Friday, March 16, 2012

GS, Investment Banking and financial WMD

The blogosphere and the media are all agog over this NYT opinion piece of why some investment banker is leaving Goldman Sachs. (Other NYT coverage here.) I believe that there has been no real moral shift at GS - he calls it a “decline in moral fiber”. Coming off of reading two books on the investment banking industry in the 90s it strikes me that investment banking then is no different than it is now.

In Roger Lowenstein’s When Genius Failed, GS comes off badly. First, it  was alleged that even as they were trying to find a buyer for LTCM, their unprecedented access to LTCM’s trading positions allowed them to dump their own positions ahead of LTCM in case LTCM failed. Second, while participating in the bail out of LTCM, GS was also acting as a banker for Warren Buffet, throwing in a proposal at the last minute after the Fed meeting that Buffet would buy up LTCM. In general, my impression of GS was that while nothing that they have done cannot be explained by rational profit maximization they were in it for themselves rather than saving the financial system (if they actually believed in systemic risk). I have said this elsewhere in this blog but I don’t believe that systemic risk by itself would have irreparably harmed the economy and especially now given that the investment banks themselves already seem to believe that this is the case. I refer to the fact that GS was willing to jeopardize the trust of other investment banks by double dealing given that the agreement to bail out LTCM was already tenuous. (Read the chapter on the bail out and see if you get the same impression). 

Recall also that GS allegedly participated in hiding the extent of financial problems in Greece.

Frank Partnoy’s F.I.A.S.C.O. was a hoot. It was more enjoyable than Liar’s Poker especially his description of some of the deals that they put together to get a AAA rating and then to sell these derivatives as “bonds”. Partnoy left Morgan Stanley after 3 years, compared to this NYT opinion piece banker who stayed for 12 years! My reading from both these books is that atmosphere in investment banking has not changed all that much. The only thing I was surprised about was that GS bankers only wanted to rip their clients off versus MS bankers who wanted to “rip their faces off” and “go out and kill someone” with their deals. In Partnoy’s time the deals investment banks were responsible for led to the derivatives disasters in Orange County, Procter and Gamble and so on.

If derivatives are indeed the financial weapons of mass destruction then investment bankers are committing financial genocide and for this they should stand trial for crimes against the economic community.

No comments: