Lloyd Blankfein climbed out of the working class to reach the top of the investment banking community, CEO of Goldman Sachs! He’s just like Sonia Sotomayor! We know this because Time Magazine, in the histrionic tradition of journalistic CEO worship, tells us so. And he takes risks, and that’s good for the capital markets and the whole world and bunnies. But there’s an irritating fly in this otherwise perfect soup. The adoring author, William Cohan, and Blankfein, are "powerfully perplexed" (quotes in original!?!) why GS should be reviled in a country so enamored of success and profit. And in the tradition of the deification article, all discussion of the reasons people loathe GS is presented solely from the point of view of the canonized subject.
The problem with the AIG $13bn? Hey, GS was perfectly hedged, and would have figured out a way to make money even if the entire financial system collapsed. Those gigantic bonuses? It’s competitive out there and we have to keep those fabulous people. And if you think there’s some connection between their success and their tight relations with the US government, then you’re a conspiracy theorist.
Maybe I can explain why people think mean thoughts about GS. Let’s start with Blankfein’s attitude towards his business, which he calls “taking risks with the firm’s money.” Here’s the doting Cohan’s example:
Blankfein was selected to run J. Aron. His appetite for risk quickly surfaced. In 1995 he chided his fellow partners for being too risk-averse and promptly left a conference room where they were meeting to place a multimillion-dollar bet with the firm’s money that the dollar would rise against the yen. Blankfein’s bet — one of his favorites — paid off, and he impressed his partners as a prudent risk taker.
See, that’s the firm’s money, not the shareholder’s money. So the rewards should go to the firm, where management will pay itself for its brilliant hiring, and its traders for their brilliant gambling, whether or not the firm wins. The investors whose money was at risk get a few pennies. In the second quarter of 2009, GS paid its employees $6.65 billion and announced a total bonus pool for the first half of $11.4bn. Dividends were in the range of $180 million. Greedy? Yes, I think that works.
And all that trading wisdom? GS is a leader in high frequency trading. Zero Hedge points out that GS proprietary trading is a huge chunk of the market. In one week, it was responsible for 16% of the trading on the NYSE. Everyone knows this kind of activity is a disaster for the institutional traders, and more so to individuals. According to Advanced Trading:
With the mix of trading strategies active in the equity market ecosystem now, high frequency traders are providing much of the liquidity, but also delivering real trading losses to the average institution.
The article offers a solution, that the institutional investors need to spend more money to fight back, which would raise their costs, and their investor’s costs.
The New York US Attorney recently indicted a guy named Sergey Aleynikov for stealing some of GS’s proprietary high frequency trading computer code. At the bail hearing, the prosecutor told the court Aleynikov should be held without bail because the code could be used to unfairly manipulate stock prices. Goldman Sachs wouldn’t do that, would it?
GS isn’t just a trading firm, it has brokerage clients and provides lots of advice to them. Of course, some get different advice than others. The Wall Street Journal reports on their weekly trading huddles.
At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.
The firm tells its clients that its traders may take positions opposite to the views expressed in their research reports. Naturally those traders are using the firm’s own money to place those bets. This practice has drawn the attention of the authorities.
Cohan quotes Blankfein, without a trace of irony:
I would like for us to be thought of as always doing the right thing and for people at the firm to be confident that they are doing the right thing," he says.
Maybe if they paid me.