Tuesday, June 06, 2006

The Goldman Hegemon? 

John Carney at Dealbreaker.com asks how long before Goldman Sachs is considered the "new Skull and Bones."

But not long ago conspiracy theorists were obsessed with the fact that so many of our leaders were involved with Yale's famous unsecret secret society, Skull & Bones. How long until we start getting Goldman conspiracy theories?

He links to a June 4th editorial in the LA Times entitled "Goldman Sachs Rules the World."

President Bush's nomination last week of Henry M. Paulson Jr., Goldman Sachs' chairman and chief executive, to replace John W. Snow at the Treasury Department has refocused attention on what has become, quite simply, the most influential company on the planet.

Goldman Sachs alums now run the White House bureaucracy (in new Chief of Staff Joshua B. Bolten), , the state of New Jersey (Gov. Jon Corzine) and the New York Stock Exchange (Chief Executive John Thain). Not since John D. Rockefeller's Standard Oil — and maybe not even then — has one firm exerted such muscle over national economic and fiscal policy.

Surprisingly, the piece attempts to define the cultural aspects that have helped the firm achieve such excellence without the anti-business bias one might expect from such a piece.

No, the company is running the world these days because it perfectly hits all the buttons of our intertwined age. First, its outlook is fundamentally global. Analysts, bankers and traders at Goldman Sachs work across industry lines — like telecoms or retailing — regardless of where their companies are based. Soon, non-U.S. revenues at the firm will be bigger than those produced at home.

Paulson has boasted of visiting China more than 70 times — not a bad resume at a time when China owns more U.S. Treasury bonds than Americans do. With most analysts expecting the dollar to sharply decline soon, it is going to take someone with a knack for stroking our foreign partners to keep the U.S. economy from hitting a wall.

Second, Goldman Sachs people are multilateralists. Joining it is like hooking up with a Wall Street cult, in that the group is more important than any individual. At other Wall Street firms, individual traders and executives can become rock stars. At Goldman Sachs, such celebrity is frowned on. For anyone who doubts that, count the number of young bankers with blue Goldman Sachs gym bags slung over their shoulders in lower Manhattan, a show of team spirit rarely seen in corporate America.

Yesterday, however, Bloomberg columnist Matthew Lynn wrote a piece with slightly less favorable overtones. He begins by noting additional Golman alumni who have been appointed to positions of huge responsibility.

In January, Goldman Sachs Managing Director Mario Draghi became the new governor of the Bank of Italy. In Britain, David Walton, who was chief European economist for Goldman in London, last year joined the Bank of England's Monetary Policy Committee, which sets U.K. interest rates. In Canada, Mark Carney, formerly managing director in Goldman's Toronto office, is now a senior official in that country's Finance Ministry.

It's not just economic jobs, either. Gavyn Davies went from Goldman to become chairman of the British Broadcasting Corp. for a few years. When someone was needed to run London's preparations for the 2012 Olympics, where did they turn? Goldman of course. Paul Deighton, a chief operating officer at the securities firm, was appointed in December. When politicians need a job filled, it seems they just shout at their secretaries: ``Get me the Goldman phone directory.''

Then he gets down to his gripes, summarized as follows:

First, it is starting to look like a bandwagon. Politicians will appoint a Goldman employee because they know the decision will get them great press. Some of the firm's success will rub off on them. Yet just as International Business Machines Corp. wasn't always the right choice for your technology department, Goldman isn't necessarily the best source of candidates for a government job. The risk is that better talent is overlooked.

Next, Goldman Sachs managers are likely to have a world view dominated by trends in financial markets. In the last decade, that might well have been right. The economy was grappling with globalization and market liberalization. Yet the next 10 years may be a period in which asset- and commodity-price inflation are the main focus. That would require policy makers who weren't groomed on a trading floor -- and you won't find them at Goldman.

Third, the concentration of power is starting to look unhealthy. A clan of former senior Goldman staffers is now in a position to help steer the dollar, the euro and the pound. There needn't be anything sinister about that -- though financial conspiracy theorists could have a field day with some of the connections. The issue is that they are likely to have a uniform set of preconceptions and prejudices. In any area of endeavor, it is healthy to have a wide diversity of views. Global monetary policy is no exception.

Lastly, there may be the potential for conflicts of interest. For example, policy makers might need to think whether oil speculation has to be brought under control. And Goldman is a participant in that trade. Would a former Goldman manager hammer one of his old firm's most profitable lines of business? And would they form an objective view on whether hedge and buyout funds are amassing too much influence? Maybe not.

I'm no expert in these things, but it seems to me that Mr. Lynn may be imagining a level of potential cronyism among Goldman alumni that is simply unrealistic in a firm of Goldman's size and scope. I don't believe Goldman Sachs is a club from which people emerge indoctrinated in some monolithic view of the world or even the markets. As co-bloggers have discussed a bit recently, is it realistic to expect Hank Paulson to adopt the policy positions of Robert Rubin? How about John Corzine? I suspect not.

What Goldman does better than most other firms in any industry, in any country, is find and develop exceptional talent, and I think this goes farther than anything else towards explaining the success of its progeny. (Of course it doesn't hurt that many of them emerge very, very rich).

Naturally I eagerly await the comments of our resident Goldman alum.


By Blogger Pax Federatica, at Tue Jun 06, 10:11:00 AM:

I also detect a whiff of veiled anti-Semitism in this idea. Even if that's not the intent, a headline like "Goldman Sachs Rules the World" ("Goldman" is a Jewish surname) is unfortunate to say the least.  

By Blogger Cardinalpark, at Tue Jun 06, 12:18:00 PM:

Throughout the history of nations, financiers have played an important role in national governance and economic policy. Earlier in this century, JP Morgan played such a role in the US. Before that it was Salmon Chase and Alexander Hamilton. During the Renaissance, the Medici family was critical. You've had Lazards and Rothschilds. You've had Mediobanca. You've had the Junkers. Today, you have Goldman.

Goldman has become the preeminent wholesale financial institution in the US, and arguably the world. It has also, and this is unusual, produced a cadre of extremely well-trained financial managers. Historically, the leading financiers were individuals. Goldman is about teams, and the talent goes deep, not just at the top.

It is entirely natural that when policymakers and politicians look for and need experienced, bright, hard working, high achieving financial people, they will turn to Goldman alumni. And when you bring one, inevitably, you'll bring many, since the top guys will recruit their employees to follow them.

That, however, suggests a thought monolith which doesn't exist. Paulson and Corzine literally did not speak with one another in the waning period of their tenure as co CEOs. They are on entirely different ends of the political spectrum. So were Steven Friedman and Bob Rubin (though they were collegial, as far as I kkow).

Goldman folks represent a wide swath of political views. There will be few extremists. No communists. They self select away from Wall Street:) (unless they are abject hypocrites, of course). They tend toward the practical and achievable. All Goldman employees are ground in a set of principles which are nearly biblical in import, starting with honesty in dealings.

It should do the country no harm to have good talent coming from Wall Street. Journalists may not like it of course, but Treasury Secretary is another name for the country's head currency trader. Wall Street types tend to get that better than Main Street CEO types, though not always. The Treasury/currency guy is the analog to the Fed Chief, or the country's head bond trader.

Over time, other financial institutions do and will attract and produce talent which in turn will migrate to Washington to aid in economic policy management. Robert Altman had Lehman training. Pete Peterson was Lehman CEO.

This administration frankly too long turned away from Wall Street advice, preferring former CEOs of industrial companies (O'Neill was CEO of ALCOA, Snow was CEO of Conrail) to Wall Street folks. Undoubtedly this derived from the experience of the Bush family as industrialists rather than financiers. It is probably not an accident that Rumsfeld and Cheney also are former industrial CEOs.

Is there potential for mischief? Well yes, of course. Managers and executors of policy are always ripe targets for mischief. A Goldman economist was sentenced to prison a couple of years ago for trading on advance Fed policy information. I happen to think there is less potential for mischief, other things being equal, with these types of people. But there is always risk of mishief. It is asinine to assert there is more risk simply because there are a bunch of Goldman people going to Washington. Speculation: Goldman people have probably on average avoided legal and regulatory sanction due to better oversight, training and behavior than every other Wall Street firm. There is simply no reason to believe the Goldman "network" poses a threat or risk to the integrity of our country's financial management. On the contrary, the talent which has served Goldman's partners and shareholders so well as a firm is likely to benefit the nation even more.

As to the antiSemitism canard, certainly embittered losers like Pat Buchanon do bring that up a bit, but even they recognize that neither Corzine or Paulson, the two most recent CEOs of the Firm, are Jewish. And they are ironically both midwesterners, from Illinois.  

By Anonymous Anonymous, at Thu Jun 08, 12:27:00 AM:

Well, AFAIC, as long as Goldman Sachs don't hire South African mad scientists to brainwash soldiers into becoming fake war hearos, vice presidential candidates, or assasins, no one whould have *any* problem with them!  

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