Since his very public resignation from Goldman Sachs, Greg Smith has been the center of attention for just about everyone with a computer keyboard and an opinion. He has been called both a hero and a man in the midst of a middle-age crisis. On one side of the debate, he is a whistleblower while others see him as a disgruntled employee, disappointed by his own potential for advancement with the company. There are several parodies of his resignation letter, including one from The Daily Mash, called “Why I am Leaving the Empire, by Darth Vader”. I’m not really concerned about Mr. Smith’s motives for his resignation. I am a little surprised by the “kill the messenger” mode that some have taken, when there really is a more important question. Given that Goldman Sachs is 143 years old, what took so long for somebody to say something?
Goldman Sachs has played a role in nearly every financial crisis since the Great Depression. In fact, in 1928, GS nearly destroyed itself with what was supposed to bring handsome profits for the company and its investors with a fund called the Goldman Sachs Trading Corporation. With the initial 1,000,000 shares selling for $100 each, the company expanded its’ market, and began selling shares in both the Blue Ridge and Shenandoah corporations. Within less than a year, and after GS realized profits of nearly $500 million, the stock market crashed, rendering 90% of the investors’ penniless, and Goldman nearly bankrupt, when shares fell to $1.75. Economist John Kenneth Galbraith described it as “the first occasion when men succeeded on a large scale in swindling themselves”.
One would think that they would have learned their lesson, but apparently, they had not. In the late 1940’s, GS and sixteen other Wall Street firms were put on trial by the federal government, accused of collusion in violation of antitrust laws. GS survived the charges with a decision in their favor. It didn’t stop there, however, when the giant became involved in the bankruptcy of Penn Central railroad in 1970. All the while, suspicions about GS and its relationship with government officials earned it the less than flattering nickname “Government Sachs”.
The company had been steadily increasing its’ power throughout the entire world, and left other countries holding the bag and dealing with the resulting damage. If you look behind the scenes at Greece’s financial crisis you’ll find GS, which carved a deal with the country’s Finance Minister, a former executive at GS, involving some creative accounting, special credit default swaps and manipulated interest rates. Think Italy is having problems? Well, their new Prime Minister is an international adviser to Goldman Sachs. Ireland’s Attorney General was a director at Goldman Sachs International. In fact, there are former executives and current advisers of Goldman Sachs within the European Bank, the International Monetary Fund, the European Union and even more who serve, in some capacity of leadership, in most countries throughout Europe and beyond.
This isn’t news to most of us. We’ve seen the revolving door at Goldman Sachs, which hires and grooms its’ employees, then sends them off to head all sorts of high level positions within our own government. They recruit those who they refer to as the best and the brightest, right out of such esteemed institutions as Harvard Business School and the Wharton School of Business. Add in those who have moved between GS and the Federal Reserve, and you have the largest alumni association ever seen. I compared some lists of the men and women who have graduated from the business schools and who have also graced the hallways of GS and the Fed. It’s a veritable who’s who of the people who run the world.
Until that September weekend in 2008, most of us weren’t really paying any attention to Goldman Sachs, or to most of the machinations of Wall Street’s chosen ones. When AIG panicked that weekend, most of us knew about it by Monday, and nothing has looked right to us since. I don’t need to rehash the tale of the “too big to fail” bunch. Some did, in fact, fail – with the demise of Lehman Brothers, during that same September, becoming the first, but not last, casualty.
So how does Goldman keep landing on its’ feet? In large part, GS owes its’ resiliency to the simple fact that the Federal Reserve has been married to GS for a very long time. When the federal government first considered creating the Fed in 1913, one of the people they turned to for advice was none other than Henry Goldman, a founding partner. With no clear cut plan of its’ own, the government absorbed every bit of wisdom that Henry was willing to give them. Presidents as far back as Franklin Roosevelt have asked for input from the industry giant. President Eisenhower appointed a Treasury Secretary solely based on a suggestion on the recommendation of a Goldman partner without ever having even heard of the man. This advice and counsel has continued right up through the appointment of Hank Paulson – another former GS senior partner, by the way.
So, Goldman Sachs knows its’ way around the rules because it helped to draft them. They play the system, close to the edge, knowing very well where the boundaries are. Critics have argued otherwise, saying that Goldman’s system of banking is not merely a matter of questionable morals, but that they have, indeed, become a criminal operation. Apparently, no one is paying attention to those folks nor do they even care. GS certainly doesn’t display any signs of changing their way of doing business. Congressional hearings are treated like minor annoyances. Fines and sanctions against them amount to spare change compared to their enormous coffers.
The leadership at Goldman continues to find new ways to increase profits and lower its’ obligations, while expanding its’ global foothold. In 2008, their effective tax rate dropped from 34.1% to 1%, something GS explained was due, in part, to tax credits as well as “changes in geographic earnings mix”. More simply stated, GS shifted a number of its’ subsidiaries’ earnings to nations with low or no taxes. Fifteen of those subsidiaries are in the Cayman Islands. Since 2001, the company has targeted numerous nations based on macroeconomics, political climates, investment policies and quality of education. They have already conquered Brazil, Russia, India and China, and their future hit list includes such far-flung, and politically questionable, areas as Bangladesh, Egypt, Mexico, Vietnam, Pakistan and Iran, among others.
To some extent, we have all played a part in this. We were happy to be employed, watching our home values rise stratospherically, albeit unreasonably. We used this new equity in our homes to improve our lifestyles. The economy, we were told, was solid and we believed we had nothing to worry about. We learned, the hard way, that it was all Monopoly money – that the hotels and houses we had put on Broadway and Park Place weren’t worth the “get out of jail” card. When we pass “Go” now, we won’t collect $200.
If there ever was a “too big to fail” model, Goldman Sachs is it. They may not have it all, yet, but they’re coming very close. I have no idea if there is a solution. At this point, you’d have to throw the baby out with the bathwater and start all over – something which is just not going to happen. Politicians put on sham hearings, and scold Mr. Blankfein and his cohorts, while pocketing donations to their campaigns. Critics have called for Blankfein’s resignation, but that would be meaningless. It would be like killing the head of a drug cartel, only to realize that there are dozens more, just waiting to run the show. It’s been going on at Goldman throughout its’ history, and we’re now just starting to catch on. In the meantime, we are stuffing our dollars under our mattresses, hoping that we don’t have to cut our own budgets any more than we already have.