Separate Myth from Reality at Goldman
16th March 2012
In April 2006, the cover of The Economist featured the image of a mountain climber and the words: “On Top of the World: Goldman Sachs and the Culture of Risk.” If today these words seem drawn from another century, to anyone working at the bank in those days – as I was – it was difficult to imagine being anywhere else. Not only had it distinguished itself with a unique spirit of public service, its global investment banking relationships were now matched with a risk-management culture second to none.
Six years later, no part of this edifice seemingly stands – not, that is, if you measure it by Goldman’s public reputation. A highly personal disavowal of the firm this past week by a former member of its equity derivatives sales team, complete with descriptions of a “toxic” culture defined by a drive to exploit, rather than serve, clients has to its many detractors in the media and politics provided conclusive proof of the unique venality of Goldman Sachs.
Of the many charges levelled at the bank since it navigated the financial crisis with far greater skill and discipline than its rivals (and at a far lower cost to taxpayers), the notion that it has betrayed its traditional client-driven culture in a mad rush for profits has, to its own people, been the most damaging. This is not because the challenge of staying focused on the long-term hasn’t been difficult in an increasingly trading-dominated institution. Nor is it because the staff of the bank is oblivious to the ways in which it too was guilty of excesses in the pre-crisis financial environment. What many are perplexed by is a portrait of a fairytale financial services industry with a single predatory actor ruthlessly exploiting an innocent world of global commerce.
Even as the bank must confront the reality of practices it cannot and must not defend, the question few seem to ask is this: how have Goldman’s clients reacted to the supposed betrayal of the sacred trust by the firm’s professionals? In one measure, the ranking of global M&A advisers in 2011, Goldman comes out at number one. This suggests one of two things: either that the largest, most sophisticated corporate entities in the world have somehow missed the fact that Goldman’s bankers are picking their pockets and just keep coming back for more. Or, and perhaps more likely, it suggests they know they live in an intensively competitive world where good advice is rare and expensive; that their experience with Goldman’s competitors suggests no less a risk of the adviser being conflicted and a far greater likelihood of inferior advice; and that if they were to judge their own industry by the same standard of media scrutiny and political exploitation, they’d long ago have gone into social work.
I made the reverse journey, beginning in journalism at The New Republic and then serving at the UN for seven years before joining Goldman’s investment banking division after business school. Five years in M&A with the bank in New York and London have of course not left me impartial about Goldman and its people. While I was fortunate to work with extraordinary journalists and diplomats in my early career, my colleagues were among the smartest, most hard-working, and committed professionals I’ve come across. And when, in my experience at least, we served alongside other advisers over mergers or IPOs, our standards of diligence were without exception the highest. (And yes, my colleagues were driven in significant measure by financial motivations. That’s why they chose to work at a bank.)
That is the Goldman I know – and the one that still can be salvaged from the shift in the bank’s balance to a focus on quarterly earnings and the reputational damage it has suffered as a consequence. The second of Goldman’s business principles states: “Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore.” Beating the competition has always been the easy part at Goldman. Far harder, though more necessary than ever, is the process of constant reinvention that has characterised the bank’s record of outperformance year in, year out.
No institution is perfect. None is free of abuses, excesses or failures. But the vast majority of the people of Goldman have nothing to be ashamed of. For outsiders in politics and the media, it is high time for a little perspective when it comes to the character of Goldman – and perhaps even to look in the mirror next time they choose to point the finger. For the bank’s leadership, however, it is time to apply the same standard of unsentimental rigour to the question of its future that its bankers and traders provide every day to its unparalleled client base.
An environment characterised by low growth, constrained balance sheets, regulatory caution and intense public scrutiny may well require a different skillset than the boom years that brought the current leadership team to power. There is nothing immortal about Goldman’s reputation. It is perishable and it is renewable in equal measure. If the bank can build a new compact with the next generation of its bankers and traders based on a redefined role in the global market place, it will succeed yet again, and no doubt yet again drive outsiders to new levels of resentment and conspiracy-making.
The global economy is shifting in unpredictable ways. A long process of deleveraging in the developed economies poses severe policy challenges. These are the difficult questions that matter.
Nearly four years after the collapse of Lehman Brothers, we can continue to obsess over every misdemeanour or instance of excessive compensation at the banks. Or we can focus on creating new growth models in the west that rely on factors other than debt and consumption, and structuring our economies for sustainable, inclusive growth. We cannot do both.