Greg Smith’s resignation letter in the New York Times yesterday,1 announcing a bridge-burning departure from his position as Executive Director of Goldman Sachs’ Equity Derivatives Division (Europe, Asia, Africa) certainly brought Wall St. to a relative halt. GS cancelled conference calls and the Goldman Flacks (PR goons) were rounded up to pour scorn on Mr. Smiths allegations as “unrecognisable”.
The importance of the letter was not so much it’s revelation of a eat-what-you-kill culture in which clients are the main course, not even the contention that somehow GS had changed culture – it hadn’t any more than any other investment bank since the Big Bang. The letter was important because it effectively took GS clients’ faces and slammed them against the restaurant window, through which they could now see their GS contact engaged in anthropophagia between raucous tales of how the current dish had of its own volition signed up to sit on the plate.
Goldman clients, Smith informs the world, have been regularly called “muppets” who are there to have the “eyes-gouged”. Such accusations come as no surprise to your author. In the Short History of the Credit Crunch we detailed how it was not just equity derivatives (Smith’s milieu) but corporate finance, CMBS, and restructuring which from our own experience were shot through with the same attitude – that the client of a bank was the primary victim of the bank’s activities. We recounted how in one particular restructuring in the auto-sector, it became manifest that the lead banks for the restructuring, though being paid six figures in fees for their restructuring advice, saw the company’s troubles as an opportunity to squeeze whatever remaining value out of the patient. Thus this same company was required to pay restructuring fees, amendment fees, and a ridiculous hike in its margin payments. To top it all, the lead banks screwed the remaining banks of the syndicate by demanding additional secret fees be paid (again six figures) thus further negating savings derived from cost cutting. We concluded that this process of seeing every crisis as an opportunity by draining the patient was in the process of being raised to the level of sovereign finance. Greece, among others, ended up being in the line of fire.
Which of course leads us back to Goldman Sachs: not only did it advise the Greek government on how to hide its debts – remembering that by “advise” we mean “gouged its eyes out” – but as a reward a scion of GS, Papademos, was installed as Technocrat-in-chief. The same happened in Italy. The relevance of this is that it constitutes the boundary condition on the efficacy of Smith’s letter. Any other professional firm would be in deep trouble following such revelation, and directors of GS clients may yesterday have considered a forthright phone call at the least to express displeasure. No-one seems to have considered whether it would be a breach of directors’ duties to continue to employ Goldman Sachs, given that it apparently exists to choose the worst options for their clients. But the problem is that GS is too big and covers too many bases. With Bear Stearns and Lehmans out of the picture, and JP Morgan and Merrill Lynch still feeling the headache of forced mergers, Goldman Sachs seemed to have survived the Crunch strengthened and backed by its links in the Federal Reserve and across national governments. This regulatory annexation, combined with its position as an adviser to issuers, market maker, and own-account trader, meant it is not just a “Big-Swinging-Dick” in the market to use 1980’s Wall St. vernacular2; it is the market. In the face of such generality of presence, it will prove difficult for corporate and sovereign clients to “choose” to take their business elsewhere. Certainly there has been an “understanding” in the Eurozone that local banks are to be preferred in future, but local banks, such as Société Générale, are hardly free from the banking culture that Smith describes.
Thus the possibility of mass defection is tempered from within by market dominance and from without by the grudging acceptance that Goldman Sachs’ despoliation of clients is par of the course in our financialised world. It is to be accepted as the price of being permitted access to capital flows. With that choice, perhaps we should not be surprised that many corporates, already hoarding cash as a protection against a second slump, have also already become very wary of investment bankers’ schemes, with resultant noticeable falls in LBO and M&A activity in the last couple of years. What was always known has merely become blatant, yet still there is a collective holding of breath. There are many potentials in the current global climate, waiting to be put to work. This is what Gramsci would call an organic phase, in which we cannot be sure what will spring forth. I am reminded of the fires one sees on peat moors in the north and west of Britain. Peat is very rich in energy and can be burnt as a poor fuel, but it shuts out oxygen from its biomass. Peat can begin burning and no-one is the wiser, due to the slow-burn in anaerobic conditions. A fire can spread over acres without sign, save perhaps to touch the surface a little heat is detected. Greg Smith’s letter, failing to cause damage of immediate significance, may well be such a slow burner: an act of revelatory arson.