Goldman seems to be making a renewed effort at PR in the wake of the letter by derivatives staffer Greg Smith accusing the firm of caring only about profits and treating customers as stuffees (“muppets” was revealed to be the new term of art). That observation probably came as no surprise to anyone save Goldman staffers, most of whom probably thought they had conned their clients into believing otherwise, and a few like Smith who believed the party line.
The Goldman CEO, Lloyd Blankfein, had an interview today with a very friendly outlet, Bloomberg News. The chat served to remind viewers of how inward looking and self referential the financial services industry has become.
We need to deal with the obvious misrepresentations before getting to the unintended revelations:
…..we’ll have to do a better job, getting out there and telling people how important this industry is, what it does when we advise companies on their growth plans and finance their growth plans and manage their assets for them and how important this is for the economy, the markets and obviously society at large.
Yves here. First, since your industry succeeded in holding up governments around the world and continues to do so (witness the backdoor bailout of German and French banks at the expense of ordinary citizens in the rolling Eurocrisis), you can spare us the false modesty. Second, you don’t advise companies on “growth plans”, you advise them on transactions. Third, you and your cohorts have done a crappy job at anything other than looting. Andrew Haldane of the Bank of England did a quick and dirty estimate of the cost of the last crisis, and his low figure was one times global GDP. If you try to make the big banks like Goldman repay the costs of the damage they didn’t, they can’t even begin to. If you try amortizing that low estimate of the losses over 20 years, the big banks can’t even afford the first year levy. It exceeds their market capitalization. So firms like Goldman don’t create value, they destroy it in a massive, profligate manner.
But Blankfein tries to pass off the idea that Goldman is misunderstood, as opposed to all together too well understood:
I think the average American probably had no contact and had never heard of Goldman Sachs before three years ago. Shame on us in a way for not anticipating how important that would be. We’re an institutional business with no consumers. It turns out, another name for consumers are citizens and taxpayers. They became important for reasons that are obvious. They always should have been important, but it wasn’t part of our audience as we thought about it. Now we will have to develop those muscles a little better than we have. Shame on us.
Translation: We should have been buying more retail advertising, like JP Morgan does, so all those financial section editors would have to think twice before dumping on us.
Later in the interview. in response to whether Goldman would have survived if it didn’t have access to the Fed’s discount window:
We did not have access to the Fed window as the bank leading up to the crisis because frankly we run ourselves very conservatively. One of the reasons why we came out of that crisis, that moment so well is because we went into so strong. Today, we carry over $170 billion of liquidity. We are very highly capitalized among the highest tier in our industry. We don’t borrow from the discount window.
This is such tripe. Goldman became a bank holding company in the crisis, remember? That was so the Fed could intervene if needed. Having access to the discount window plus all sorts of backdoor and direct bailouts, like the TARP, the Primary Dealer Credit Facility, guaranteeing money market funds, rescuing AIG, kept Goldman afloat. As derivatives trader and now venture capitalist Roger Ehrenberg wrote in 2009:
Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm…
There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in [option] premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….
Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded in all fields, Wall Street included. But when value created is the direct result of the risks borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not and apparently will not be done, and we, dear taxpayer, are the worse for it.
Now let’s get to the juicy bit. While Blankfein tries to maintain that Goldman can manage its conflicts of interests, he paints the firm as so inherent conflict-ridden as to make the case that clients can’t be well served dealing with a firm that can’t have an undivided loyalty to you. That is tantamount to an admission that big corporate and institutional clients would be better served if there were more players, better yet, firms that were more specialized.
Let’s start with his basic premise:
I think no one who is going to be effective in this business can avoid conflicts of interest coming up. You can do that if you only represent one client in every industry, in which case you won’t really be able to be that effective, knowledgeable, or influential. You won’t be able to get anything done.
Ahem, that’s an investment banking side argument, and it isn’t remotely true. As debunked above, investment banks are not strategic advisors. And even then, he’s also wrong on his premise that “you wouldn’t be effective or knowledgeable” if you represent only one client in an industry. That has long been Bain’s business model, and Bain has long been one of the top three consulting firms.
The reason that banks have industry specialization on the banking side is a bad reason: CEO and CFOs feel more comfortable with a banker who knows the gossip and the deals in their industry. But guess what? That patter is irrelevant to getting deals done. A generalist banker (say at a boutique like Rothschild) can work up the industry comparisons in very short order. And the knowledge of how to price securities offering is held on the sales and trading side of the firm, not among the glad-handed investment bankers.
We have this bit:
If you advise a client today, you have to lend to that client. If you lend to that client, they have to pay back. Now you have a stake in the outcome of their business decisions. You give them advice, but since you are a lender to them, like every bank has to be today, you have conflicts of interest. They always have to be managed.
Again, for a Goldman, that takes place in the context of M&A, and the lending role is exaggerated. Takeover loans are put into collateralized loan obligations and are sold to investors. The lead banks retain a small slice (for credibility reasons, unlike mortgage backed securities, investors like to see the lead banks have some skin in the game) but most is sold off. And a bank like Goldman would likely hedge at least some of the credit risk with credit default swaps.
With prime brokerage clients, the conflicts are even more rife. Goldman lends to many of its hedge fund clients (that’s where the real juice is), yet hedgies are acutely aware that their broker can and will trade against them, and so go to great lengths to disguise their positions and intentions by trading through multiple firms. Consider how this conflict worked against dealers in the case of Long Term Capital Management: the firm was massively leveraged, and when traders realized it was hugely on the wrong side of certain trades, they began exploiting its distress, which only made matters worse for the firm and ultimately for the dealers, who had to bail out LTCM so it could be wound down in an orderly manner. But preying on smaller hedge funds that got it wrong has never bothered the big banks, and many feel they were treated badly in the crisis when their prime brokers squeezed them by raising haircuts far beyond what seemed to be warranted even given the terrible market conditions.
The problem, of course, is that clients see the roles differently that Goldman does. This is Blankfein’s account:
For example, in the market making business, we give prices to our client and a client decides whether to trade or not. We hope as a result of that exchange, we will make money and not lose money. If over time we lose money, we will be out of business. We have other businesses or we are an adviser and other businesses where we are a pure fiduciary. One of the things we set up to do when we wrote our business standards report is go out and carefully delineate for our audience what our roles and responsibilities are in each segment of our business. As an adviser, we work for the best interests of our clients. As a fiduciary, our clients to come first. As a market maker, we have to protect Goldman Sachs.
But remember the Greg Smith letter. As a salesman, he saw his role as advisory (and there is a tension in being a salesman of any sort for a bigger firm: the salesman is often more protective of his clients than the house is, since loyal clients might very well follow him if he leaves the firm). Yet it was very clear from Blankfein’s testimony before Congress in 2010 that he saw Goldman’s role in CDOs like Timberwolf as that of a market-maker (caveat emptor!) when some clients thought Goldman was acting in at least an advisory capacity. To pretend that firms like Goldman don’t prey on that gullability is naive.
So the newer, friendlier Lloyd Blankfein isn’t that much more persuasive than the old version, save maybe to those who hold similar views. But until Blankfein and his ilk are subject to meaningful pressure, all he need to do is make occasional contrite gestures, like this Bloomberg chat, as he carries on as before.
An occasion contrite gesture and he’s good until his next confession, I guess.
Pretty sure he’s not Catholic.
But he works for the biggest Vatican/Jesuit owned banking proxy in the world….Goldman Sachs..that is how they operate. Just doing God’s work so he says.
Any links for that?
JUST GOOGLE IT!
Just want to add there is a lot of stuff about this topic on google. Here is one interesting link entitled: Does the Vatican Hold You Mortgage?
the link is broken but please google it.
Goldman’s coup in Europe has almost succeeded. and their work in Libya has to be admired – Can’t blog about henchman and not even mention the major sordid details of US Hegemony. Or can thou?
Here Hear Yves!!!
“This is such tripe.” Perfect summary.
He’s such a bad actor, literally. He’s probably expecting an Emmy. And what PR hack wrote the drivel?
“Get the hook!”
I think he’s stole gold from Libya.Not to mention the folks that were killed and the country that got broke. Blankfy is just a suit wearing dick like Jamie – both more clueless than the gossip columns let on. F’em.
I’d love to see socialist actor Wallace Shawn play Blankfein in the next “Shrewdest Jerks in the Room” disaster movie. Shawn, the (helium) voice of Rex in Toy Story, looks a lot like Lord’s-work Loyd, but their souls and worldviews couldn’t possibly be father apart. Shawn would destroy the wicked squid with great, joyful hilarity.
Wallace Shawn. I had to look him up but he was instantly recognisable from his picture. I thought, “Wasn’t he the guy in Princess Bride?” Yes, he played Vizzini. I think you are right — he’d make a great Bleakfern.
Vizzini: I’ve hired you to help me start a war. It’s an prestigious line of work, with a long and glorious tradition.
DT, a brilliant idea! Wallace Shawn, are you tuned into NC? There should be NO problem funding this film, destined to be a blockbuster. Wallace Shawn’s “Oscar” is waiting for Wallace Shawn’s magic touch. The right film would be so important, so timely, so entertaining, and who but Wallace Shawn could do Lloyd Blankfein justice? What “Producers” are ready to get rich as Croesus on one film?
Paging Wallace Shawn! Mr. Shawn, the time to cash in on your rare talents has come. Can you get an Oscar for Leading Actor AND Scriptwriter? Cha-ching!!!
You only think I gave you your home’s title, that’s what’s so funny! I switched mortgages when you weren’t looking. Ha ha, you fool! You fell victim to one of the classic blunders. Everyone knows you never start a land war in Asia. But only slightly less-well-known is this: never go in against a Blankfein when death is on the line! Hahaha ah-hahaha ah-hahahah–
I am not certain it is useful to parse every sentence of a PR lecture that is utter bullshit. The important problem is an utter failure of bank regulation, for which we can thank Phil Gramm, Clinton, Bob Rubin, Barney Frank, and every Congressman and Senator in office since 1999.
OTC derivative trading by commercial banks simply must be made illegal. Let these f***ers choose between Fed backstopping and destabilizing the financial system. Those who think they are smart enough to choose investment banking (which today means selling credit default swaps) will blow up before Christmas. Then we won’t have to listen to them, except in bankruptcy court.
Yves, the Comic!
Her translation of Lloyd Blankfein’s newspeak into oldspeak brightened my day.
“Translation: We should have been buying more retail advertising, like JP Morgan does, so all those financial section editors would have to think twice before dumping on us.”
All true Yves! I watched the CNBC interview today. He is a scoundrel.
I don’t want to get into ethnic stereotypes and the further nastiness that ensues, but didn’t he come off as rather a nebbish,- (Wallace Shawn, more than Woody Allen, came to mind)? If so, what more perfect camouflage for an equal opportunity predator.
Lloyd needs to channel Ofraud’s nearly facist nationalism – a ferverent embrace of the ‘Murican industral military, previously reserved for the “other” party. A corporation dedicated to global aspirations of “we know how to arrange the deck chairs” will have four more years of a President who will market more armaments, and more than one kind. Co-option includes a strategy of preserving the status quo – but rebranding it. Yes, let’s “break up” big banks, help the kids go to skool, sell Lockheed in the dark continent. Pathetic, we could have made something else.
The lack of adversarial interviewing in the US is amazing.
Here in Oz we regularly see the PM, other ministers, business people, etc pummelled in interviews.
Fully versed, well-researched interviewers who hammer on any inconsistencies.
Doesn’t ANYONE do it in the US?
Here in the US we have “newspeople” who are on the status quo’s payroll. Ej Dionne to David Gregory – they have mansions in the NW DC Area. They are reporters in the sense of national security. It’s a terrible, low rent production, out dated, insufficient and unprepared.
I thought it was pretty funny when the CNBC anchor asked Blankfein if he accidentally died how he thinks he would be remembered. Blankfein looked a bit rattled by that one. LOL…
Admittedly, when he spit out the “What if you were hit by a bus?” question, I was in stitches, the highlight of that particular interview in fact. I don’t wish personal harm to anyone, but the Freudian slip was amusing to say the least.
These interviews today had all the makings of a Larry King interview – lob softball questions around and once-in-awhile toss out something ridiculously random. But, maybe a closer parallel could be drawn to the info-mmercials shown on TV at 3am in the morning. To that end, GS finally became “transparent” transparently ridiculous in their PR campaign!
Can you say CLEMENCY SPEECH? Or, let’s paint a happy face on Uncle Lloyd?
What turns your stomach more: a. this man’s actions? b. the fact that SOMEone thinks a little lipstick willfix all that?
The mention of the Vampire Squid seems to make Blankfein’s ass tired. That’s pretty neat.
Welcome to our home. Indeed. OT
…until Blankfein and his ilk are subject to meaningful pressure, all he need to do is make occasional contrite gestures…
the best pressure for Lloyd would be for Lloyd to be holding his a)ankles or b)the cell bars, while some other inmate was applying meaningful pressure. I’m sure there would be various gestures, I just don’t know if contrite ones would be on Lloyd’s face when the pressure was applied.
Sickening. And the purpose of this smarmy interview wasn’t even to allow Blankfein to redeem his awful image. It was simply to assure investors that Goldman Sachs has a bright future. Lloyd should have worn shades. That he was willing to gulp down his pride like that was kinda interesting. But his entire purpose was not to apologize. It was to say that GS was going to expand into the BRICS and grow its business beyond America’s shores. Except of course for Silicon Valley. And will the Fed pick up the pieces of GS again when it goes bust in Africa because it sells CDS with its same cotton-candy business model? Michael Hudson is right when he says that all GS et. al. are engaging in is “destructive destruction.”
They all need to be arrested. The sneaky bankrupting of the American people by the FED and the TREAS for the unsustainable debt crimes of their perps on Wall Street is an outrage and must be stopped. The same goes for the politicians who are allowing this. We will all wake up broke and homeless one day as a result of the ongoing robbery. Then the crooks who are capitalizing on the crisis as we speak, the crisis that they intentionally created will offer a fraudulent fix for all of their fraud which will allow them to steal our National Sovereignty. This was their intention all along. Wake Up America and stop participating, paying, conforming and complying to their lies.
“Takeover loans are put into collateralized loan obligations and are sold to investors. The lead banks retain a small slice (for credibility reasons, unlike mortgage backed securities, investors like to see the lead banks have some skin in the game) but most is sold off. And a bank like Goldman would likely hedge at least some of the credit risk with credit default swaps.”
That is not factually correct on a number of fronts. Let’s take this step by step.
1. “Collateralized loan obligations” (CLOs) are standalone independently managed investment vehicles. Think – hedge funds but with a lot more restrictions on what they can buy or sell. Let me rephrase that – CLOs are ACTIVELY MANAGED THIRD PARTY FUNDS. Whereas subprime mortgage CDOs, for example, are “static pools”.
Besides which, per the LSTA CLOs now represent a declining share of primary loan volume – something like 40% vs. 60% in 2006-2007. Hedgies, total return investors, non-agent banks, etc. make up the remainder. No-one “puts loans into a collateralized loan obligation and sells it to investors” – this is utter nonsense.
2. The lead banks could not give a flying rat’s behind about retaining a small slice for “credibility reasons”. The AGENT BANK typically retains some inventory to facilitate trading, because in syndicated loans, the agent is your first call. [Since the agent sees all buys and sells, if you trade away and then come back to the agent on something else – they’re going to know, and give you grief about it.] Now, on some loans – no inventory is retained; on other loans, the big in-demand ones, you’ll have 5+ desks take inventory. And yes, some of the time this is purely speculative. But Step 1 is not to “retain a slice of the risk” – no-one cares about that in syndicated loans. [That’s why they are “syndicated” – banks WANT to move them off-balance sheet.] The agent explicitly needs the inventory to transact, because in a given loan you might only have 20-50 institutions involved total, some of which are completely unwilling to part with their holdings (for a variety of reasons, e.g. the need to stay fully invested).
3. Anyone who talks about hedging syndicated loans with swaps knows nothing of the LCDS market. Or, rather, the pathetic state thereof. This ain’t High Yield bonds where you have your pick of single-name CDS or the CDX index. At best you can try some portfolio-wide or desk-wide hedging via the LCDX, but that’s not going to protect you if you’re, say, RBS and half the deals you’re agent on are middle-market (i.e. dis-correlated from the index). Nor is that going to help if you’re Goldman and your desk has positions in 85% of syndicated loans (while you’re only agent on maybe 10%-15%).
Bottom line. Nice try, but for the love of pizza, at least make the attempt to learn about the specifics of a given asset class before trying to shoehorn it into the “standard CDOs-are-evil-and-so-are-the-banks”(TM) narrative.
No, many ABS CDOs were managed, so you’re wrong there. I’ve been discussing managed v. static CDOs since 2007. Timberwolf and the Citigroup CDO squared that the SEC and Citi wanted to settle but is in play thanks to Rakoff were managed, for instance. The “managers” were marketed as independent, and that’s why the SEC went after some of those deals, because they weren’t.
CLOs are in fact just another type of CDO, as you presumably know. Pretty much everyone just uses the shorthand “CDO” when they really mean “ABS (asset backed securities) CDO.”
And some CLOs WERE static. Recall all the ones sold to dumbass foreign investors where the deal was structured so that there was a trigger and the top tranche would take losses only if a certain # of names were downgraded, and the deals were marketed as including SPECIFIC credits like GM and AIG that savvy people in the US knew were gonna be downgraded?
And your comment re trading inventories misses the perspective of some of the parties who are the end buyers. For investors in Japan (who are meaningful players) and some European investors (I’ve done a lot of work with foreign banks) the skin in the game is VERY important to their participation, even if the lead bank would retain a portion regardless.
Your harrumphing about hedging in no way contradicts the point made: that Goldman would try to hedge at least some the risk of any exposure retained on balance sheet.
And perhaps most important, you manifest a basic reading comprehension fail. The reason for talking about CLOs was that Blankfein was saying banks had to be lenders to serve clients. There was NO “evils of CLOs” point made, as you falsely charge. Instead, I was arguing that the importance and necessity of the lending role was greatly exaggerated. You confirmed that by saying the lead bank retained inventory only to facilitate trading.
Better trolls, please.
US and International accounts understand that being a big player with GS gives you direct access to the White House and the Halls of Congress. GS offers unrivaled political capital and getting screwed on some of the GS deals is just the cost of access. As long as GS owns Washington, they do not need to lose much sleep over bad PR.
Sure fraud is complicated and there are different levels that are defined as asset classes. The riskier investments are meant for the insiders. Yeah, they will let high rollers participate for a while in their casino but eventually you will lose it all. Many of the investors admitted they did not even know what they were buying from these sophisticated Wall Street schmucks. At the end of the end day, the Wall Street Casino is rigged and the investors are their playthings. Like all of us and our mortgage notes and they don’t give a darn about you. If you would have known at your closing this is what they were really doing, would you have agreed to it? Hell no.
Calling Andrew Ross Sorkin.
Bob Diamond’s back in town, and he’s looking for 3 submissive financial reporters to obey his every whim.
Pick up your new dog collars at Toys in BabeLand, then meet Ezra Klein and Roger Lowenstein at 11:00 PM in the lobby of the Waldorf Astoria 301 Park Avenue to rehearse your lines, “I’ve been such a bad doggie”, “doggie want a bone”, etc
Mr. Diamond will expecting the three of you at 11:30 sharp.