Can Wall Street Change?

Most of the American public were horrified back in 2008 when they learned just how ruthless and unethical some Wall Street banks were when it came to their client’s money. Since the fall of Lehman, the mortgage-backed security crisis and the Great Recession, changes (namely Dodd-Frank) have taken place to ensure that what happened in the Fall of 2008 will never (hopefully) happen again. But is it really working?

According to Greg Smith, who recently resigned from Goldman Sachs, not much has changed.

Smith was employed for 12 years as a London-based executive director for Goldman, overseeing equity derivatives. He resigned today and promptly issued an Op-Ed piece that was published in the New York Times.

In it, he tells how he joined Goldman right out of college and was immediately enamored with the firm’s culture, which revolved around teamwork, integrity and always doing the right thing for the client. That was then.

Now, as he scathingly writes, the firm’s culture has been lost and the decline in the firm’s moral fiber could well bring down one of the world’s largest banks. What once was a place that did right by clients is now a place where profits are placed above people. According to Smith, there are three quick ways to become a leader at Goldman:

a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

He goes on to tell how over the last 12 months he has heard five different managing directors refer to their own clients as “muppets,” how junior analysts are learning from these same people and how little senior management does not understand that if clients don’t trust you, they will eventually stop doing business with you. He concludes:

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

This can be said about any organization operating in any industry.

Though we must take this OpEd as exactly that (an opinion) there is fact sprinkled throughout Smith’s diatribe: Trust may be the single most important, intangible asset an organization can gain and without it, a company is nothing. If not immediately, then eventually.

The “Wall Street Mind” and “Too Big to Fail”

Simon Johnson is the former IMF chief economist and current professor at MIT’s Sloan School of Management. And to say he is skeptical about the friendly relationship between government and Wall Street — particularly Goldman Sachs — would be putting it way too lightly.

He seems to be looking around at the industry “overhaul” that has occurred since the banks tanked the economy and wondering why everything is exactly the same as it was before. Very little has changed, he asserts, and he still thinks that at least one major firm remains entirely too big too fail regardless of how much Congress members want to walk around patting themselves on the back for passing Dodd-Frank last summer.

At the Institute for New Economic Thinking conference in Bretton Woods, he asked the following. (His transcribed comments here come from the video below.)

“Who in the room thinks that if Goldman Sachs were to hit a rock, a hypothetical rock — I’m not saying they have, I’m not saying they will. If they were to hit a rock today, Saturday, who here thinks they’ll be allowed to fail like Lehman Brothers did unimpeded by any kind of government bailout starting Monday morning? Can Goldman Sachs fail?”

After this, he pauses and looks around the room from his podium. You can’t see the crowd on the video but it becomes apparent that no one spoke up or raised their hand.

“I’ve asked this question around the country [and] only one person has ever raised his hand. It was in New York. He had a big short position in Goldman stock. That’s New York. But seriously, it can’t happen. Goldman Sachs is a $900 billion bank, total balance sheet. You might want to say it’s too big to fail. You might want to use the language of [Bank of England governor] Mervyn King and say it’s ‘too important to fail.’ You wouldn’t allow it to fail. I wouldn’t allow it to fail if it was my decision. You wouldn’t either. It’s too scary today given the nature of the global economy. And from that scariness comes power — comes an enormous amount of power.”

He then asks the audience what happened to the plans to reform this? Why is “too big too fail” still allowed to persist? Why is, as he claims, “it going the other way … too big to fail firms have gotten bigger”?

In his explanation is a lot of truth and straight talk about what he believes has been a failure to reform. Watch the video below in its entirety to hear all his insight. It’s 10 minutes long but you can make the time. (via The Economist)

In somewhat related news, New York magazine has put together a multi-part feature on “The Mind of Wall Street.” At it’s core, the piece asks if, when it comes to post-financial crisis reform, Wall Street won then why is it so worried.

Combined, both go a long way to explaining the current climate in the financial sector.

Corporate Malfeasance From Enron to Lehman

The world has seen its share of bad business ethics ever since citizens began offering goods or services for a stipend. The effects of such wrongdoings have been magnified, however, as businesses have prospered and the greed of some has grown. Greed which can sometimes drive people to forget their morals. Some may think of Lehman Brothers as the the worst case of corporate malfeasance to ever rock the business world, while others may claim it was Enron.

One website has published what it claims are the “10 Great Moments in Corporate Malfeasance.” I’m not so sure the word “great” aptly describes these 10 moments. I would guess “worst” or “reputation-ruining” would be more appropriate. Nevertheless, after introducing the piece with the Enron scandal, the site says “what follows are 10 more examples of what a person might do if given the chance to make more money.”

It lists pharmaceutical maker Roche (#10) as refusing to sell its HIV drug Fuzeon at $18,000 (what it was valued at by South Korean health officials) as opposed to $25,000. Even though the drug maker would still make a hefty profit, it refused to sell at the discounted price with the head of Roche’s Korean division claiming, “We are not in the business to save lives, but to make money. Saving lives is not our business.” That’s one people won’t soon forget.

WellPoint (#7) didn’t fair so well in the spotlight after the U.S. health care debate raged this year. It was found that the insurance company was severely abusing recission (the policy of finding ways to cancel insurance contracts). Whose contracts were they canceling?

Women who were diagnosed with breast cancer.

WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators. Once the women were singled out, they say, the insurer then canceled their policies based on either erroneous or flimsy information. WellPoint declined to comment on the women’s specific cases without a signed waiver from them, citing privacy laws.

Getting to what most people think of when they think “corporate malfeasance,” the list mentions Goldman Sachs (#5) and its “doomed-to-fail” fund.

Investment banking house Goldman Sachs created Abacus 2007-ACI, a fund of mortgages it sold to investors. What Goldman didn’t tell Abacus fund investors was that the mortgages they were betting would succeed had been handpicked by a favorite Goldman investor to actually lose.

That investor was John Paulson, who eventually made $1 billion from the fund.

IBM (#1) and its tech support garnered the unattractive top spot on the list. The tech giant sold some of its earliest model computers to Nazi Germany, with its founder, Thomas Watson, receiving the highest honor the country could bestow upon non-Germans, the Grand Cross of the German Eagle.

IBM admits that the company’s computers were used to carry out the logistics of the Holocaust, but denies awareness of this use at the time.

Thankfully, there are organizations in place that act as watchdogs for major corporations. CorpWatch is a nonprofit that works to expose corporate malfeasance and “advocate for multinational corporate accountability and transparency.” And probably more well-known is Corporate Accountability International, an organization that has fought against abusive corporations for more than 30 years. They have an impressive track record; from the infant formula campaign of the late 70s and early 80s to the nuclear weaponmaker’s campaign that spanned a decade, they work to bring to light wrongdoings of big businesses. Something Lehman and Enron could have used.

We are a capitalist society, which is only wrong when greed comes before humanity.

Insurers Turning to Outside Help for Investments

It seems more and more insurers are choosing to stick with writing policies and collecting premiums while leaving the management of their assets to others.

This is good news for Wall Street since its money managers have watched their asset bases dwindle during the downturn. According to industry estimates stated in The Wall Street Journal, insurers last year outsourced management of more than $1.1 trillion, up from about $980 billion in 2008.

Last year, the company chose BlackRock Inc. to look after $23 billion of bond securities of its nearly $160 billion portfolio. Allstate Corp. got out of the stock-picking business by hiring Goldman Sachs Group Inc. to manage a $5 billion equity portfolio out of its overall $100 billion investment pool.
Other big winners include Conning & Co., of Hartford, Conn.; State Street Global Advisors, part of State Street Corp.; and General Re-New England Asset Management, owned by Warren Buffett’s Berkshire Hathaway Inc.
Deutsche Bank AG and BlackRock are the two biggest money managers for insurers, controlling about $200 billion in insurance assets each, according to data from the money-management firms and Patpatia & Associates, a Berkeley, Calif., consulting firm that tracks insurers’ outside investments and advises them on outsourcing

Last year, the company chose BlackRock Inc. to look after $23 billion of bond securities of its nearly $160 billion portfolio. Allstate Corp. got out of the stock-picking business by hiring Goldman Sachs Group Inc. to manage a $5 billion equity portfolio out of its overall $100 billion investment pool.

Other big winners include Conning & Co., of Hartford, Conn.; State Street Global Advisors, part of State Street Corp.; and General Re-New England Asset Management, owned by Warren Buffett’s Berkshire Hathaway Inc.

Deutsche Bank AG and BlackRock are the two biggest money managers for insurers, controlling about $200 billion in insurance assets each, according to data from the money-management firms and Patpatia & Associates, a Berkeley, Calif., consulting firm that tracks insurers’ outside investments and advises them on outsourcing.

Both Deutsche Bank and BlackRock claim that 2009 was a record year for them in terms of new insurer assets. Goldman Sachs has seen their asset base increase 50% in just a few years. In 2007 Goldman had “five people on the team managing $32 billion of assets; it now has a staff of 38 managing $66 billion.” We can clearly see the increase in insurer assets under management with the following chart:

Picture 3

But not all insurers feel the need to outsource their asset management. Prudential Financial is one example. The company employes a staff of 3,000 to manage it’s $260 billion investment portfolio, along with billions of dollars in assets from other companies. Prudential is a unique exception however, as it considers asset management one of its core business units.

It remains to be seen if 2010 will surpass last year in terms of insurers turning to others to manage their investment portfolio, but all signs are point to yes as most insurers realize outsourcing is more economical.