Wednesday, March 14, 2012

March, Wednesday 14, 2012

DOW +16 = 13,194
SPX – 1 = 1394
NAS +0.85 = 3040
10 YR YLD +.17 = 2.27%
OIL +.27 = 105.70
GOLD -31.30 = 1644.80
SILV – 1.26 = 32.25
PLAT – 15.00 = 1679.00

There was a pretty remarkable story in the New York Times today. A guy by the name of Greg Smith is quitting his job at Goldman Sachs as an executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa, and he wrote an article explaining why he was leaving and what he believes is wrong with Goldman.  It's not a revelation about Goldman, the only thing that's unique about it is that a Goldman drone actually broke away and admitted publicly that Goldman is bad.
Let me share a few salient points from the article. If you want to read the whole thing it is entitled:

Why I am Leaving Goldman Sachs
by Greg Smith

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm —  I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

 The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus,God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question from junior analysts about derivatives is, “How much money did we make off the client?” It is a clear reflection of what they are observing from their leaders about the way they should behave.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

Again, you can read the entire article by Greg Smith, but the story should really make you think, because we've been hearing this stuff about Goldman for years. It's not new. We know that Goldman sold garbage to its customers and then turned around and bet against the junk they just sold. Goldman has done deals that were based on nothing more than a lie. That's the Abacus deal that Smith was talking about; a deal that eventually lead to the Greek default. And it is not unique to Goldman. The bankers have distorted the markets and even the government in order to get their profits.

In 2009, John Reed, the co-founder of Citigroup, came to regret his efforts to push for the repeal of Glass-Steagall. Just to remind you, Reed worked with Sandy Weill and Robert Rubin, a former partner of Goldman Sachs and later Director of Citigroup and eventually a Treasury Secretary; these guys were all working to repeal Glass-Steagall. And in 2009, Reed said: “I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate from trading bonds and equity.” So, ten years after the repeal of Glass-Steagall, John Reed realized it was a bad idea; he realized he had struck a treasonous deal, and so he tried to justify his greed; he said: “When you're running a company, you do what you think is right for the stockholders. Right now I'm looking at this as a citizen.” Apparently, Citigroup management must renounce citizenship as a requisite for employment.

And so everybody knows the repeal of Glass-Steagall was a mistake, even the guy that pushed it through Congress, but even after watching the markets crash in 2008, we haven't fixed the problems. Why? Because the Big Banks lobby against reforms, and they own the government.

The problems are not just limited to Goldman Sachs or Citigroup. We have a vast segment of the economy, the financial sector, that has turned the market into their own personal casino and forced or coerced or tricked the public into covering their losses. High Frequency trading does not provide liquidity, it provides flash crashes and scalping; most of the  derivatives do not provide risk management, they're nothing more than a bookie's mark – a way to siphon off a slice of productivity.

The financial sector's influence has smothered government and spread to the media and the culture as a whole. The mantra was “greed is good” and “what's good for Wall Street is good for America”; both lines are lies. The stock market is not the economy, even though bloated bankers see themselves at the center of and masters of the universe. The red and green digital tickers do not reflect the real economy but a grotesque distortion. When the wealth of America is centralized in the pockets of the Wall Street elite, that's where the money stays; it does not trickle back to Portland or Pascagoula. The notion that greed is good is just obscene and has been unacceptable for thousands of years.

Greg Smith's letter of resignation in the New York Times took courage but it told us nothing new.

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