Goldman Is Evil But McKinsey Is Worse

It is remarkable the way that McKinsey goes from train wreck to train wreck yet manages to depict itself as some sort of Corporate America Zelig: ever on the scene but not doing much of anything in particular. This is despite the fact (for instance) that McKinsey was singularly responsible for the biggest value destroying deal of all time, save maybe Bayer’s purchase of Monsanto, which was the Time Warner acquisition of AOL. McKinsey pitched AOL to the Time Warner board five times and the board had the spine to reject it only four times.

Or how about the Enron bankruptcy? McKinsey was all over Enron every bit as much as Arthur Andersen had been, but didn’t leave fingerprints at the crime scene like signing off on Enron’s financials…even thought it was widely acknowledged as having approved of the accounting treatment that sank Arthur Andersen.1

But as McKinsey has gone from sleazy…its former head of the firm and a then-current partner convicted of insider trading….to sleazier…the moving force in a major South African bribery scandal, the firm has managed to outdo Goldman at the height of its financial crisis disrepute. There is no question McKinsey’s advice killed people, a level of damage that is much harder to credibly pin on Goldman.

My most cold-blooded interlocutors, the sort that react to news of corporate misdeeds with a “Gambling in Casablanca?” shrug, are seething over the fact that no one at McKinsey was indicted over its role in stoking opioid sales in the US, nor was the firm charged either. And it isn’t due to class loyalties; they all have advanced degrees and are either in the 1% or the top half of the 10%.

For those of you who managed to miss this story, which was the lead item at the Wall Street Journal when it broke, McKinsey agreed to pay $573 million to settle claims with 47 states and the District of Columbia related to the recommendations it provided to Purdue Pharma and other drug companies for their opioid businesses, with no admission of wrongdoing. Most of the money is to be paid in the next 60 days.

The Journal gave some examples of McKinsey’s advice:

Memos McKinsey sent Purdue executives in 2013 that have been made public in bankruptcy court filings included recommendations that the company’s sales team target health care providers it knew wrote the highest volumes of OxyContin prescriptions and shift away from lower-volume prescribers. McKinsey’s work became a Purdue initiative called “Evolve to Excellence,” which the U.S. Justice Department described in papers released last year in connection with a plea agreement with Purdue as an aggressive OxyContin marketing and sales campaign.

According to bankruptcy court records, McKinsey sent recommendations to Purdue in 2013 that consultants said would boost its annual sales by more than $100 million. McKinsey recommended ways Purdue could better target what it described as “higher value” prescribers and take other steps to “Turbocharge Purdue’s Sales Engine.”

Not to put too fine a point on it, but other disclosures about Purdue Pharma showed that the company set out to create addicts. One approach was that it encouraged doctors to switch from a version of OxyContin that lasted 8 hours to a supposed 24 hour version. But the 24 hour version actually provided only 12, at best 14, hours of relief and Purdue Pharma knew that. When patients came back to their doctors complaining that they were in pain, rather than tell them to go back to the 8 hour formulation, Purdue instead told MDs to increase the dose, when that would clearly not solve the problem.

It’s inconceivable given how much McKinsey probes what its clients are currently doing that the firm somehow missed that Purdue’s sales practices were bound to kill patients. In other words, McKinsey was setting out to “turbocharge” clearly criminal practices.

Oddly, both the Journal and the Financial Times skipped over proof that McKinsey knew its clients were exterminating some of their customers, recounted in the New York Times last November:

The [2017 McKinsey] presentation [to members of the Sackler family] estimated how many customers of companies including CVS and Anthem might overdose. It projected that in 2019, for example, 2,484 CVS customers would either have an overdose or develop an opioid use disorder. A rebate of $14,810 per “event” meant that Purdue would pay CVS $36.8 million that year.

From a New York City legal aid lawyer:

Let’s do a little math. McKinsey advised both Purdue Pharma’s and Johnson & Johnson’s opioid businesses. McKinsey said it stopped giving opioid-related advice in 2019. The Financial Times kindly provided this data:

According to the US Centers for Disease Control and Prevention, the number of deaths each year from overdoses involving prescription opioids rose fourfold between 1999 and 2018. More than 232,000 Americans died from prescription opioid overdoses in that period.

Recall that among its recommendations, McKinsey encouraged Purdue to push more drugs through doctors who sure looked like pill mills. So let’s assume that McKinsey’s turbocharging resulted in 5% more than if Purdue had had to stumble around for more aggressive sales tactics on its own.

That’s nearly 12,000 deaths.

And opioids aren’t the only instance of McKinsey having blood on its hands. McKinsey also advised ICE on cost cutting. As ProPublica exposed, in 2017, McKinsey’s recommendations on reducing spending on detainee food and medical care were so aggressive that the ICE staff were uncomfortable with it:

The consulting team became so driven to save money, people involved in the project said that consultants sometimes ignored—and even complained to agency managers about—ICE staffers who objected that McKinsey’s cost-cutting proposals risked jeopardizing the health and safety of migrants…

In what one former official described as “heated meetings” with McKinsey consultants, agency staff members questioned whether saving pennies on food and medical care for detainees justified the potential human cost.

McKinsey in a public whinge (after refusing to comment on materials ProPublica sent in advance of publication) tried claiming it was just helping ICE negotiate better prices, which led ProPublica to publish additional documents showing ICE staff complaining at the time that there was no procurement fat to be cut:

What is McKinsey looking to find? They are looking for ways to cut or reduce standards because they are too costly and to achieve cost savings through edits to the standards without sacrificing quality, safety and mission.

Some immigrant advocates lay six deaths of children and teens in the year after the McKinsey-mandated budget cuts at the giant consulting firm’s doorstep, such as:

A 16-year-old Guatemalan boy’s lifeless body was left near a toilet on a cold hard concrete cell floor from approximately 1:30 a.m. until 6 a.m. in May this year. He was supposed to have been taken to a hospital with a 103 degree fever, but instead was chucked into a cell at the McAllen immigration detention center in Texas.

Footage from an immigrant detention center in Texas obtained by Pro Publica and published online on Thursday, Dec. 5, showed the final hours of the young soccer player, Carlos Gregorio Hernandez Vasquez, who died from complications of the flu while in U.S. Immigration and Customs Enforcement (US ICE) custody.

McKinsey made over $20 million from its work with ICE, which included accelerating deportations, to the degree that, as ProPublica put it, “provoking worries among some ICE staff members that the recommendations risked short-circuiting due process protections for migrants fighting removal from the United States.” In other words, when ICE is the most dogged defender of immigrants in the room, you know its bad.

Oh, and how about probable deaths in Saudi Arabia due to McKinsey helping the kingdom persecute critics on Twitter? McKinsey identified that Twitter was giving heavier and much more critical coverage of austerity measures introduced in 2015 that the conventional press. McKinsey identified three Twitter accounts that were driving most of the negative commentary. One account owner and two brothers of another account owner were arrested. McKinsey incredibly batted its baby blues and said it has no idea that the information might be used to hurt people….in this case, toss them into Saudi pits, um, prisons.

Well, you might say, Goldman has done really horrible things! I challenge you to identify Goldman misconduct that is anywhere near as directly linked to deaths, let alone so many.

Yes, Goldman was a huge and initially very well remunerated player in the 1MBD scandal. But McKinsey was all over the South African Eskom bribery scandal. The McKinsey haul was not as big but the scam was similar: taking a cut from helping government officials loot.

Yes, Goldman was the firm that gave Greece the currency swap that made 2% of its debt appear to go poof (again Lloyd Blankfein, who also approved the 1MBD deal, was in charge her; IMHO the Goldman acquisition of commodities trader J. Aron over time took the firm’s conduct down several notches; commodities traders are know as just about the sleaziest in finance, which is saying a lot). This deal might not have been quite as dreadful for Greece as it turned out to be; currency and interest rate moves after 9/11 worked against Greece. But Goldman was not uniquely evil here. JP Morgan did a similar deal for Italy.

What about the Great Vampire Squid? The financial crisis? If you go back and read Taibbi’s 2010 classic, you will quickly see that once Taibbi gets past the dot com era, the sins he attributes to Goldman are actually those of powerful Goldman alumni, and not the firm. Goldman was not a major player in subprime or in CDOs1, even if it sold some particularly rancid late in cycle CDOs like Timberwolf. Goldman did buy a sleazy abusive servicer, Litton, right before the crisis (some firms who should have known better, including Merrill, bought servicers when subprime was tanking, as if they’d be able to make a quick buck when the market turned. Ooops). But even so, Litton wasn’t in the top ten in servicing back in the day of Peak Foreclosure, so even the damage it did that was wasn’t as bad as that of the leading actors. Bank of America’s servicing book was also vastly bigger than anyone else’s.

But more important, the central theme of all of Taibbi’s colorful takedown of Goldman is that it’s a master of financial pump and dump schemes. But Goldman is an institutional player; its smallest “retail” clients (until a recent plan to go further down-market and I’m not certain how successful it is) are very high net worth. In other words, whatever redistribution Goldman is doing on its own behalf, ex exercises like the runup to the 1929 crash, where Goldman was a major creator of systemically disastrous highly leveraged trusts, is within the ranks of the investing classes, from other monied, usually very highly monied interests to itself. That’s why there isn’t a readily identified Goldman body count. Unlike for McKinsey, which really has destroyed some people’s lives, Goldman instead severely dents their bank accounts.

How about the rise in inequality? Isn’t that more the fault of Big Finance than McKinsey? In case you missed it, neither Goldman nor McKinsey have been the most prized employer among newly-minted MBAs, and that reflects where the big money prospects really lie.  Private equity has long been the hot spot, along with other posts in the money management biz that work off the private equity/hedge fund fee formula. My contacts claim that since the early 2000s, half or more of the billings at all the top three consulting firms, McKinsey, Bain and BCG, come out of private equity.  So who is the bigger collaborator?

McKinsey has been promoting higher pay for executives since the 1950s, when partner Arch Patton accounted for 10% of the firm’s revenues. McKinsey hasn’t often created management fads but has regularly legitimated them and greatly accelerated their adoption.

In my day, McKinsey did do cost cutting studies, but reluctantly and in recessions. Consultants then hated firing workers and McKinsey had the good sense to wonder if head-count-cutting might create future enemies. Now I gather, as the ICE example above attests, that McKinsey has no concern about damage to little people in the interest of firm and (typically) client executive enrichment.

McKinsey did invent the sort of retail financial firm nickel and diming that Elizabeth Warren later called “tricks and traps”; I know the manager on that Citibank study personally and her type of fee and product rejiggering was quickly rolled out to other financial firm clients.

McKinsey most certainly didn’t invent securitization but was a zealous promoter; I recall numerous “If you’re not on this bus, you’ll be under the bus” analyses back in my day. More generally, McKinsey was an aggressive advocate of bank deregulation long before Rob Rubin got his fingers in that pie. McKinsey partner Lowell Bryan touted the idea that banks were all going to go broke (see his 1992 book Bankrupt) and therefore they needed all sorts of gimmies from regulators.

More generally, McKinsey has made it all too clear that it will look the other way as far as client abuses are concerned. As Will Bunch pointed out in the Philadelphia Inquirer:

Imagine that you’re a Hollywood screenwriter, and you have this idea for a movie that would somehow bring the concept of the James-Bond-type-spy-saves-the-world-from-diabolical-evil-genius thriller into the 21st century. Given the grim realities of late-stage capitalism, you labor over your script to create an arch-nemesis that the audience will really hate — a multinational conglomerate with its slimy hands in just about everything.

It’s a given that your villainous firm (your script calls it simply “The Firm”) will advise the world’s absolutely worst dictators — helping Saudi Arabia’s  autocrats identify dissidents, advising Turkish strongman Recep Tayyip Erdoğan on running his brutal regime more efficiently, working closely with the state-run businesses and banks in repressive nations like Vladimir Putin’s Russia and Xi Jinping’s China, even aiding Beijing to flex its expansionist muscles through building islands in the South China Sea.

But that sounds too plain vanilla in an increasingly corrupt world, so you spice things up. Your screenplay introduces The Firm as hosting a lavish party in a remote, exotic corner of China — literally, the other side of the world — with guests arriving on camels and feted in red-carpeted tents surrounded by sand dunes. The camera slowly pans back to reveal the soiree is just a few miles from a vast concentration camp where Chinese guards are cruelly mistreating thousands of Uyghur Muslim detainees.

Before you say that having a party (a partners’ multiday offsite) near the Uighur concentration camp doesn’t amount to endorsement, people who are close to the firm and know China well agree with Bunch. A highly regarded McKinsey alum who built a factory in China in the early 2000s and continues to do business there wrote the firm’s managing director to call out McKinsey’s approbation of the Uighur, um, settlements. As he said to me:

McKinsey has clearly lost a significant amount of its moral compass. My favorite example is China. Last fall my wife and I went to Xinjiang, the westernmost province of China, where the silk road enters China. That region and its capital, Kashgar, has gotten lots of recent press because of the oppression of the Uighur minority. It’s worse than most press describe. It’s a police state like the storm troopers of Star Wars. Last fall (after we were there) McKinsey held its annual senior partner meeting in the desert near Kashgar. For that to have been done was, to me, a clear signal to the Chinese government of McKinsey’s tacit approval of their actions there. It was appalling. No other part of China, including Tibet, is even remotely as oppressive.

The lesson here is perverse. Even with deregulation, even with the revolving door, there’s still enough oversight in finance to catch at least some abuses, even if too many of them result in mere fines as opposed to people going to jail or at least being barred from the securities industry for a while. If nothing else, the existence of regulations means victims can also tell the press and legislators about violations, as opposed to merely depicting themselves as having been treated unfairly (contracts, unless they are between big fish and therefore negotiated, will not be of much help to ordinary Janes and Joes).

And there actually is little tolerance in finance for actual stealing (perversely outside of private equity, a disconnect I do not understand). Look at the outrage over Wells Fargo’s fake accounts scandal, even though the bank took only small amounts from many customers. Wells suffers to this day. I know many people who say they’d never open an account with them. So a second lesson is that dropping below industry-standard sharp practices runs a very large business risk in finance.

By contrast, McKinsey has long had a business model of invading at the fingertip and going for the brain. In some case like ICE it’s a near complete success; the ProPublica account describes how ICE management had become dependent on McKinsey and thus wasn’t at all like the mythical client hearing McKinsey’s ideas and going off and having a robust internal debate about what if anything to implement. By contrast, the Sackers were no doubt confident of their independence yet McKinsey sussed out how to play into their greed in the interest of its fees. So you can get to the position of McKinsey having undue influence via very different routes.3

McKinsey has enough confidence in its abuses not coming to light all that often and, as with Enron, being able to make a credible enough claim that they weren’t influential, that they have far fewer checks on their behavior than even big notoriously greedy financial firms. So don’t expect the opioid fine to slow down McKinsey’s moral decline.

_____

1 Some of you may recall that McKinsey wunderkind Jeff Skilling had Enron as his client and then jumped ship to become an exec and later CEO. At a McKinsey alumni partners gathering in the mid 2000s, one person addressed the room: “How many of you worked with Jeff Skilling?”

About 1/3 of the hands went up.

Next question: “How many of you are surprised that he was involved in something that didn’t pass the smell test?”

No hands went up.

2 The top CDO arrangers though 2008, in order, were Bear Stearns, Merrill Lynch, Wachovia, Citigroup, Deutsche Bank, and Bank of America Securities. Goldman was prominent due to it apparently having intermediated AIG CDOs with Middle Eastern investors (ie, it looked like a big counterparty to AIG in Maiden Lane III, but the scuttlebutt was that Goldman wasn’t really “facing: AIG). I’d have to check my archives, but if Goldman was actually a middleman, I think it is highly unlikely that Goldman would leave itself in a position to eat AIG losses in the event of a default; the firm is famous for having its interests extremely well covered. But it would also be just like Goldman to intimate it might get in a bit of pain so as not to have to burn some rich and stupid customers it would rather keep alive for future fun and profit.

3 Even in my day, there were certain clients that were widely recognized within the firm as being so dependent on McKinsey as having limited capacity to function on more than inertia if McKinsey were to abandon them. And as one wag put it, “The most profitable clients are the most diseased.”

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55 comments

  1. Thuto

    I don’t know how disgraced former executives caught with their pants down or their hands in the cookie jar fare after their fall from grace but I imagine it’s a combination of keeping a low profile and taking a long vacation away from the scene of their crimes. Not so Vikas Sagar, the ex-Mckinsey South Africa partner responsible for the Eskom bribery scandal who watches the mess he left behind from the commanding heights of a cushy London gig as co-founder of Kalido, a tech startup with millions in VC funding and a “leader in global innovation” award from the World Economic Forum. A businessman with a tarnished reputation easily raises millions in VC funding and his company gets showered with accolades from the WEF? Background checks and due diligence clearly aren’t a thing in the rarefied air of Davos and venture capital.

    I think the likes of Mckinsey, Deloitte, Goldman et al will keep trotting out the “we’ve learnt our lesson and we’ll do better” trope whenever they’re caught bending the rules, and they’ll live to fight (scam) another day. The financial capitals of the world will do their part to provide a soft landing for executives emerging from these companies with less than stellar reputations, and so on and so on…

    Reply
    1. Yves Smith Post author

      Even with not being that plugged in, when I was in London in 1984, and everything was less busy, Mayfair was super dead due to the amount of Middle Eastern absentee owners. That is now where a lot of hedge funds and I assume VC funds hang out. So I wonder if Mayfair is still just a destination for dirty and dumb money. Not that it makes the spectacle of a crook landing on his feet any more palatable.

      Reply
    2. fajensen

      Being Crooked is a marketable skill.

      I know of two such people, one was a CEO at a large company, who hired friends and family for lucrative consulting gigs. The other was the controller who signed off on it all.

      Both eventually got nailed, fired, convicted of fraud, jailed, and both were employed in similar positions six months after getting out of jail.

      Someone needs a CEO with a proven track record in flexible resource allocation and a controller who will sign off on anything.

      Reply
  2. russell1200

    It is my understanding that it is McKinsey that crapified the HOI industry. Starting with Hurricane Floyd in North Carolina, they pushed the industry to fight even legitimate claims. A policy that the industry wholeheartedly used for Katrina.

    Lat I checked, the number of insurance companies that follow the old school – good service/fast claim resolution model is extremely small. But I haven’t checked in a few years, so I am sure it is better now.

    Reply
    1. ambrit

      An anecdote from Katrina’s aftermath.
      An elder couple a block down the street from us in the town that we went through Katrina in lost their house. Like us, they stayed and rode it out in their attic. Unlike us, their house was stripped to the studs by the wind and flood.
      Later, their son told us that the insurance company reimbursed them for a new roof. The company argued that the walls were destroyed by flood, and thus not covered by their storm damage policy. This was upheld on appeal. Before Katrina, the neighborhood in question was not designated as a flood zone, so, no flood insurance requirements, even for mortgages. The maximum storm water height, verified by myself and some hardy neighbors, was 19.5 foot above mean sea level. The average ground height above mean sea level of that part of town was between six and ten feet.
      Most of our hurricane related ‘support’ came from a Federal fund via the State of Mississippi. Haley Barbour, the State Governor at the time, and his family, made out like bandits. (That’s Tradition in the North American Deep South.)

      Reply
      1. Swamp Yankee

        I worked for an insurance newspaper in Boston (mostly sold to the industry, whether it was independent agents, insurers, various think tanks, etc.) right after Katrina. I remember well this odious practice, and how I was in a small minority who thought it horrible (“well, your walls were damaged by flood, we only cover wind” — that sort of willfully obtuse nickel-and-diming that you both describe above) in my office.

        My editor and her predecessor were particularly supine in their willingness to accept all manner of nonsense from Insurers.

        I found the state regulators so in bed with the companies that I was blacklisted by the Rhode Island Dept. of Insurance, who refused to speak to me after reporting how they operated.

        I can only imagine things are much, much worse today.

        Reply
  3. UserFriendlyyy

    Wait a minute!! Are you trying to say that the elites in the government and leading consulting firms AREN’T explicitly trying to murder as many poor people as humanly possible all over the globe? Well I guess that puts to bed the age old question of incompetent or evil. Both.

    Reply
    1. Yves Smith Post author

      It says “McKinsey.” I don’t know how you read otherwise. Oh, now I do, see my reply below. Never thought a cached page that stale could be served up. Sorry!

      Reply
  4. brook trout

    Unfortunately this sort of bad consultant advice goes on at a much smaller scale as well, although not with the loss of life consequences outlined above. I just finished tearing apart a financial model provided to our new township supervisor by its “financial consultant.” The model was an embarrassing effort that disregarded new development in the township (one development in particular is currently at a healthy build out pace) and ballooned expenses. In my experience, township governments–at least ours– have consistent budgets since they have no programmatic variable expense–excepting law suits, of course, which can be a major variable with a small governmental budget (a fact upon which developers rely). The pattern is the same, large scale or small. Once a consultant has his/her hooks into you, the main concern seems to be pumping the engagement to maximize revenue to the consultant. Or am I being too cynical?

    Reply
  5. Fazal Majid

    “no one at Goldman was indicted over its role in stoking opioid sales in the US”

    Yves, did you mean McKinsey rather than Goldman? This sentence is out of line with the rest of the paragraph.

    Reply
    1. Yves Smith Post author

      The text says McKinsey. I don’t know how you are seeing “Goldman”. I did a couple of quick cleanups right after it launched and went away for more than an hour to listen to a court hearing (during which time you made your comment) and no one has edited it since then. Cloudflare or your browser must be serving up a very stale cached page. Please refresh your page.

      There is a “Purge Cache” function in the backstage. I now see I have to use it way more often. Sorry for the confusion.

      Reply
      1. Fazal Majid

        Yes, WordPress and its caching plugins (or CloudFlare CDN) are a continual irritant. You can set up automation to automatically purge the cache when content is edited, but there may be a cost associated with too many cache invalidations.

        Regarding the AOL-Time Warner acquisition (where AOL bought Time Warner rather than the other way round), I don’t know if McKinsey was advising AOL or Time Warner. If the former, then they richly deserved their fee, as Steve Case convincing Time Warner management to exchange their valuable if dowdy stock for his grossly overvalued dot-com Ponzi scheme shares, despite Ted Turner screaming bloody murder, was one of the greatest scams ever perpetrated (Fortune mag had an amazing article on the subject back when). If they were advising Time Warner, then I’m amazed they are still allowed to advise any business more substantial than a lemonade cart.

        Reply
        1. Yves Smith Post author

          McKinsey was advising Time Warner. Time Warner was a long-standing client.

          I can also name McKinsey partners who’d gone over to be Time Warner execs before the deal. One of my friends (who is a very savvy negotiator) read the employment agreement of one of them. He said it was the most egregious contract he had ever read.

          Reply
  6. The Rev Kev

    In one aspect, you can say that McKinsey is an enormous success. I have been thinking about what Michael Hudson had to say in that “Changes in Super Imperialism” interview and its implications. It occurred to me that in order to fulfill the vision of the modern world that Michael Hudson describes, that you would need entities like McKinsey to make it possible. And if they did not exist then you would have to create them. I seem to recall Yves saying once or twice that McKinsey was not like this at all back in the 70s(?) so it seems that an existing firm was taken over slowly and repurposed here (removes tin foil hat).

    Reply
  7. DJG, Reality Czar

    To quote you: “In my day, McKinsey did do cost cutting studies, but reluctantly and in recessions. Consultants then hated firing workers and McKinsey had the good sense to wonder if head-count-cutting might create future enemies. Now I gather, as the ICE example above attests, that McKinsey has no concern about damage to little people in the interest of firm and (typically) client executive enrichment.”

    So, if I may ask, how would this be reflected in the training of Vanquisher of Iowa, McK alum, and stalking horse, Peter Buttigieg?

    Or am I paranoid?

    Reply
    1. DJG, Reality Czar

      Small point: Kashgar isn’t the capital of the Xinjiang region. Urumchi is.

      Kashgar is where the Silk Road makes its exit from China, which explains Kashgar’s strategic importance. In fact, I have read that westerners can’t get into Kashgar these days. So I am impressed if your informant succeeded in doing so.

      Reply
      1. rosemerry

        The “evidence” of the cruelty to the Uighurs so dear to the West is missing from the Will Bunch comment. Adrian Zenz seems to be the main source of all the expertise on the Muslim Uighur repression by China.

        Reply
  8. upstater

    I am so happy that we have a McKinsey alum, Pete Buttigieg now in charge of transportation in Biden’s America. And such a box-checker, gay, Afganistan “veteran”, mayor of a rust belt city that accelerated rust, etc, etc. What is there not to love about entrenched corruption in every aspect of US life?

    I’m looking forward to PPP privatization of transport that will make the privately contracted commuter rail systems, Ron Emmanuel’s Chicago grift and the various toll road look tame.

    Is complete collapse the only solution?

    Reply
  9. Peter VE

    Fear not for McKinsey’s prospects. The current McKinsey “senior expert” and “First Gentleman” of Rhode Island, Andrew Moffit, is there to ensure their view is heard by the next Secretary of Commerce, his wife Gina Raimondo.

    Reply
  10. lincoln

    I remember an FT quote some years ago where McKinsey similarly recommended Johnson & Johnson exploit drug addicts:

    “The state showed the court a presentation developed by McKinsey in 2002 for a series of workshops with J&J. The consulting company suggested that J&J target “high abuse-risk patients (eg males under 40)” with its drug Duragesic, a patch based on fentanyl, an opioid that is 50-100 times more potent than morphine. According to the plaintiffs. J&J explored questions such as: “are certain physician specialities more or less likely to prescribe long-acting opioids?”; and “can we influence flows to take advantage of this difference?”.”

    Reply
    1. Carla

      @Bob — Correct. And nothing will change until the executives of these criminal enterprises get long prison terms, with no parole, and the companies are liquidated.

      A fine is not a consequence. Criminal enterprises print money, or they have such easy access to it that they might as well.

      Let’s see all McKinsey’s senior partners troop off to jail for 15-20 year terms, along with some Sacklers.

      Then put Bezos, Zuckerberg and Gates behind bars, just for starters. Things would start to change pretty damned fast.

      Reply
      1. Dirk77

        If this article has McKinsey pegged right, then if they were advising the poor and middle class, they would suggest a more effective way. I won’t say what it is, as I’m surprised I thought of it, reading this article. Yet I wonder if it will be the next step. How did it come to this?

        Reply
    2. flora

      And the fines are so small relative to the profits.
      It’s like issuing bank robbers parking tickets for not putting a quarter in the parking meter instead of putting them in jail for robbing the bank.

      Reply
  11. Dick Swenson

    I worked for a small Canadian consulting company for 13 years. I did one job for which I was proud, but the rest of the time I found the assignments confusing. It seemed that our job was to protect the management of the company that hired us from having to take responsibility for the issues facing the company that hired us. We usually recommended rather obvious ideas and were then paid off.

    My company did succeed until the founders finally decided that they wanted to retire with their ill gotten gains. they sold the company to a much larger IT company and it slowly sank into oblivion.

    My conclusion: Consulting companies are only used to prevent management from having to be accountable. Furthermore, they extract capital from those who hire them without being accountable themselves.

    Reply
    1. 1 Kings

      See Dr Cox as a consultant in ‘Office Space” slash/burning workers left and right “What is it you actually do here?”
      If you’ve every been in front of one of these jags whose salary and profit is based on destruction and CYA philosophy, you’ll never forget. But am afraid a reckoning is in our future rather than Jennifer Aniston and a Zen road construction ‘happy’ ending..

      Reply
  12. A

    I am also concerned about the cumulative effect of advising every major competitor in every major industry
    It’s very hard to steal market share
    So advising all the players necessarily means you have to grow the market – but is that necessarily a good thing for society? (Eg expanding share of stomach of packaged foods and fast food in an obese society)
    And increasingly the insights that McKinsey provides around how to grow sales are very advanced – how to send the right marketing message at the time to get the sale. Triggering an impulsive vs executive decision
    Profits from this growth accrue to shareholders and executives – furthering and wealth and health gap

    Reply
  13. Susan the other

    Just remembering all the stuff about domestic drug running by our best and brightest, the CIA; Hudson’s recent expose on Superimperialism, drug running and offshore banking, and folding it into the promotion of opioids here beginning in the early 2000s – like it was the next step to make a legitimate business out of opioids. And not even the big televised scandal in southern California with Maxine Waters going ballistic could slow it down. The most recent deaths due to overdosing on prescription drugs and the criminal complicity of Perdue? – this was “policy” or lack thereof which is also policy. And all the other crap. Enron, etc. McKinsey must be very closely connected with the shadowy corners of our government to have had such a long and profitable ride. In a rarified class. But the really astonishing info above is the bit about a McKinsey directors’ “party” in Xinjiang China where the New Silk Road is going in. It is always implied that the treatment of the Uighurs there is an example of the police state that is China… But I think it is more than that. If it were just Chinese general paranoia then McKinsey would not have had such a lovely party right there next to the Uighur concentration camp and Lop Nur nuclear testing and research facilities. Several questions pop up: is Kashgar a big distribution point for opium? Is McKinsey involved with not just the Silk Road but also with China’s most high-tech advances, including space travel? And obviously, does McKinsey have a State Department passport? Clearly their (McKinsey’s) guests weren’t thrown into the concentration camp along with the Uighurs. What interesting information.

    Reply
  14. Robert Hahl

    Around the turn of the century I worked for a 1000+ lawyer firm that had been acquiring other firms and following McKinsey’s plan to demand 100% of every client’s legal business or force them to go elsewhere; also 2200 billable hours per year from associates. Of course it created lots of turmoil, hence gouging of clients. This plan was widely seen as a failure.

    I left. A few years later at my new job, I was on a conference call for McKinsey to pitch this very same plan they had implemented at my old job, and claimed it was a big success there, which nobody but me could see was total BS, until a year later, when that old firm had to merge with another 1000+ lawyer firm in order to survive.

    But from the owners’ perspective this loot-and-merge approach may be very lucrative since it keeps the number of big law firms small, and so the big companies that use them have very few alternatives.

    Reply
    1. Objectivefunction

      Ah yes, ‘work life balance’ in professional services:

      168 hours in a week = 84 hours for the company, 84 for you!

      Reply
  15. Pelham

    So much of the country has been so damaged by players like McKinsey and, apparently, just about every entity and actor associated with the financial sector that it might be time for Flyover vis a vis Wall Street and Washington to start thinking a bit like Scotland vis a vis the UK.

    Rather than splitting off or secession, however, what’s needed is a completely different financial system that’s transparent, simple and devoted exclusively to investment at home and minimization of the rentier class. This would probably require a separate currency, or perhaps better, a 21st-century version of tally sticks. Fancifully (but not legally) let’s call it the Graeber-Hudson Republic.

    Reply
    1. John Anthony La Pietra

      IIRC, the other day someone here made a comment about the old Japanese “currency” unit of the koku — a volume of rice enough to feed one person for a year. Could we do something like that? Hmmm. . .

      We might have to allow for “US-koku” exchange rates among corn, wheat, soybeans, potatoes, and other basic “currencies”. Maybe a premium for “sterling” examples of each? . . .

      Reply
  16. HH

    As long as ambitious and amoral young people seek employment at profit-motivated amoral organizations, there will be perverse incentives at work. The only effective remedy is severe punishment for malefactors. The fact that such punishment is not forthcoming indicates capture of the regulators by those they are supposed to oversee. The big private sector firms have learned how to buy off individuals at all levels of government through political contributions and revolving-door jobs. Until these tactics are outlawed, the corporate malfeasance will persist.

    Reply
    1. Yves Smith Post author

      This is just a bad analysis. Please see Paul Krugman on this topic. You can’t manipulate commodity prices without an increase in PHYSICAL inventory. Where is the inventory? Who was hoarding wheat and coffee, for starters?

      And why isn’t this trade back on in this era of super cheap funding? The absence of a new runup in commodities with cheap leverage is proof the thesis is all wet.

      Oil is an exception because you can inventory it by keeping it in the ground. And buyers don’t buy or hedge based on near term contracts, they price off a contract formula called BWAVE.

      Storied investor Jim Rogers (Soros’ original partner, also of Investment Biker fame, who has no love for bankers) pointed out around the time the food price increases started that the Chinese target, that everyone in China be able to eat an egg a week, would require double the wheat currently produced globally. He was going long ag as a result, but not via commodities indexes.

      Rising living standards in China and with that improvement in diet largely explains the food price increases. It’s not just calorie increase but eating higher up the food chain that greatly increases the demand for grains. It varies by the type of critter, but a rough and ready rule is every time you go 1 step up the food chain, it takes 10X as much in calories, so 10X as much in grain calories to produce as much in meat calories. And the eggs that Rogers flagged? Chicken are actually very efficient users of grain. They fall markedly below the 10X rule of thumb.

      Now the action of speculators may have made it harder for classic real economy users to hedge well but that isn’t the argument.

      Goldman does make money, all right, but it was through a process called “date rape”. Most buyers of commodities contracts who are rolling them monthly at contract expiration, like retail EFTs and ETNs based on commodities and dumb money like pension funds, can have their predictable contract roll gamed. You are looking in the wrong place. And consistent with the thesis of the post, it’s the money people who are the losers. From a 2007 (no typo) post:

      John Dizard, a writer for the Financial Times (and a casual acquaintance), illustrates below how fortune favors not necessarily the brave, but the powerful in his article, “Goldman and its magic commodities box“. Dizard discusses how Goldman plays the commodities market, using its role as the largest manager of commodities index funds (Goldman designed and maintains the most popular index, the Goldman Sachs Commodities Index, or GSCI, the biggest commodities index, which it has successfully leveraged into becoming the largest manager of GSCI-based index funds), market maker, and principal trader (see this post on the questionable role of indexes).

      Dizard calculates the collective losses to investors (organizations like pension funds, endowments, and insurers) on the monthly roll of the GSCI (required because the index uses futures contract that expire every month) at 150 basis points on $100 billion of funds, or $1.5 billion. And who is on the other side of these trades? Dizard believes Goldman is at the top of the list:

      Two weeks ago, I unfairly profiled the Chicago speculator community. “Profiling”, in the sense of accusing or convicting a suspect based on race or general appearances, is wrong, even in the case of such a rich and privileged group as the “locals”, or speculators in the commodities pits.

      I was describing the practice known as index roll congestion, or “date rape”. This involves profiting from the requirement that public investors’ positions in commodities indices be “rolled over” from one contract month to another over a known five-day period. The price of the old month’s contract is depressed and the price of the new month’s contract is inflated. This can be a huge source of profit for those ready to take advantage of the naive public.

      In the column, I was correct to point out that index roll congestion costs people who use indices such as the Goldman Sachs Commodity Index something in the order of 150 basis points of return a year. Given that formula-managed commodities index funds have $100bn in assets, of which GSCI-linked funds account for $60bn, a lot of money is being lost by the public to someone.

      My mistake was to look at a line-up of the participants in trading on the floors of the exchanges and point out the suspects who wear gold chains, mink coats and alligator shoes, instead of the clean-cut, polo-shirted, Harvard graduate working for the famous public company….

      The economic function of the locals, or speculators, in the view of public policy, is to provide liquidity for hedgers who want to offset the risk of a future requirement to buy or sell a commodity. For a price, the speculator commits his capital to taking the risk the hedger is unwilling to assume. Hedgers are supposed to be nice people who act for consumers; speculators are supposed to be non-nice people who wear pinky rings, buy magnums of champagne in nightclubs, run the exchanges and bet against the public.

      I had thought that the mountain of index fund money, with its fixed, known periods of buying and selling, would be a source of profit principally for the speculators.

      Actually, the problem is that there probably isn’t enough speculative capital relative to the huge weight of the index funds. And, one might add, firms that manage the index funds. Firms such as Goldman Sachs.

      Locals besieged me with e-mails insisting on their innocence and said that Goldman was likely to be the principal beneficiary from the index roll. I finally did get a response from the firm. First, Goldman pointed out that it was not the only seller of funds – or notes or swaps – linked to the GSCI. (It is, however, the largest user of GSCI-linked product). The firm said it was obligated only to deliver the closing price on the reference days for each commodity contract in the index.

      That means Goldman knows the size and position of the target it must hit and can, as its people say, “manage our corresponding position”. That means that it has to deliver a price at the end of the roll period. If it can cover that obligation at a better price, it will, and pocket the difference.

      While Goldman won’t disclose just how good a business this is, it agrees the business is consistently profitable. Given that Goldman knows how many contracts it has to buy and sell on certain dates, that in many pits the GSCI is the biggest single factor in the market and that it has many trading hours to cover its positions at advantageous moments, its profitability is not surprising.

      The GSCI has not been as profitable for all the investors who use it to get commodities exposure. Last year it lost about 15 per cent on a total return basis. Goldman itself had a record year. The customers’ yachts weren’t just small, they were under water.

      Reply
      1. Recall

        This is just a bad analysis. Please see Paul Krugman on this topic. You can’t manipulate commodity prices without an increase in PHYSICAL inventory. Where is the inventory? Who was hoarding wheat and coffee, for starters?

        As an intrepid blogger pointed out almost exactly a decade ago, we don’t have that information.

        And why isn’t this trade back on in this era of super cheap funding? The absence of a new runup in commodities with cheap leverage is proof the thesis is all wet.

        Or rather, we didn’t have that information:

        AMIS was created as a tool to address excessive food price volatility and to strengthen global food security in a period of heightened insecurity in international food markets. Its creation is thus intrinsically linked to the two consecutive price hikes that occurred in 2007/08 and 2010.

        After the 2007-08 world food price crisis led to social unrest in a number of countries and drastically worsened the food security situation, the world experienced another food price shock in the summer of 2010 when the Russian Federation announced an export ban on wheat in response to a severe drought and wildfires that threatened much of the country’s crop.[1]

        Under the auspices of its Intergovernmental Groups on Grains and Rice, FAO invited all its members to Rome for an extraordinary meeting in September 2010 to discuss the troubled market conditions and to stimulate a coordinated response. While the event failed to yield any immediate results, it can be credited for triggering constructive discussions that eventually led to the creation of AMIS. The meeting acknowledged that unexpected price hikes and volatility were “amongst major threats to food security and that their root causes need to be addressed.”[2] In particular it recognized “the lack of reliable and up-to-date information on crop supply and demand and export availability” as well as “insufficient market transparency at all levels including in relation to futures markets” among the main drivers of the most recent disturbances in world food markets.[3] It further emphasized the need “to enhance market information and transparency”, calling for improved “monitoring of planting intentions, crop development and domestic market information.”[4]

        The reason why they’re not doing it now is because the international community shut them down.

        Now the action of speculators may have made it harder for classic real economy users to hedge well but that isn’t the argument.

        That’s a hell of a way to talk about the food insecurity of a quarter of a billion people.

        Reply
        1. Yves Smith Post author

          Wowsers, talk about doubling down on bad analysis, straw manning, and failing to rebut the information provided. All bad faith argumentation and violation of our written Site Policies.

          The point is Krugman’s contention was that there had to be an increase in inventories for prices to be higher than the price that would reflect what results from supply and demand.

          I never disputed that contention even in my long-form debunking in ECONNED and I agreed in the post you cited too. I said in my initial statement that oil was different because producers could and did inventory oil in the ground.

          In other words, if prices were being manipulated, it would have to be via hoarding of physical supply by actual users. The potential hoarders I listed for food were end consumers and place like food producers (think General Mills).

          It could not happen via financial speculation on any sustained basis, which is what you’ve been asserting with no support whatsoever from the very outset. That is a position I have consistently taken.

          Oh, and that post was written in 2011, a time when you asserted the problem was solved.

          You also completely ignored the point I made at the outset on the importance of China’s tremendous increase in income on world food demand and the impact it had on prices. I didn’t bother giving other examples of how I saw investors reacting, like hedgies I knew personally buying agricultural land in Africa and South America (it’s likely they eventually sold the African land to the Chinese, they’ve been trying to secure their food supply for over a decade).

          And there is no evidence that your initiative had any impact on the LEVEL of prices, which was your initial bone of contention, but volatility, which did increase greatly in 2007 and 2008. There was a big runup then. China was massively buying oil in anticipation of the Olympics and there may have been other pre-Olympics buying. There was evidence of Chinese speculators hoarding metals like crazy at this time. So if you want to point fingers, you need to find the speculators in the actual physical commodities. You haven’t.

          And it’s appalling but par for the course for you depicting my criticism of your bad analysis as lack of sympathy for the poor. Ad hominem, which is an indirect proof of inability to substantiate your assertions (we regularly see readers resort to name calling when they are losing arguments).

          Reply
  17. ObjectiveFunction

    ‘Ambitious and amoral young people seek employment’

    As Michael Lind and others have noted, Corporate America no longer select its future senior management out of the local Jesuit college (or Yale), expecting them to work their way up from entry level, while moving to the right school district, joining the right golf club and laughing at the right jokes to become ‘Company Man’.

    But that model doesn’t suit a ‘nimble’ (predatory) multinational company in a shareholder über alles world. And nobody expects, or wants, most hires to stick around any more.

    ….So since the 1980s, it’s the I-banks and Tier One consultancies who act as the next screening mechanism for the nomenklatura, hiring heavily but not excusively from a range of ‘elite schools’. An Ivy degree remains an advantage here, but is no longer itself a meal ticket.

    (note: engineers and techies still tend to join companies directly, but have to get themselves put on a management track to move up)

    This intensive bank/consulting apprenticeship steeps these kids in all the usual spreadsheet tricks: lever up! free trapped cash! lease, don’t buy! aggregate and scale! slash fixed costs (especially headcount)! It’s just learning a language, really. After 2-3 years of this, the ‘fittest’ go on to punch their tickets at the 25 or so brand name ‘Top Ten’ MBA schools. And then, in their late twenties, they are ready to enter elite management programs, either directly or after a further period at a bank or consultancy. Or, since 2000 or so, to found or join a startup, or fund if they can afford it.

    Most (not all) of these kids are really, really bright and motivated. Who wouldn’t want to hire them? But the competitive pressure cooker definitely breeds amorality and groupthink. While like the “Ninety Day Wonder” lieutenants of US Army fame, the price of their inexperience is paid by others.

    As to your (well-taken) remarks on the Government ought to do something, who do you think is staffing it? The very same whiz kids, of course (steered by the very same consultants)! The revolving door is over there.

    Rem facias, rem, si possis, recte; si non, quocumque modo rem

    Reply
  18. West side J

    The tentacles spread in all directions: the head of Boeing when the killer MAX was “developed” has McKinsey in his bio too, before honing his bottom-line skills under Jack Welch.

    Reply
  19. Sound of the Suburbs

    The person that wrote “The Confessions of an Economic Hit Man” comes over as a really nice person when you watch his videos on YouTube.
    How did he do the terrible things that he did?

    He started off doing the things he had learnt were the right things to do.
    Only later did he realise they weren’t panning out as expected.
    They only served the wealthy few, and the vast majority were worse off in the countries he was trying to help.

    He was being drawn into a world of powerful people, first class travel, first class hotels and he was making lots of money.
    By the time he realised he wasn’t actually doing what he thought he was doing, he had been sucked into the world and lifestyle of the people at the top.
    How could he ever give this up?

    He did eventually, when he could take it no more.

    Reply
    1. Sound of the Suburbs

      The corruption and downfall of civilisations and empires.

      “The Fate Of Empires and Search For Survival” Sir John Glubb
      http://www.rexresearch.com/glubb/glubb-empire.pdf
      The pivot point where the decline begins.
      “But, beneath the surface, greed for money is gradually replacing duty and public service. Indeed the change might be summarised as being from service to selfishness.”

      That sounds like the ideology we call “neoliberalism”.
      It’s the same mistake they always make.
      The end is nigh.

      It wasn’t so easy this time, but they managed it all the same.
      Economists do identify where real wealth creation in the economy occurs, but this is a most inconvenient truth as it reveals many at the top don’t actually create any wealth.
      This is the problem.
      Much of their money comes from wealth extraction rather than wealth creation, and they need to get everyone thoroughly confused so we don’t realise what they are really up to.
      They need to confuse making money with creating wealth, so all rich people look good.
      Neoclassical economics is the pseudo economics that performs this task.

      Money is the only thing that matters; we are on the downhill slope.

      Reply
      1. John Rose

        The distinction between wealth creation and wealth extraction (rent) suggests this as the criteria for reforming economic analysis toward true predictability and why current economics fails so completely on that score. If rent is not a category in the analysis, the analysis fails.

        Reply
  20. fwe'theewell

    Yves, I can’t find a more current link as I’m embezzling time from work atm, but doesn’t Goldman bear responsibility for fleecing municipalities via bonds and/ or other instruments? /thank you as always

    https://money.cnn.com/magazines/fortune/fortune_archive/1995/08/07/205148/index.htm

    You’re an investment banker, and you have to buy Treasuries that will provide enough cash flow in interest and principal to make the expected payments on the old muni bonds. The municipality does not reward you for getting the Treasuries at good prices, because any benefit from hard bargaining at this stage of the deal must go back to Uncle Sam (that’s the restriction we just mentioned). So you, the banker, see an opportunity to make an extra profit for your firm by marking up the prices of the Treasuries that you’ll sell to the municipality well beyond the going market price. The only problem is that you will have just broken the law, denying U.S. taxpayers savings that should have been theirs. That last point, unfortunately, does not seem to be much of an impediment to investment bankers.

    One especially interesting transaction is an $899 million bond refunding done for the Commonwealth of Massachusetts in 1993. It appears to offer a classic example of how yield burning takes millions of dollars from the pockets of taxpayers and puts it in Wall Street’s billfold.

    The deal in question was senior-managed by First Boston (now called CS First Boston), but Goldman Sachs provided the securities for the escrow. A comparison of the prices Goldman charged, taken from the bond documents, with those printed in the newspaper for the appropriate day, shows that the investment bank charged the municipality $8 a bond more than the going market rate, producing for itself an excess profit of at least $7 million. Is an $8 markup per bond a fair deal? Says Stewart Brown, a finance professor at Florida State University and an expert witness for the SEC: “A markup of that size is unconscionable.” New York City, for example, simply refuses to pay a markup of more than $1 a bond.

    Reply
    1. fwe'theewell

      Link among police brutality, community impoverishment, and financiers

      https://www.thenation.com/article/archive/chicago-has-spent-half-a-billion-dollars-on-police-brutality-cases-and-its-impoverishing-the-victims-communities/

      In 2014, Chicago issued almost $100 million in bonds to pay for legal costs from the previous year, mostly police misconduct cases. When bonds are used to cover legal costs, taxpayers are on the hook for both the victims’ payout, and the interest to bondholders. Interest payments on a 30-year bond can be as high as the principal on the bond itself. For example, Chicago will have to pay $25 million in interest and fees for just one $28 million police brutality settlement. The beneficiaries of these interest payments are the high-wealth individuals that typically invest in municipal bonds.

      Cities also have to pay banks fees to issue bonds. Since 2004, Chicago has paid banks including Goldman Sachs and JPMorgan Chase nearly half a billion dollars for bond related fees.

      Furthermore, by using bonds to pay for these costs, city officials let these payments jump to the front of the line. When there is a revenue shortfall, bondholder payments are always prioritized ahead of funding for social services, because defaulting on a bond can hurt a city’s credit rating and cause the cost of future borrowing to jump.

      As a result, these police brutality bonds redirect money that should be going toward public services to paying for the impacts of police brutality. The resulting cuts have a disproportionate impact on communities of color. In addition to being the majority of victims of police abuse, they end up paying a second time when their communities bear the biggest brunt of budget cuts when resources are diverted to these costs.

      Reply

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