Friday, November 13, 2009

Defending "Goldmine" Sachs?

Earlier this week, The Times of London published a much-read article on Goldman Sachs that featured an extensive interview with the company's CEO, Lloyd Blankfein.  Blankfein drew much attention for a quote in the article, said light-heartedly, in which he claimed to be "doing God's work".

Predictably, many people didn't see or care for the humor there--elsewhere in the article, an unnamed Goldman employee wryly notes, "We don't club baby seals.  We club babies."  Across the blogosphere and throughout the media, criticism of Goldman has continued to grow in recent months.

Because Goldman is indisputably the king of Wall Street, and because much attention has been placed on prominent ex-Goldman leaders in key government positions, the firm is a lightning rod for criticism during the current financial crisis.  Yet, bombastic quotes aside, the main impression I came away with after reading the article was a sense of reinforcement in my belief that Goldman is simply smarter and better at what they do than anyone else out there.

Truth is, even before the financial system's implosion, Goldman was more successful and more competent than its competitors.  Its acumen at realizing the severity of the sub-prime mortgage crisis early on is just one example--the article notes "When the credit crunch hit, [Goldman's] losses in the mortgage sector were only $1.7 billion, lower than any other big investment bank. UBS lost $58 billion."  It should also be pointed out that Goldman never underwrote anywhere near the amount of bad mortgage debt as did competitors like Citigroup and Merrill Lynch, and Goldman still hedged its risk in order to limit its losses and avoid catastrophe.

Charges against Goldman of illegal market manipulation or of having sinister influence over government policy are pure paranoia.  Yes, Goldman has benefited handsomely as a result of the banking industry bailout.  But, as Blankfein points out, Main Street needs Wall Street in order to generate economic growth.  Huge paychecks and bonuses?  Well, Goldman makes gigantic profits, and the bonuses make up only a small percentage of those.  Hey, Tiger Woods also makes a boatload of money.

Well, it's on that issue of compensation that I'm sympathetic to the critics, not just of Goldman, but of the entire banking industry.  On the one hand, I believe that that these companies should be allowed to determine their own compensation plans and reward success as they see fit.  On the other hand, the Wall Street banks make their huge profits (which enable their huge bonuses) by placing enormously risky bets--bets which they know are covered by the government if they bet poorly.  Since the government can't afford to lose Wall Street, Wall Street can play fast and loose.

I think the issue at the heart of the matter is how we view our economy.  We are comfortable with the idea of business offering tangible goods and straightforward services, relatively easy to quantify and categorize and explain.  We are far less comfortable with the idea of money made on paper, from the endless buying and selling and re-shuffling of assets and debt and commodities and securities.  To the casual observer, it's just money being created out of thin air.  Forget slamming the mighty Goldman Sachs for being the best player at this game, the real question at hand is whether it's sound to have an economy so dependent on this type of operation.

I don't know the answer to that, but unfortunately I think there won't be serious discussion on this topic, or it will be drowned out by typical class-warfare sentiments.

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