Goldman's golden sunset moment
By Julian Delasantellis
You may think yourself in a particularly unfortunate pickle should your
business take you to Seattle for the next few months, especially as you
absolutely hate the people in Seattle. Fear not. There is one place in the city
where you can absolutely, positively be guaranteed not to run into any
Seattleites - the Pike's Place Market, specifically, the Fresh Fish Market that
anchors Pike Place's southern selling space.
Originally it was an actual seafood market for the local young professional and
student neighborhoods nearby. By the mid-1990s, the proprietors came to the
conclusion that they couldn't stay in business as a fish market just by selling
fish - they had to provide some manner of value added for the customer as well.
This they did with entertainment, specifically a borderline shtick
act consisting of fishmongers removing the customer's desired fish from the ice
then flinging it around the establishment like baseball infielders executing a
double play, until it reaches the fish cutter behind the display. This they do
with comedy and pizzaz, as with a customer specific routine that goes something
on the order of "Coho for Cleveland!" or "Swordfish for Seoul" The tourists
love it; "What a cute, quaint city Seattle is!" The purchased fish are usually
left behind in the hotel rooms to be enjoyed by the families of the immigrant
cleaning staff.
Lately, the financial news makes one wonder if there is a new offering lying
there, lifeless and conquered, upon the tonnes of ice - perhaps it's the "great
vampire squid" wrapped around the face of humanity - Matt Taibbi's famous
description in Rolling Stone magazine of the American brokerage house Goldman
Sachs. Is last year's "miracle of evolution" destined to be seen this year on
plates stuffed with onions and tomatoes because of its overweening pride and
hubris.
It sure was different a year ago for the Wall Street powerhouse that comedienne
Tracy Ullman refers to as "Golden Sacks". For most of 2008 and early 2009, the
firm carried the reputation of The Seer, the company that, instead of being
broken and humiliated by the subprime mortgage meltdown, saw it coming, and put
on a grand global short position on the subprime sector that paid off like
gangbusters. Back then, many people believed that Goldman did not need, but was
forced to accept, billions in Federal assistance offered by the US Treasury.
Now we know better than that.
In midsummer 2009, Taibbi accused the firm of being at the center of everything
nefarious over the past century. ( See
Goldman good but not that bad, Asia Times Online, July 9, 2009.) Then,
in early August, came reports of Goldman's lead in a technologically savvy but
morally sleazy bit of market manipulation called high frequency trading (HFT)
(See Goldman
Sachs, the lords of timeAsia Times Online, August 5, 2009). It almost
seemed that Goldman's ability to make money had totally superseded the material
world itself, and that it was now filling its coffers through something
resembling non-corporeal financial telekinesis.
So, as summer faded to autumn, Goldman was still unquestionably the primus inter
pares of the international banking cabal that had kidnapped Barack
Obama in order to attack puppet strings to the president's arms and legs. Then
this year, the Greek financial crisis broke out among the world's
overleveraged, and we found out about a new way Goldman made money - to
paraphrase the late John Houseman in a TV commercial for a long-gone US
brokerage: "They made money the old fashioned way - they lied about it."
As the disparate economies of Europe coalesced into what we now know as the
European Union, formalized by the signing of the Maastricht Treaty in 1992,
they all knew one thing. Without Germany on board the effort would be
pointless, since only Germany and its Bundesbank possessed sufficient inflation
fighting credibility to convince the markets that a countervailing force
existed to lean against all those inflationary socialists, especially in
France, on the rest of the Continent. Maastricht was designed very simply -
whatever the Germans wanted, the Germans got. In 1999, the guard dog got some
bite to go along with the bark.
The last thing that the Germans wanted was to continue to run their accounts
properly, with hard-earned budget and trade surpluses, while still having the
good Bavarian burghers having to write big checks to those countries, mainly in
Southern Europe, who didn't. New rules, with attendant sanctions, were
established that declared those countries with excessive budget or trade
deficits "out of compliance" with Maastricht.
Of course, even with penalties on the books, everyone knew that Germany was
never going to be given a pfennig from countries in violation of the rules;
these countries did not join the EU in order to be treated like errant
schoolchildren subject to the stick of the strict Prussian schoolmaster.
Sixteen centuries ago, St Augustine entreated the Lord to "make me good, but
not just yet". When Greece had similar sentiments at the turn of the
millennium, they asked for assistance not from Providence, but from Goldman
Sachs.
The concept of what we now know as the financial market swap is sometimes
included by those with only a cursory knowledge of the operation as being one
of the Wall Street perfidies, but that is not necessarily true. Like most
tools, swaps can be used for either good or bad. Good use of swaps may be by a
company that has debts tied to variable interest rate financing but assets
payable in fixed-rate financing. A swap, in essence a trade, could equalize the
debt/income stream.
Then again, there's what Goldman did for Greece. From a recent piece in Der
Spiegel:
Greece's debt managers agreed a huge deal with the savvy
bankers of US investment bank Goldman Sachs at the start of 2002. The deal
involved so-called cross-currency swaps in which government debt issued in
dollars and yen was swapped for euro debt for a certain period - to be
exchanged back into the original currencies at a later date. Such transactions
are part of normal government refinancing. Europe's governments obtain funds
from investors around the world by issuing bonds in yen, dollar or Swiss
francs. But they need euros to pay their daily bills. Years later, the bonds
are repaid in the original foreign denominations. But in the Greek case, the US
bankers devised a special kind of swap with fictional exchange rates. That
enabled Greece to receive a far higher sum than the actual euro market value of
10 billion dollars or yen. In that way, Goldman Sachs secretly arranged
additional credit of up to $1 billion for the Greeks. This credit disguised as
a swap didn't show up in the Greek debt statistics ... At some point Greece
will have to pay up for its swap transactions, and that will impact its
deficit. The bond maturities range between 10 and 15 years. Goldman Sachs
charged a hefty commission for the deal and sold the swaps on to a Greek bank
in 2005.
"Hey!" Mr European Central Bank asks Mr Greek Finance
Ministry. "Where's all that euro debt you used to have, you know, the stuff we
were about to penalize you for?"
"Dang if I know - we've looked in every shoebox in the building. Still can't
find 'em. "
Today, Goldmanite E Gerald Corrigan (and former head of the New York Federal
Reserve) tries to assuage an angry European Community by saying that "with the
benefit of hindsight ... the standards of transparency could have been and
probably should have been higher", but there was no self-abasement or
contrition back when the swaps were put on. Then, there was just the audacity
and insolence of an institution that thought it could stick its thumb in the
eye of the new world monetary superpower, the European Central Bank, on behalf
of Greece and not get caught doing so.
I title my lectures on the great fin de siecle of macroeconomic
liberalism, from the 1989 fall of the Berlin Wall to the crash of Lehman
Brothers, the "Era of strong markets and weak governments". Few examples
illustrate this sociopathy better than this. In the manner that the strong have
been wont to do to the weak from time immemorial on the back pages of American
muscle magazines, Goldman apparently thought it was none other than its
evolutionary privilege to be able to kick sand in the face of the European
regulators.
But that was a long time ago, during those long ago joyous tidings of
overleverage and excessive debt; now the world is cautious and poor; Goldman is
even paring senior partner bonuses to the seven-figure range - can you believe
such penury?
The 2008 crises of Bear Stearns and Lehman Brothers, in March and September
respectively, were the birth pangs of the new order. An old adage, probably
dating back to the time of Napoleon, advises an investor to keep cool, to keep
one's powder dry so as to be able to buy "when there's blood in the streets".
If Goldman really was the superhuman world ubermenschen that last year's
media implied, you might have expected that the company and its people rode out
the two birthing crises of the new era with steely eyed cold determination and
patience. Nothing could be further from the truth. New government reports are
out on trading in the company's stock during the crisis; for many Goldmanites,
manic depressives in their up phase would have shown a steadier hand on the
stock tiller.
Take the aforementioned Goldman managing director E Gerald Corrigan, who sold
US$2.65 million of Goldman stock on March 19, 2008. Edward Eisler, named as
co-head of the firm's securities division that February, sold $3.7 million in
the stock the same day. Taking the prize for the most nervous nelly for that
day was the firm's mergers and acquisitions specialist, Jack Levy, seller of
over $5 million in Goldman stock.
It was much the same after Lehman's fall on September 17, 2008. Then, Goldman
managing director Edward Berlinski sold over $12 million of Goldman common
stock; the next day, another $6.8 million. The above-mentioned Levy, another $6
million on the 17th, a further $4 million on the 18th. The selling prize for
that day seemed to have gone to Masanori Mochida, Goldman's Salt Lake City Utah
chief, who, according to the records, sold $55 million in stock that day.
In all this, I'm leaning against the wind in opposition to those who last year
said that Goldman ruled the world, and equally against those who this year say
you'd be better off with darts and the stock page rather than listening to
advice from Goldman. Goldman is comprised of humans, which makes it a human
organization, subject to all the mortality and error that anything the species
undertakes. Last year was glorious, but this year one wonders whether the firm
is heading gently into that good night.
No human organization stays at the pinnacle of the greasy pole forever. In the
'90s it was Salomon Brothers, the famed bond trading house made famous in
Michael Lewis' 1989 book, Liar's Poker. Salomon eventually was consumed
and digested by Robert Rubin's Citigroup, with the once-proud titan now sharing
Citi's fate as a poor fallen ward of the state.
What firm could be the next Goldman? I'd look to the private equity and real
estate powerhouse, the Blackstone Group. Quietly, almost surreptitiously, it's
become one of the largest financial institutions in the world. Perhaps most
importantly, the firm's CEO, Steven Schwarzman, in a recent interview with
Bloomberg, cautioned the proletarian class in the US Congress to stop
criticizing the financial industry, saying:
My biggest concern is that
... financial institutions are going to feel under siege and that they're going
to retreat in terms of extension of credit ... We've now increased the
uncertainty from the political environment directed at the banks ... The
uncertainty and the tone against them is so difficult that they may lack the
confidence to start doing their normal function. And the danger of that is that
that could really start to impact an economic recovery."
Meaning
that, like a society scion who seemingly comes out of the womb with pristine
table manners, Schwarzman already knows how to order the servants around.
Of course, the bricks that these great houses of money are built on are not
made of brick and mortar, but of the tax cuts the Anglo-Saxon world gave to its
richest citizens, starting in the late 1970s and early 1980s. (For a review of
the the income distribution factor in money management, see
Hedge funds: playing dice with the universe, Asia Times Online, July 6,
2006).
Where once a society's wealth was distributed widely among tens of millions of
families, it's now concentrated and centralized among far fewer actors, each
with a whole lot more interest and incentive in finding a top-notch brokerage
house that will make their money grow - a 5% return is a lot more important to
a guy whose $100 million is being managed by Goldman than to the guy who is
daytrading a $1,000 nest egg away at the brokerage inside the local Sears while
his wife shops for pantyhose.
To tell the truth, I'd rather get hit with a flying fish than some of the
atrocious research reports being peddled as "revelation" at many brokerage
houses. The smell will wash off quickly, far more quickly than the overpowering
sweat and Hugo Boss bouquet of a fetid stock recommendation.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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