Have Goldman Sachs focused on their operational risks to the exclusion of all else, to the extent that their destruction is now politically convenient in the current US climate, and what tools could be used to achieve that end?
I began, two weeks ago, by writing a blog entitled “Has Goldman Sachs caught the Blackwater Disease?” However, the more I explored the issue, the more I believe that the implications stretch wider. While I am not a fan of the concept of the “Perfect Storm,” I do believe Goldman Sachs has ignored non-financial risks at their peril. This blog is not a reflection on whether Goldman Sachs are good, bad or indifferent; it is a reflection upon how disregarding all risks can create the conditions to destroy a company, just when that company appears to be at the top of its game. This blog explains those conditions affecting Goldman Sachs, makes comparisons with what happened to Blackwater, and explains how the downfall of Goldman Sachs as they are today might be affected.
Unlike the health care bill, immigration or the wider economic woes of the country, the conduct of the investment banks and how they brought the U.S. to the edge of financial collapse is an issue that can be made personal. Thus far, Capitol Hill has cried foul about “investment bankers” and criticized the banking industry, but they have not targeted any one institution particularly.
Simultaneously, the TEA Party is rising. The TEA Party recently held their first convention, which has been likened to a first date – the various groups have been communicating for a while, and now they want to see if they can work together. The TEA Party is increasingly being seen as a voice for the silent majority that whilst long silent, now want their country back. They demand a return to responsiveness to the electorate by politicians and the cleaning up of Washington, DC; the finance industry is the significant designated bad guy.
It is not a great leap to understand that the TEA Party, representative of the silent majority, must be a very attractive demographic for a President and Congress that have alienated many over the healthcare bill, are looking down the barrel of mid-term elections and need to begin to repair that damage. They need a scapegoat, and at the moment, there is truly no scapegoat bigger than Goldman Sachs.
There have been a range of allegations in newspapers recently, not least in the New York Times. The role of Goldman Sachs in the downfall of AIG and their profiteering from it, their financial engineering of the Greek debt, and then shorting as a result of their knowledge and other allegations, all contribute to the image of Goldman Sachs as an organization committed only to their bottom line with no thought for their country, Main Street or the welfare of anyone but themselves.
Goldman Sachs stand by every action they take as being both legal and in the interest of their employees and shareholders. An investment bank with their influence everywhere, their profit margins and bonuses are driven both by advising and market participation. The reports about the AIG relationship are that their active reluctance to seek a third party valuation and setting low valuations on arrangements with AIG hastened AIG’s demise. Not only did these acts hasten AIG’s demise, but a percentage of those funds went to GS to settle obligations – obligations that have since significantly increased in value, making GS more money on the backs of the taxpayer.
Just as Eric Prince was perceived to have influence at court through his relationship to the Republican Party and the White House, so Goldman Sachs is perceived to have influence through the penetration of its alumni into government – the joke “Government Sachs” isn’t so much a joke as a loose description. Hank Paulson ran Goldman Sachs, Tim Geithner came from there, as did Neal Kashkari, who ran the original TARP fund. It does not take a conspiracy nut to argue just how much GS profited from the decisions of the organizations, “off the taxpayer’s back.”
Thus far, there have really only been allusions as to these relationships and their effect on government policy. However, desperate times call for desperate measures, and one can effectively argue that the Democrats are getting desperate. Since gaining control of the Presidency, the House and the Senate, it’s easy to perceive that they have done nothing with them, and the loss of Senator Kennedy’s seat to the Republicans must have sent shock waves through the party.
“When a president realizes he can achieve nothing domestically, he turns to foreign policy” (with grateful acknowledgement to Arthur Hodgeson); when a Democratic president is under pressure, he finds a fall guy. For Clinton, it was Microsoft and the anti-trust showdown. For President Obama, it may well be Goldman Sachs.
Goldman Sachs is a strong, well-financed institution that is positioned to fight such demonization and investigations hard, but, ironically, that makes them all the more worthwhile a target. A strong fight played out in the media where the Democrats can lay the corpse of Goldman Sachs, painted as the root of all evil that brought about the downfall of the modern financial system, would play well with certain demographics.
The movement would start with more formal investigations. Do not forget, the media component has already begun in the New York Times and other media profiles and investigations, just as it did with Blackwater. At some point, when instinct or numbers suggest it is time, a Congressional Committee or two will begin to become officially interested, and a Special Investigator will be appointed. At that point, it will be clear the game is afoot and sides will be drawn. The Special Investigator may find evidence of activities that are contrary to the interest of the United States and its citizens, and here, it becomes interesting.
Just as RICO has been put to some very interesting uses over the years, the Patriot Act is drawn broadly; in the wrong hands with a passionate agenda and sufficient evidence that the interests of the US were compromised, it could be that Goldman Sachs are open to a form of asymmetry that, until now, they never contemplated. It’s clear nothing would give many in the country greater pleasure than television pictures of Goldman Sachs executives in handcuffs, arrested under the Patriot Act for the wrong done to the citizens of the United States.
What is the comparison to be drawn, it will be argued, between attempting to kill a couple of hundred people on a plane and driving millions into joblessness and across the poverty line? Questions of the role of the government and its responsibilities will come into play, and provide a wider pulpit for the Democrats to argue just how seriously the Republicans forsook the nation over the past decade. I understand that many will dismiss this scenario as a fiction that “could never happen here.” To those people, I suggest they return to Tom Clancy and remind themselves of how someone flying a plane into a building can only be fiction.
Goldman Sachs would fight, and most outside Wall Street may underestimate just how much fight an organization that regards itself as elite has and is prepared to use to protect its position. When confronted with death, an organization will do whatever it takes, and Goldman Sachs certainly has the influence and muscle to go all the way – personally, actions such as trying to get the President impeached and flooding the electorates with anti-incumbent advertisements (thanks to the Supreme Court) would be the tip of the iceberg.
How were the conditions for this demonization created? Goldman Sachs, in pursuing their operational goals of financial success for the firm and their shareholders, lost sight of the bigger picture. Perhaps they have such confidence in their power and financial base that they believe the Government and elected officials would never vilify them, and under normal circumstances this would be true.
However, these are not normal circumstances and normal perceptions simply do not apply. I again emphasize that this is not a recommended course of action nor a judgment of Goldman Sachs, but simply an explanation of the worst case scenario for them –one that seems to be slowly growing in likelihood each day.
How did this come about? It appears that Goldman Sachs, true to their culture, focused on the financial risks to themselves and their clients. They aggressively control downside risk, and equally aggressively grasp opportunities, or the upside risk. However, financial and operational risks are not the only risks that affect a business, and the other risks are changing in just as volatile a manner. Understanding this is critical to businesses, and an important argument for non-core components of businesses in demonstrating their relevance.
That Goldman Sachs have caught the Blackwater disease of being the personification of an industry at the wrong time is certain; the question is what will happen as a result. The real question is whether one regards this scenario as likely, and commits the ultimate heresy of shorting Goldman Sachs.