Guest Post: DON’T Let Goldman Be Goldman

By Wallace C. Turbeville, the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. who writes at New Deal 2.0

William D. Cohan’s op-ed piece in the July 7th New York Times had the same title as this article, but for the word “Don’t.”

At first glance, I thought the Times piece might be a report on New Age self actualization for investment banks. But the title suggests something more troubling. The whole point of financial reform is that Goldman (and the others) should no longer be permitted to be Goldman. A return to business as usual is the last thing we need.

Mr. Cohan is a student of Goldman, but he profoundly misreads the firm’s role in the Wagnerian drama we know as “The Great Recession.” He begins by imploring us all to “fess up” to the fact that financial reform would have been impossible had the Administration and Congress not “demonized” Goldman.

“Demonization” is a popular word in today’s political discourse. It suggests unfairness. Mr. Cohan does not dispute the facts asserted by the Administration and Congress. Instead, he points out that underlying ethical flaws were shared throughout Wall Street. They arose from the shift toward a business model that rewards taking imprudent risks with other people’s money. Mr. Cohan says that “Goldman Sachs did nothing differently in the years leading up to the crisis than did other firms of its stature.”

Anyone who has raised a child is familiar with a common excuse for bad behavior. The proper response to “Everyone else is doing it” is a stern demeanor and the answer: “Maybe, but so what?”

But let’s give the article a generous interpretation. While the casual reader might interpret the shared lapse in ethics as an excuse, perhaps it is not intended to be read this way. We will assume that Mr. Cohan intended not to excuse Goldman but to find fault with political leaders who unfairly singled out the firm.

It seems obvious that the example of a single firm is a more effective rhetorical device than calling out generalized bad behavior. Politicians used this device and public opinion was successfully mobilized. The job got done. I believe that the public understood that the bad behavior was widespread, and that Goldman was merely one example.

Was it unfair to make Goldman the example? The article argues that Goldman was just like all the other firms. It was not.

Goldman was actually better at executing a certain investment banking business model than anyone else. It became a leader in the industry, admired by competitors, the media and politicians. The problem was that the business model, so effectively executed by Goldman, turned out to be bad for America. The model inherently risks the survival of critically important institutions. It is also nearly impossible to use the model and, at the same time, maintain business ethics conforming to the shared values of the society.

Goldman historically promoted its commitment to ethics when soliciting clients. I am convinced that Goldman people genuinely believed this commitment to be true. It may even be the case that ethics were taken more seriously at Goldman than at its competitors. But seeking business based on ethics carries with it a responsibility. Pursuit of a business model with inherent ethical challenges has consequences that are unavoidable, especially to a firm which has held itself out to clients as particularly ethical.

Goldman’s success was envied up and down Wall Street. The pressure to keep pace with Goldman’s earnings drove other firms to emulate its model. At a minimum, managers at other banks were driven to take greater risks hoping for greater rewards as proof to shareholders that they measured up to the Goldman team.

It is ironic that Goldman was first to foresee risks of a deteriorating market and acted to defend itself. Goldman’s aggressive preparations, including the extraordinary demands to AIG for collateral, may have actually contributed to the intensity of the panic. Goldman was so prepared that, when the tsunami finally hit, the only real threat to it was a total systemic collapse. Congress and the Fed stepped in with cash to avoid catastrophe and Goldman, now even more powerful compared with competitors, immediately prospered. The real irony is that Goldman was greatly responsible for the problematic business model; yet, because management pulled the plug so effectively, the value of the bailout to Goldman shareholders was disproportionately large.

Mr. Cohan suggests that it was unfair to use Goldman as an example because of its relative ethics and its effective response to the danger. Those points may be relevant if the real issues were incompetence and larcenous intent. Instead, the core concern was and is the dysfunctional business model that generated massive profits for the firms but devastated the society.

Goldman was not just like all of the others. It was the leader. Becoming the leader involves a trade that should be well understood at the highest levels of Wall Street. Investment bankers often engage in businesses with underdeveloped rules of conduct. Pushing the envelope may be risky, but the rewards are more than worth it. If a firm is a leader, its profits and the wealth and power of its managers are virtually limitless. If it turns out that the business has consequences to society that are intolerable, even if the consequences were unforeseen, the leader will be the example held out to the public. Management is held to a high standard, but the pay scale more than reflects the level of difficulty.

Is this an unfair trade? I don’t think so.

Finally, Mr. Cohan concludes that we should “lay off the firm and allow Goldman and the rest of Wall Street to return to some semblance of normalcy.” Besides unfairly demeaning the entire financial reform effort, this statement suggests that our problems have been solved.

In fact, it would be a monumental error if financial reform ends with the passage of the legislation this month. James K. Galbraith points out in testimony to the Commission on Deficit Reduction that focusing on Medicare and Social Security as a means to reducing deficits is misguided. Economic growth is the only sensible solution. He cites the need to restore the financial sector’s role of capital formation for productive purposes, i.e., commercial lending and equity investment. The current legislation focuses on curbing dangerous behaviors and on procedures to deal with financial panics. It does not reconnect Wall Street capital to the engine of economic growth: productive and innovative businesses which employ American workers.

No one wants to drive Wall Street out of business, certainly not politicians whose campaigns rely on it as a source of funds. But the economy will not prosper unless Wall Street reengages with the broader economy. Current bankers will keep their Hamptons estates under the new regulations. But their successors may not be able to afford mansions if 10-20% unemployment is the new American reality. Wall Street’s attention must turn away from churning derivatives on existing products and instruments and toward growth of the economy and jobs. If more government intervention is needed to force this turn, so be it. Neither the public nor its political representatives should feel regret if this means Goldman and the other banks must fundamentally change.

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17 comments

  1. attempter

    Well ain’t that nice of Cohen, sticking up for the poor upset little people at Goldman.

    How much has he written about the trillions of dollars stolen? The tens of thousands of jobs permanently destroyed? The millions doomed to wrecked lives of under- and unemployment? The shattered dreams and suicides? Who knows how many shortened lives from stress and the travail of poverty?

    This has already long since been history’s worst robbery, and it just continues, untold millions stolen every day, monotonously, hideously, day after day.

    Even before the Wall Street-engineered crash and Bailout, the country was already being looted and smashed by finance sector rioting. This sector has long been purely parasitic and larcenous. Get back to normal? It shouldn’t be allowed to exist at all. It must be completely wiped out. That would restore the human normal.

    And yet there are those preaching the opposite, that we the people should give up, roll over, surrender, submit, crawl. That we should accept slavery as our destiny. These of the Propaganda Ministry are accomplices of the infinite capital crime.

    If we ever can redeem America and bring these infinite criminals to justice, those who tried to carry out this propaganda roundup, the media aspect of driving us into the slaughterhouse, must go into the dock as well.

    1. Joseph

      join the club my dear friend; not only millions of americans are fed up, but also worldwide there are a lot of people dammaged by these practices and people
      a/ middle classes, swiftly disappering
      b/ small firms, with the credit draught
      c/ savors and pensioneers, who see their money vanishing
      d/ unemployed desperate families
      e/ third woorld inhabitants, who say prices of food soaring last year, tens of millions died of famine
      d/ and last our children and grandchildren, who will pay the debts, through our governements, of these banksters
      keep well and try to smile
      Regards from Barcelona

    2. Doug Terpstra

      Always good to have you lead off the comments, setting an appropriate tone for all to follow.

      Turbeville’s own gentlemanly critique of Cohan NYT piece is way too gracious. “We will assume that Mr. Cohan intended not to excuse Goldman but to find fault with political leaders who unfairly singled out the firm.”

      Why? How can we possibly assume that from this, “Goldman Sachs did nothing differently in the years leading up to the crisis than did other firms of its stature” and that it has been unfairly “demonized”? WTF? Engineering economic WMD’s and calling its own deals “shitty” is excusable because “everyone’s doing it”?

      Cohan says we should “all to “fess up” to the fact that financial reform would have been impossible had the Administration and Congress not “demonized” Goldman.” And Turbeville agrees, “Politicians used this device and public opinion was successfully mobilized. The job got done.”

      Remind us again, what job got done? Every credible source I’ve read says that lobbyist-authored fin-reg is all but irrelevant.

      So ‘Mr. Cohan concludes that we should “lay off the firm and allow Goldman and the rest of Wall Street to return to some semblance of normalcy.”’ What’s ‘normalcy’: 20% real unemployment while taxpayers and the Fed fund billion-dollar bankster bonuses?

      Finally, Turbeville writes, “Wall Street’s attention must turn away from churning derivatives on existing products and instruments and toward growth of the economy and jobs. If more government intervention is needed to force this turn, so be it.”

      This is like the reverend professor J K Galbraith in one of yesterday’s links, preaching an old sermon to the choir: “The financial crisis in America isn’t over. It’s ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law … What to do? To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations…”

      Gee, now why didn’t I think of that—two years ago? None of these ‘mainstream’ insiders seems willing to state the obvious. There will be no substantive reform with teeth, no investigations or prosecutions for blatant fraud, just as can never be serious questioning of war or war crimes after nine years, or Israeli policiy after five decades. There will be no change in the obvious practice of bribery, regulator incest, legislator prostitution, or judicial treason.

      Why not? Because all branches of the US government are broken. It is unaccountable to the people and illegitimate. Until serious writers are willing to help Americans confront that stark reality, nothing can change. Stating the obvious again and again is just distracting, tiresome can-kicking.

  2. anarkst

    “No one wants to drive Wall Street out of business…”

    Just off the top of my head, I know several hundred million Americans that would love to drive Wall Street out of business. These are economic parasites, nothing more.

    1. NOTaREALmerican

      Re: These are economic parasites, nothing more.

      Not sure about “several hundred million”. When I told my power-hour instructor – 30 yo female civil-engineer working for a private company that is currently working on a local county water project (but she also does 8 aerobics class a week) – when I told her that my Zombie bank was insolvent (in response to a question about why her friend couldn’t get a loan) and should have been broken-up by the government two years ago (2Big2Fail, blah blah blah, if you can’t fail it’s not capitalism, blah blah blah, tax money paying for my Zombie bank, blah blah blah) her first response was: “But we need big banks, right?”.

      Americans LOVE big things. Bigness means prosperity. Big houses, big garages, big cars, big stomachs, big boobs, big teeth, big hair… The ultimate success is 2big2fail.

  3. Joseph

    and
    it was decided in the 80s, to help families who couldnt access credit, due to a bad record or a previous foreclosure; beautiful idea¡
    they paid a higher interest, but could get a mortgage, and a unification of credits if needed, scaping from usury
    As there was a limit to what the system was allowed to risk in dodgy credits ( in Spain, following central bank instrucions, around 3%, may be unexisting in the US) they made a pack with those credits, and sold to investment banks. Those made a cocktail, and resold again.
    Rating agencies blessed the system with AAA. Unhappy because there were not making anough, they started trading those in futures, initially at a fractional system, 10% down, at the end, people like GS at 0.5% down; To make it worse, people like Christopher Story says that people who took mortgages, where obliged to sign 3 originals, and kept none, so the same mortgage, got sold 3 times. Still not satisfied, because they were not making enough, they made insurances against goods they didnt own, the Credit Default Swaps, in a system, that was virtually impossible to know who owned what, who insured against what, and who was finally responsible for unpayment
    the rest of the story you know, Lhemann, AIG, trillions to support banks, and a big Depression
    thanks for reading me falks
    keep well

  4. HTML Reader

    In case it is not obvious, the italicization is the result of a malformed ’emphasis’ tag. Here is the location of the problem:


    <p><strong><em>By Wallace C. Turbeville, the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. who writes at <a href="http://www.newdeal20.org/2010/07/12/dont-let-goldman-be-goldman-14750/">New Deal 2.0<</a>/em></strong></p>

    Note the <</a>/em>, which should be changed to </a></em>.

  5. Glen

    Not to state the obvious, but we’ve been letting Goldman be Goldman, and that didn’t turn out very well at all.

    Is it just me, or does it seem like the quality of the lying to protect Wall St has really started slipping since the financial crisis?

    1. prostratedragon

      Vast and somewhat unexpected increases in necessary production have really shoved out that extensive margin in basic shop-built mendacity into some true jury-riggings.

  6. JTFaraday

    “The real irony is that Goldman was greatly responsible for the problematic business model; yet, because management pulled the plug so effectively”

    we know that Goldman Sachs knew exactly what they were doing all along, and thus, we know they should held criminally liable, even if they’re going to get off on a technicality, and that their highly touted ethics are a smoke screen.

    Interesting how Cohan turns it all 100% inside out:

    “Mr. Cohan suggests that it was unfair to use Goldman as an example because of its relative ethics and its effective response to the danger.”

    1. JTFaraday

      Last time he showed his face in public, Robert Rubin was STILL insisting no one could have known.

      But, GS did.

  7. Hugh

    Cohan’s op-ed was one of the dumbest I have seen. Goldman was a leader in driving the world financial system to collapse. So Cohan’s solution? Let Goldman be Goldman. It’s like Einstein’s definition of insanity, doing the same thing over and over and expecting a different result. Then he has the chutzpah to suggest that this time it will be OK because we’ll say that Goldman won’t have any government backstops. So if it goes splat, it goes splat. Anyone seriously believe this, especially with all the Goldman alumni at Treasury and the Fed? Or if the fall of Goldman puts the system at risk?

    Beyond on this, similar to a question Yves raised earlier today, what social purpose does Goldman serve? Goldman siphons off liquidity from markets mostly for the benefit of its own employees. It creates situations of great wealth destruction. I hate to tell Cohan but these are not social goods. I could have written a much shorter and to the point opinion: Does Goldman serve any useful social function? No. Does it have any reason to exist? No. Finis.

    1. NS

      Oh but didn’t you know…they are MARKET MAKERS rewarded richly by doing GAWDS work!

      This op-ed is a testament to the incredible hubris of the entire sector. While claiming to be ethical and responsible there isn’t even a glimmer of understanding of the consequences of their actions. Goldmanites really believe they are special and above others. Why not too, they infiltrated government and its highest offices; gamed opaque markets so thoroughly they will win even when it appears they have lost.

      But one point is correct, Goldman is hardly alone. JPM, Citi, Merrill and the entire sector have committed the same crimes, if not worse while escaping any consequences for what are clearly illegal activities. Case in point; Alabama bond issue that bankrupted a city. The politicians and old boys bought off by JPM are in jail but so far, no prosecution of the bank that behaved irresponsibly and illegally. And if by chance they are, they will be merely fined a sum equal to the pay of one underling with no relief for the citizens who need water paying NOW from that bond deal.

      I’m resigned that there really are just two classes in this nation. One class which includes Goldman gets carte blanche either through regulatory/governmental arbitrage/ capture or through extortion in who they will fund and who they won’t fund at both federal and state levels for their campaigns and pet projects. The rest of us aren’t even on their radar screens. We constitute the second class; our productivity, wages, taxes, savings, private information, health, all aspects of our lives are merely fodder and prey, individually and collectively. Enforcement of laws are only for us less-special people that Gawd doesn’t reward with stunning/historic wealth. We will all pay for the misdeeds of a few while they continue to enjoy their special lives the pharaohs would envy.

      Remember, do not speak out or object to the serial robbery of the poor to the rich or you risk being publicly called a whiner by former Sen. Phil Gramm who is now VP of UBS which directly benefited from his legislation.

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