By James Kwak
The instinctive defense from Wall Street bankers is that they deserve the money they make: they’re just that good. By that logic, Jon Corzine was the best of the best: he was the head of Goldman, after all (although in his days, if I recall correctly, Goldman and Morgan Stanley were roughly tied in prestige). The failure of MF Global may have had many causes, but it does make one wonder: Are the people at Goldman really that good individually, or is it the firm (and its reputation, and its information flow) that makes them so good?
Andrew Ross Sorkin speculates that MF Global got Goldman-style risk-taking without Goldman-style compliance and risk management. I would just add: they also got it without a Goldman-style too-big-to-fail government guarantee.
The Baseline Scenario 
No. Here’s what our Simon said about GS on PBS:
“Goldman Sachs and Morgan Stanley had a problem, which is, they were about to fail, and that everyone felt that this was coming, and they couldn’t borrow easily from the Fed, because they weren’t banks.”
$10 BILLION FROM THE TARP.
That shining new building, directly across from “FREEDOM TOWER”, (standing above a former car-park, the scene of automobiles spontaneously combusting and engine blocks disappearing on a sunny day), wasn’t cheap either = $ 2 billion bucks.
Oh, almost forget….let’s get some HELP, again, from the PUBLIC SECTOR:
“$2-plus billion construction bill, Goldman got New York City and State to bless a $1.65 billion tax-free so-called liberty bond issue, plus another $66 million in job grants, tax exemptions, and energy discounts.”
Life is good.
Paul Solman, PBS….oh, finally, a real reporter doing his job somewhere:
PAUL SOLMAN: So, you mean Goldman Sachs borrows money from the Federal Reserve at a tenth-of-a-percent, a quarter-of-a-percent, takes that money, invests in U.S. Treasury securities at 3.5 percent, 4 percent…
DAVID STOCKMAN: Three-and-a-half percent, exactly.
PAUL SOLMAN: … and they make the money just…
DAVID STOCKMAN: On the spread.
PAUL SOLMAN: And the money is simply being recirculated from the Fed back to the Treasury?
DAVID STOCKMAN: That’s exactly right.
PAUL SOLMAN: But, mainly, Goldman raises money privately, through the markets. And because the Fed is keeping interest rates so low, that private money is also very cheap, as long as the markets think the government will never let Goldman fail.
Doing God’s Work, alright, with other peoples’ money.
It’s the letterhead James.
MF Didn’t Segregate Client Collateral: CME
http://www.bloomberg.com/news/2011-11-01/mf-global-probe-said-to-involve-hundreds-of-millions-in-funds.html
Now they tell us!!
All joking aside, this is complete and total regulatory failure … AGAIN … at the self-regulatory level (CME) and at the federal oversight level (CFTC and SEC).
And, of course, complete breach of fiduciary duty.
Are the people at Goldman really that good individually, or is it the firm (and its reputation, and its information flow) that makes them so good?
James, what do you think.
Seems like their undoing had to do with this large Eurozone soverign debt investment they made. If he made a bet and it did not come through – I am not convinced on that basis alone can an investor be judged. They must be evaluated on the risk-reward profile prior to the bet, not on the Monday morning after.
However, one of the basics of investing is diversification. It seems this was more of a “bet the farm” exercise, which is generally unwise, but again not knowing the exact situation…maybe they were already halfway down the crapper and this was the only shot they had,
“Are the people at Goldman really that good individually, or is it the firm (and its reputation, and its information flow) that makes them so good?”
Better lawyers and lobbyists help too.
Actually it’s pretty easy to figure out the “too big to fail” part — just compare Goldman’s performance with those of other banks that are also too big to fail. This is elementary statistics stuff. Why so many people, obviously smart and well trained, have asked this question in the past three years without anyone suggesting this test is really puzzling. Of course, it’s less puzzling once you consider how inconvenient the answer is: before Dodd-Frank started directly restricting prop trading, Goldman had consistently outperformed the competition. But these people are supposed to be intellectually honest instead of pushing agendas through rhetorical questions, right?
So maybe it’s the firm, maybe it’s the information flow (all that government connections, you know), or maybe something else. But when one mentions the too big to fail part, you know he either does not have a brain or, for the sake of greater good, refuses to use it.
@James
Nice of you to deflect the negative attention generated by your capo’s shillin’ for Hoenig. Perhaps you do have some utility for the “Professor.”
MF Global was not deemed “too big to fail”, which disqualifies the firm, and its people, from earning the label “really that good”.
Only bankers doing “God’s work”, and others chosen by these virtuous servants of the Divine, deserve the people’s money when they do things the Devil made them do.
The too big to fail has a number with it which I believe Kwak and Johnson place at $100 billion max for a bank. Dean Baker in his recent book said Blogoyavich’s scam was “small potatoes’ compared to most corporations whose CEO’s recruit board members who get paid several hundred thousands to attend a half dozen meetings a year and rubber stamp CEO salary proposals.Smells pretty Ponzi to me.
And without Goldman’s ownership of the federal government…
Kwak: “Are they really that good??”
Me: “Eeeehh………. NO.”
http://delong.typepad.com/sdj/2011/11/understanding-mf-global-brad-delongs-brain-degrades-into-jelly-department.html
Educational link.
http://ftalphaville.ft.com/blog/2011/10/31/717181/mf-global-and-the-repo-to-maturity-trade/
Gee, who would have ever thought this MFGlobal mess had something to do with short-term Repos??? I’m stunned and shocked!!!!!
Oh nevermind, investment banker anus-licker Andrew Ross Sorkin says it’s because MF Global wasn’t as conscientious as Goldman Sachs has been. What the hell was I thinking??? Sorkin’s brown-tipped tongue always sets me straight. I just wish Sorkin would clean his tongue once in awhile.
When you are good you are good and you deserve to be compensated for an outstanding performance. However, where Wall Street has it wrong: When you are bad and you loose or steal money, you don’t get compensated.
Just like the great game of Monopoly: Pass Go but don’t collect $200
Yeah…and they’re doing “God’s work.”
I sincerely wish that a giant tsunami would just wash them all away…
Are they really that good? In any other sector- bonuses are based on performance. You do well, you get a cut. You break even- you keep your job and salary- no bonus. Nowhere, other than TBTF within the financial sector, will an employee lose money for the company AND get a bonus for doing so.
I’m always amused when one of these bailout cry babies says that these bonuses are necessary to retain the “talent”?!?!? Really? Where are they going to go? Every other industry rewards this talent with a pink slip.
So, here’s the joint SEC-CFTC press release on MF. The key phrase occurs midway, “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”
In other words, it was news to the regulators. MF told them there may be a slight problem here, possible felony, but hey … . Put aside the fact that whoever was scouring the books of the MFers saw it immediately — like over the course of the day or two, if that long, it took to review the books — and passed on “a transaction that would include the transfer of customer accounts.” The SEC and CFTC could have had platoons camped out 24/7 for years and not have found anything at MF. They’d just stare at computer screens and printouts with slack-jawed amazement.
The banks and former investment banks really should push hard for the acceptance of whatever rules the SEC and CFTC come up with per Dodd-Frank, and do it quickly … the rent available under the individual and joint supervision of the SEC and CFTC will be ungodly … the 2005-08 period of rent-capture at the expense of customers truly will pale in comparision. Makes one shutter in anticipation of future earnings reports.
http://www.sec.gov/news/press/2011/2011-230.htm
SEC-CFTC Statement on MF Global
FOR IMMEDIATE RELEASE
2011-230
Washington, D.C., Oct. 31, 2011 – The Securities and Exchange Commission and Commodity Futures Trading Commission today made the following joint statement:
“For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global, Inc., a jointly registered futures commission merchant and broker-dealer, in anticipation of a transaction that would include the transfer of customer accounts to another firm. Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm. The SEC and CFTC have determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets. SIPC announced today that it is initiating the liquidation of MF Global under the Securities Investor Protection Act (SIPA).”
# # #
http://www.sec.gov/news/press/2011/2011-230.htm
your question is moot: Goldman makes its individuals better and the individuals make the institution better.
Since you never left school, the analogy for you: the difference between a prof at MIT and university of florida.
BTW…you are correct about bankers deserving the money they make.
They also make a whole lot less than football players, golf players, hollywood actors simply because the common man has no problem paying $10 per month to ESPN to watch his faourite team loose or to watch a bad movie but has a huge problem paying $5 per month for the use of a debit card.
BTW…MF Global is gone…and among the 10th largest bankruptcies..and the system is working fine….proving that SIFI and the high capital buffers that Simon repeatedly rants about is a completely bogus concept.
On second thought, it’s not the letterhead. It’s the shoes.
So, one of Sorkin’s conclusions is that Corzine’s bets may still pan out. That is to say, the Spanish and Italian debt he gambled on will be supported, whatever the cost, by Europe.
In other words, he bet on Spain and Italy being TBTF in the long term. That may be true, but MF Global wasn’t, and Corzine didn’t have the ECB – or the US Treasury – to back those bets up. There’s a lesson in there… somewhere.
Too big to fail explains why large Wall Street firms don’t go under in bad times but it doesn’t explain how they make so much money in good times (before paying out bonuses–as the shareholders could tell you after-bonus profits aren’t as impressive). You’re right that “information flow,” a benign term for frequently unethical and criminal front-running, is an important part of the explanation. Goldman’s client base and reputation may well give it an edge over other firms in this department.
Here’s my comment on Sorkin’s article about Goldman alumni:
Robert Rubin was “a dazzling trader when he was at Goldman.” Were you privy to his P&L and, more importantly, its sources? Robert Freeman, who “sat next to Rubin at the Goldman arbitrage desk for 17 years” (NYT Magazine, 7/19/98), pleaded guilty to insider trading in 1989. My experience trading bonds for J.P. Morgan for a dozen years suggests that illegal practices are rarely confined to a single trader on a desk (http://ustreasurymarket.com/ ).
Chris Flowers was “a remarkable Goldman banker.” Does this mean that he made his clients’ shareholders or his Goldman partners richer? If you mean the former, what is your evidence? Shinsei Bank “has lost ground” is a bit of an understatement.
Jon Corzine was “considered a bright, aggressive trader who had a history of making big bets that paid off.” I do know two bets he made at Goldman that paid off for him: that he wouldn’t be punished for the millions his department stole from the Treasury through yield burning (Goldman did pay a $5.2 million settlement, http://www.sec.gov/news/press/2000-45.txt , but the subject wasn’t raised during his campaigns) or front-running a collapsing LTCM (“When Genius Failed,” pp. 172-5).
Goldman’s “secret sauce” includes all of Wall Street’s essential ingredients: toll collection, zero-sum gaming, and unethical and criminal acts. It may well have a rare fourth ingredient, effective risk management, but that is a matter of competence, not ethics: Goldman created and sold fraudulent mortgage securities; it survived the crisis by dumping them in time.
Andrew Sorkin, like most business reporters, should be less impressed with the people he covers. As I wrote in 1997, “much of the battle is in demystifying what people do on Wall Street (even the liberal New York Times describes successful deal makers and traders with terms such as financial engineer, whiz-kid, or rocket scientist, when parasite or thief would often be more accurate).” http://efficientmarkets.com/wallstreet1997.html
Thanks for the great post, former trader. There are a lot of jokers in this deck – the one that’s loaded with cash. The old saw that money creates money still holds, especially when it comes to technology and that also includes software technology.
High-speed “trading”, the most elaborate form of rent-seeking I can imagine, has made piles of that stuff for the biggest outfits. It allows them to get that extra millisecond edge which, in the age of global market automation, can make all the difference. But it isn’t really trading, just a very elaborate form of vigorish. The Masters of the Universe increasingly come across as glorified bean-counters.
since when does Goldman have good rsik management? They would have gone under if the govt had not bailed given AIG money to pay them offin full on CDS contracts. Not knowing your partner can’t make good is not good risk management.
@ Desi: “your question is moot: Goldman makes its individuals better and the individuals make the institution better.”
All your “good” at is SWINDLING…it’s approbation, not mutual circle-jerk-a-fication.
I just thank God we have the Party of family values, the Republican Party, to help navigate America to higher ground. Of course, I’m not referring to Newt Gingrich, the Catholic man now working on his third wife. I’m talking about a much better example for America’s children:
http://abcnews.go.com/WNT/video/herman-cain-3rd-woman-claims-harassment-14869760
Trying to reach someone about being a guest on a talk show, Denver market, Friday morning.
@LM,
If the US government did not come and bail various financial institutions, including some really big GS counter parties, GS would still exist?
Would Goldman’s have had to give Buffet a sweetheart deal for a measly few billion if they were really that good?
Ballad Of A Thin Man Live 1966.
anibalnikov47
No. Softly. Quietly. No. Not even close.
As one who played (electro-mechanical) pinball against the Harvard B School boys in the B School eat shop for many years: No.
They are greedy and arrogant for wins. They never “roll” with the losing.
Maybe, years later, they grew up, learned something, but, nah, they were not worth (in my mind) the money they attracted as silly neurotic boys with newly minted Harvard degrees.
All the wrong people are attracted to Wall Street: the mentally ugly, insecure, most materialistic, self-centered…
We should pay Wall Streeters like priests, make the management of *my* money — the people’s money — a sacred responsibility. Instead the worst go there to scam the system for a couple of years with a “new product” with accompanying computer model. They sell for the commissions, never to actually help anyone.
Wall Street is the worst of us. It is all the idiocy of OWS — in expensive clothes and lots of walking around money.
But, no: they don’t deserve it. ….Lady in Red
Say I send 102,400 people a free 9 week trial of my email investment newsletter. In it I include the usual blah-blah-blah that you can get on blogs or TV, plus my investment tip. Half of my mailings have advice opposite to the other half. Then the next week I do the same with the successful half, and randomize my advice to the others. After 9 weeks 2,000 people think that I am a genius (assuming that they have read the newsletter). And several others think that I am pretty good. I could build on a reputation like that for a long time.
Are people at Goldman good? Yes. Are they lucky? Yes. Are they overpaid? Sure.
The question is not whether Goldman is better, but whether the economy needs its financial industry making bets like a gambler in a casino. Goldman gambled that AIG would cover its losses. And it bet wrong, that is, until its man on the inside, Goldman and bank lobbyist Timothy Geithner, arranged for the government to cover Goldman’s bets at public expense. Goldman and Geithner are arguments for a public banking system.
GS vacuums the big one. They cheat, they lie, they steal….and they’re emboldened, to boot.
Any dissenters, besides Desi Doing God’s work?
http://www.truth-out.org/occupy-colleges-now-students-new-public-intellectuals/1321891418
Published on Truthout (http://www.truth-out.org)
Occupy Colleges Now: Students as the New Public Intellectuals
Monday 21 November 2011
by: Henry A. Giroux, Truthout | News Analysis
(excerpt)
“The police violence that has taken place at the University of California campuses at Berkeley and Davis does more than border on pure thuggery; it also reveals a display of force that is as unnecessary as it is brutal, and it is impossible to justify. These young people are being beaten on their campuses for simply displaying the courage to protest a system that has robbed them of both a quality education and a viable future.
Finding our way to a more humane future demands a new politics, a new set of values, and a renewed sense of the fragile nature of democracy. In part, this means educating a new generation of intellectuals who not only defend higher education as a democratic public sphere, but also frame their own agency as intellectuals willing to connect their research, teaching, knowledge, and service with broader democratic concerns over equality, justice, and an alternative vision of what the university might be and what society could become.”
(Read it ALL)
http://www.truth-out.org/occupy-colleges-now-students-new-public-intellectuals/1321891418
Published on Truthout (http://www.truth-out.org)