Thomas Day | Greg Smith, Goldman-Sachs, Culture, and Governance

rcwhalen's picture

Wherein Tom Day of Sungard drops out of hyperspace just long enough to write the following missive on the PRMIA DC web rant soapbox and get a few hours sleeep.  Ode to Frank Partnoy. --  Chris

Frank Partnoy's article from FT, Friday March 16, 2012 (click here) may
well have been written by Mr. Blankfein or Mr. Dimon too.  Maybe it was? 
It does make you wonder: Are academics routinely "bought-in" (not
"brought, but bought") to add credibility?  A mouthpiece to help
deflate existing, imagined, or other reputational risks?  I think this
every time I read anything Paul
bothers to write, which is usually nothing but "print it,
spend it, print some more".  Theory being (in my opinion) - we will
own Africa and the Middle East one day anyway, so why worry about debt. 
Perhaps a new breed of lawyer, banker and economist is upon us. 


     The "'SIFI Spring' Evangelist"


SSE's seem to be everywhere these days, trying to pump-up the market to convince
the world that there is a hopeful, global, and persistent recovery right around
the corner.


Partnoy begins his article with a false conditional assumption that asserts
that the central difference between animals and humans is "thinking about
the future". Obviously this is a false premise, as squirrels "think
about the future". 


The central difference between humans and animals - besides having a
"soul" (or perhaps 'animal spirits' at minimum) - is something
Partnoy obviously didn't learn in kindergarten, but all kindergartners seem to


The central differences include:


  • Values, like Honesty and Fair Play
  • Committed Relationships
  • Integrity
  • Truth
  • Sophisticated and Actionable Communication


Here is a link for a gentle reminder of some others:


It is worth reading the list from the above link. Doing the right thing with
the right attitude isn't all that hard, after all.  Perhaps Partnoy can
use this link as a reference point for how to properly think about enhancing
corporate ethics and standards. Oddly, Partnoy states that:


"[obviously] no one should
expect derivatives sales people to be honourable, any more than we should
expect a zebra to scrub off its stripes."


His point seems to be that the "natural habitat" for financial
product salespeople is one that we all should obviously realize is
dishonorable, at least in Partnoy's "academic" (i.e., fictional)


For most of the rest of the bankers in the room, aren't you a little
offended by this illuminati arrogance?  Here is a professor with a new
book he is about to trot-out in June 2012 entitled: "Wait:
the Art and Science of Delay"
evangelizing the world that we bank
salesmen/women are, "of course", dishonourable. 


Listen: trying to sell a book called "Wait"
by concluding your FT article with the advice that everyone should draw a deep
breath and "....take time to think about these [i.e., proposed SEC and
Dodd-Frank] rules" - does this not strike you as a little disingenuous?
Slightly less than straight-shooting and, obviously, self-serving? As my young
children would say: "It seems to be somewhat 'sketchy'".


What am I missing? 


Based on what I was able to surmize about the book, I feel it can be safely
avoided as its title summarizes its axiomatic points:


When all the world is having
'black-swan dreams' (my word, and yes - please use it!) or living through an
actual black-swan event, or simply when you need to make a choice between one
or another thing(s), those with clarity, wisdom, patience and understanding will
be the survivors and winners.


This is so basic it does make me wonder about book publishers.  Very
few of us in the  trenches probably need 200 or 300 pages of yet another
text that conveys a simple idea over the span of 200-300 pages.  This is
why I love Twitter.  Economy.  Economy of words. 


What isn't clear to me, something that seems obvious to Partnoy, is that
financial product salespeople (especially those evil "derivative"
salesmen) are dishonorable. 


Axiomatic again, of course, is that there are bad actors - and Vampire Squid
companies are all around us like some  hard to observe virus; however,
banks are full of "good guys" not just "bad guys". 
Further, I don't think we need Washington D.C. to define what
"honorable" or "fiduciary responsibility" means.  If
we as an industry are so oligopolistically "captured" that we
actually do need such "wisdom" from Capital Hill, God help us. 
We don't need to "Wait", as Partnoy seems to suggest.  Shapiro
has a nice set of fiduciary standards - informed by years of case-flaw (oops, I
mean "law") and court decisions under ERISA - that we can immediately
apply and enforce. 


PROBLEM: All of these GSE G-SIFI and SIFI
banks don't want a new fiduciary standard.  Conclusion:  Shapiro and
the SEC will never in 100 years get a new one passed.  The ugly truth is
that while Greg
Smith wrote a scathing blast about Goldman's internal cultural weaknesses
, these
same weaknesses exists up and down the street - not just Wall Street, but Main
Street too.  The difference is that on Wall Street we are now the owners
of an oligopolitic, palm-pressing, politically and policy saavy industry
(cross-border, not just domestic) that has enough "inside the
beltway" clout that "deimplementation" not
"implementation" of financial reform is the primary focus of the
banks and their army of lawyers.  The Volcker
provides a vivid example, as does the sabotage of the Office
of Financial Research
- supported and virtually sponsored in being crushed
by Administration and Supervisory leadership before Dodd-Frank was even born.


Next, Partnoy thinks there is a difference between a client and a
counterparty?  Fiduciary rules should only apply
if you are an "unsophisticated" investor.  The idea: 


"Shame on you Mr. Banker if the
faces are ripped off your poor hapless unsophisticated hoi polloi." 


But "sophisticated" investors?  Well, they get to play under
different rules because they are smart and the others are not. 


By Partnoy's own logic - and therefore justifying Goldman's actions and
making the tacit point that Greg Smith is "disgruntled" - it's o.k.
to insert the vampire blood funnel down the throat
of your "sophisticated" clients because they are labeled


Using Partnoy's logic, if you are a "sophisticated
" (i.e., $2.5 million or $250k in income over the last two
years), and assuming he is right, perhaps clients ought to consider running
away from Goldman? 


As Partnoy tells us in his article: it is always open-season
on non-client "sophisticated" accounts (i.e., the "institutional
guys"). Goldman bankers have a "license to kill" and, of course,
the recipricol: "the right to be killed" - in theory.  However,
"...the right to be killed" was itself "killed" as soon as
these monolithinc oligopolies became functional GSEs.  Given the AIG
, not to meantion the Abacus deal, and
many other non-investigated
inside "deals"
,  we have been forced to implement tastless
programs like the TARP, the Capital Purchase Program (CPP), the TLGB, the TAG,
and many other "innovative" bailout programs.  This is total
asymmetry of outcomes:  Tails I win, and heads you lose.  The big
banks can kill clients and markets, and when the punch-bowl gets drained, and
everyone is walking around bumping into each other and passing out, they are
saved by the very hands that are supposed to be protecting our citizens from
unsafe and unsound practices.  Something
sounds wrong in Kansas.
  As Thomas Sowell has said:


"What is more frightening
than any particular policy or ideology is the widespread habit of disregarding
facts." - Thomas Sowell


If this isn't a shout-out to all Goldman client and institutional accounts,
few of which are likely to be "unsophisticated", to "run"
on the "bank" (they are now a Bank
Holding Company
after all) then it must  mean only one of two things:


  1. GS clients are almost universally “ignorant
    (i.e., ‘dumb’) money and they believe Goldman is the
    "smart-money" and they need the Goldman
    "smart-machine" to help them “look smart” about
    investments.  In all of this, we can assume they are right, and firms
    like Goldman are benevolent and looking out for their clients and
    counterparties;  or
  2. You realize that the Ivy League salesman
    with his Rolex, limo, sexy wife (or girlfriends), house in the Hampton's
    and access to the GS jets are "designed", pre-packaged and
    taught how to make you feel "less" so they can "take
    more".  Like many on the financial sell side, they pimp the
    "ride" (i.e., their NY banker lifestyle) and then take you on a
    ride.  This is pretty much the way the world works for the "dumb
    money", while the smart money bankers giggle in the corner.


Here I can't help but think of a CEO I used to know in the Southeast
US.  He refused to do business with anyone other than Goldman. No offense
intended, but this particular CEO wasn't the sharpest tack in the box. 


After one especially hard aquisition - one which a well known Vampire Squid
advised - he never really realized that the advice received cost his
shareholders years of sacrificed returns due to the Squid recommending an
over-oversized liquidity pool, post acquisition.  The CFO, a mere southern
banker -not a NY whiz kid - felt the liquidity pool should be half the size
that the Squid recommended, and so did the Treasurer (another blunt tack, but
nonetheless some intellectual pulse). 


This Squid's advice was provided right about the time rates dropped from
6.5% to 1%, and the liquidity pool was largely mortgage securities that the
Squid sold to them (at large premiums) from their own inventory.  You can
imagine the harmful result.  Rates radically reduce, prepayments spike, premiums
become an albratross, and effective yields go through the floor. 


Oddly enough, this same CEO will tell you - to this day - that the Squid is
great because, heck, they helped finance "his" two jets and are just
good people.  He had
been "Goldmanized"


- definition
: a person who feels good with another bankers hand in his
pocket, sifting for loose and not so loose change.


What about Partnoy's new term: "pseudo client


I went to ERISA, Google, and many other sources.  I encourage you to do
the same.


As far as I can tell, Frank is the proud creator of this term.  Better
him than me. 


I will take my creations: "black-swan dreams" and being
"Goldmanized" over his creation: "pseudo client
relationships".  Sounds like something a lawyer might say.


Do we all need to take Frank's wisdom and mark-up all our finance, banking,
risk management, and economic texts to add this new special word? 


All "counterparties" take
note: it is open season on you and your neck. According to Partnoy, the Goldman-Sachs
(skip the "ad", it is political and stupid) is totally justified to
rip your head off when it is to their advantage.  Why would any
counterparty trust having their business managed or cleared through any SIFI


Clearly - we are also informed by Partnoy - Goldman appears to be an ardent
supporter of the Volcker Rule (I can hear protests to the contrary). This
was/is a shocker.  I have always assumed Goldman would want to keep their
"hedge fund within a bank holding company" structure, and any bank
charters forever.  This allows them to finance their trading books with
government "back-stopped" money.  Therefore, I can only assume 
Partnoy has some inside knowledge or insights.  In the article, Partnoy
clearly makes the point that Goldman is merely a "fellow
gambler around [the] poker table
."  There is it: Goldman
the Casino.  This is precisely the problem the Volcker Rule is hoping to
dislodge from the Bank Insurance Fund, and something I am sure the Federal
Reserve would like to see curtailed.


I am sure Frank is probably right about this, but I suppose we just didn't
fully appreciate Goldman considers themselves gamblers as described in the
article. Goldman has always traded its proprietary views, but martingale
suckers Goldman is not. 


Since we have now been so ably and thoughtfully educated by Partnoy - 
with clear confirmation that Goldman is merely another casino gambler - I am
sure Lloyd and company would agree that the Goldman Bank Holding Company (BHC)
should be a "source-of-strength" as required by the Federal Reserve's
long-standing capital policies.  Therefore, we must expect Goldman will be
divesting of any and all banking charters, and flipping them out of their Bank
Holding Company structure?  Thanks for the tip about the spinoff! I will
keep my eyes peeled open for that one (**note to self: do not hold your


But Frank must be right, right?  Clearly the Goldman is strong enough
to stand on its own two feet.  After all, the CCAR stress-test proves this
to be true.  Therefore, why would the FRB or FDIC, or anyone else want to
subject them to the Fed's safety net, much less the FDIC's safety net. Let Goldman
give up their charter - BHC and any IDIs.  Why not?  They aren't a
real bank and were approved to be a BHC over a weekend, a process that normally
takes 6 - 9 months of due diligence.


No.  The Goldman, like others, will never give up this exclusive and
valuable (in times of stress) charter.  GS can never give up the BHC
charter because, systemically, they aren't strong enough to stand on their own;
like most, they are too interconnected.  They are, as we all know, Too Big
To Fail - regardless of protests to the contrary.  Moral hazard has been a
growth industry these last few years.  And the Goldman, as others, like to
ensure that they have access to the variety of legal "options" that
can be exploited as a regulated depository underneath a BHC.


In conclusion, Partnoy gets to a point - finally - that I believe is proper:
a new fiduciary standard is needed. 


The industry is fighting this effort, and you know what: they will
win.  Like the Volcker Rule, there are too many palm-pressing, campaign
donating, back-room shinanigans between NY and DC to believe the
"industry" won't trump the "government" and, therefore, the
rights of "We the People". 


The article does make you reflect on two final points:


  1. Are there other Partnoy's out
    there that are paid "angel economists" that make it their
    business to defend Vampire Squids upon whom the "curtain has been
    parted" and instead of seeing "God", they see a little old
    man hunched over some basic gears and levers blowing a lot of smoke, and
    related hot air.  Washington DC doesn't need to "...tell us what
    the word 'client' really means."  We are all adults.  The
    banks should tell the world what 'client' really means.  No need for
    the SEC, the FRB, or the US Government to tell us this answer.  Ask
    your kindergartner: he or she can help.
  2. Caveat emptor works when
    there are no oligopolies and the system isn't rigged.  The US
    financial system is an oligopoly and "rigged" financial system
    that benefits the few, and writes-off the many.  This structure
    continues to produce significant "welfare loss" to our
    nation.  Welfare loss is when marginal social costs aren't offset by
    marginal social benefits. Throughout the on-going financial crisis, if
    there is anything we have learned it is that the marginal social costs of
    allowing our banks to be too big to fail are far outweighed by the
    marginal benefits from these same organizations.  One way to end TBTF
    is to take seriously the "living wills" and "recovery and
    resolution planning" concepts of the Dodd-Frank Act (2010).



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hedgeless_horseman's picture


Same Shit, Different Dealer.

malek's picture

Awesome rant. Thank you!

AccreditedEYE's picture

Great stuff. Thanks Chris.

CulturalEngineer's picture

Neither Goldman Sachs, Bernanke, Wall Street, the duopoly... or especially Randian Objectivists and "neo" whatevers understand the true scaling problem our biological roots present.

Its not that hard to understand.

But managing the dilema (solution isn't possible) requires careful design of checks and balances.

Issues in Scaling Civilization: The Altruism Problem

Zero Govt's picture

Dishonesty is the root of the problem we're in

that root grows all the way back to central banking and indeed Govt


off these branches many rotten apples hang

AnAnonymous's picture

Monopoly is the terminal point of competition.

So what?

Zero Govt's picture

Nope. Competition never stops.

See competition in a forest, some parts established that will peak and then decline with new young turks on the rise below them. Constantly refreshed at peak performance no one tree dominant for very long

Nature (natural competition) is how we, man, were designed to perform. We call it the Free Market

Monopoly is a walking-dead un-refreshed stinky zombie at all stages in its life(half-dead)cycle ..see every Govt in history: sloth, brain dead, corrupt, corrosive, unproductive, destructive, backward and unchanging, worthless

our societies are living in a wholly un-natural (perverse) state: we have a dead-rotten monopoly (Govt) at our core.. that's why countries die (so often) ..check the history books

Govt (monopoly) is the problem

Freedom (competition) is the solution


DavidC's picture

Double glazing by another name.

When I got quotes for my house to be double glazed I had several quotes, including one from a single-person business and one from a large well-known name in the UK. The former, priced and quoted at a reasonable level, the latter at over twice the price. The salesman got on the telephone to his manager, who then spoke to me and came out with the 'Mister C., I am in a position to give you this large discount but it's only valid today' crap (incidentally, STILL at a higher price than the single person business). No prizes for who I went with - and he did a brilliant job.


williambanzai7's picture

Next time you have some Wall Street derivative hustlers trying to explain a trade they want your client to buy, just say: Perhaps we should go get some independent advice or another quotation on this since you are acting as my counterparty in this trade and what you are trying to sell seems convoluted.

Just watch the contortions and listen to the horrible squealing noises...

I am sure a version of this happened in Italian about 10 years ago.

Google and Facebook make their money monetizing your privacy and Wall Street makes it monetizing conflicts.

Zero Govt's picture

the first thing you should do when seeking a service/product is seek out competition to strike the best deal

us Apple users don't do that because we know what's best instinctively of course!

But competition is the key

What smacks me about these derivatives is these insurance contracts (for that is what they are) were offered to gumless politicos etc without the dimwits shopping around at all. They didn't negotiate and haggle, they were just hed-fuked into the 'wonder' of these new, sophisticated uber-complex contracts which they actually knew nothing about

the other issue of contracts is time. The longer a deal risk increases massively because of change. Avoid wherever possible contracts over 6-12 months ..the best deal is struck on a market stall, there and then. Time (and change) has a habit of ripping everything up within months

Lastly the vast numbers of Govts and smaller towns that have been literally bankrupted into paying up I'd say tell the bwankers these Drv's are worthless, call their bluff, go to Court if needed