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15 Mar

Events of Interest and Analyses, A Foreign Perspective

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News

Afghan Taliban suspend peace talks with US

Group says “erratic” US did not keep promises, while President Hamid Karzai demands foreign troops pull out of villages.
Last Modified: 15 Mar 2012 16:56 GMT

Central & South Asia

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Maid in Lebanon abuse video kills herself

Suicide comes days after footage emerged of Ethiopian woman being violently dragged on Beirut street by male employer.
Last Modified: 14 Mar 2012 16:03 GMT

Syria: Songs of Defiance

An undercover Al Jazeera correspondent takes us inside the lives of Syria’s anti-government demonstrators.
Syrian President Bashar Assad and his wife Asma

Exclusive: secret Bashar al-Assad emails lift lid on life of leader’s inner circle

• Messages show Bashar al-Assad took advice from Iran
• Leader made light of of promised reforms
• Wife spent thousands on jewellery and furniture

Anti-homophobia protest in Springfield, Mass 14/3/12

Ugandan group sues anti-gay pastor in US

15 Mar 2012: Sexual Minorities Uganda says Scott Lively promoted violence against gay people there, contravening international law

I have developed a rule. If you have money, there will always be somebody
trying to take it off you

Andreas Whittam Smith

Thursday, 15 March 2012

In an outpouring of rage, shame and frustration, Greg Smith wrote in The New
York Times yesterday, the day of his resignation from Goldman Sachs, that the
investment bank had become “as toxic and destructive as I have ever seen it”.
During Mr Smith’s 12 years with the firm, something did indeed change in the way
banking is conducted and not just at Goldman Sachs, but everywhere
else.

Investment banking went from being “relational” to being “transactional”.
Clients ceased dealing with a single investment bank, using it as a trusted
adviser and facilitator, almost as a family friend, and began to shop around for
the best provider of the service it was looking for at a given moment. If I want
to do this sort of transaction, I shall go to Bank A; if another sort of
transaction, I shall go to Bank B. In response, banks started to think in terms
of offering products rather than a broad-based service.

This change had begun some time before Mr Smith started his career. Many
banks had originally been partnerships, with the partners doing their work in a
single big room, each one sitting at a rather grand desk. These business
relationships, which each partner would handle on his own, using only the
administrative services of the firm, would often last for decades. Goldman Sachs
continued to operate with a partnership spirit until 1999, when it became a
public company. Now these firms are more like high-class shops with products to
shift. Even loans become products.

Alongside this change from counselling to selling came a new emphasis on
avoidance, that is avoidance of regulation and avoidance of tax. Avoidance has
become a feature in what investment banks do. The technique is the same in both
cases, exploiting loopholes in the regulations. The first one serves the bank’s
own purposes; the second, the clients’. Which is not to say that the activity is
illegal. Mr Smith comments: “I don’t know of any illegal behaviour.”

In his article, he recalled the culture he encountered when he first joined
Goldman Sachs: “It revolved around teamwork, integrity, a spirit of humility,
and always doing right by our clients.” And he bitterly contrasted it with what
he had more recently encountered. He would attend meetings with fellow
executives at which “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… people talk about ripping their clients off.” The
clients are called “muppets” in internal emails.

Having long sensed and seen evidence that this way of doing business is rife,
almost natural I sometimes think, given the ease with which people do it, I have
developed a rule. If you have money, there will always be somebody trying to
take it off you. I apply it in business settings and in managing my own
resources. When I receive an unsolicited letter asking me to some tax planning
seminar, or containing an “offer” from my bank, I think only that these people
are trying to take my money away through charging excessive fees.

However, if I were running Goldman Sachs, I would have a simple answer to Mr
Smith’s diatribe: “Goldman Sachs does not deal with the public. All our clients
are themselves professional firms or businesses and it is caveat emptor or
let-the-buyer-beware out there. If our clients allow themselves to be ripped
off, as you claim, they have only themselves to blame.” This is an arguable
defence, even though products are often made unnecessarily complicated to thwart
rational analysis. But, again, there is a simple answer: if you don’t understand
it, don’t buy it.

What Mr Smith is pointing out, however, is the sheer unpleasantness of
operating in the way he describes, its moral worthlessness. Indeed, he calls
some of his colleagues “morally bankrupt”. He has longed for a Goldman Sachs
leadership that would 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
axe murderer), you will be promoted into a position of influence.”

My guess is that if Goldman Sachs operates as Mr Smith describes, then it is
a relatively rare example of the heartlessness with which financial firms can
behave, driven by greed. I can think of a different example. A large endowment
fund, of which I am a trustee, employs a successful, long-established investment
manager in the US to undertake a specialised task. On more than one occasion in
the past 10 years, when markets have become unfavourable, the firm has advised
us to withdraw some of the funds it manages on our behalf and bring them back
when the outlook improves. The firm loses investment fees as a result but earns
enormous goodwill and trust from us. I must send Mr Smith the name.

a.whittamsmith@independent.co.uk

 

 

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