money its senior executives make. How much is too much? When the CEO makes 68 million smackers and seems to be frankly unapologetic for relying on a government bailout so that he can make another 60 million dollars the next year, well, you know, that just isn’t very smart politically. Nor is it very socially responsible.
Instead Goldman Sachs seems to be embarking on a communications strategy that says basically that it exists for only one reason: To make money for Goldman Sachs. Of course, it does that very well. And according to the latest SEC civil suit, it made money for itself by betting hard against products it sold to its customers.
It was as if General Motors was somehow able to make billions of dollars by selling Buicks that it knew were going to break down within 3 to 6 months of being driven off the lot.
Blankfein was once quoted in the Times of London saying that his firm was doing “God’s work.” I didn’t know that it was all part of God’s plan that a financial firm aggressively recruit and hire the smartest people on the planet, then use those people to work very hard to do one thing and one thing only, to make lots and lots of money by creating strategies to not only confuse investors, but also rip off customers by selling them lemons of investment vehicles, designed specifically to lose money for those idiots who were dumb enough to buy them. And then to smartly put in place all kinds of former employees in places of great influence, so that if the wheels do happen to fall off, and business starts to really suffer, they can get themselves a bailout, so that they start to make some money again.
That might not be a fair analysis about what Goldman does and the good it provides to the American economy. But right now, this has become the conventional wisdom, and thus far, Goldman Sachs hasn’t done much of a job giving an alternative view.
What was good for GM was good for America in the mid-twentieth century. It is increasingly looking these days that what is good for Goldman Sachs in the 21st century may not be what is good for the American people. And that is a real problem for the folks at Goldman Sachs.