How the Masters of the Universe Melted Wall Street… And Why They’ll Take Us to the Brink Again
Crown Business, 416pp
Review by Christopher Silvester
This book is a cautionary tale. It is not primarily about Goldman Sachs but all those Goldman Sachs wannabes — which means most of the firms on Wall Street, according to Suzanne McGee, a contributing editor at Barron’s who is worried that Wall Street hasn’t learned the lessons of the financial crisis. ‘The quest is already under way for the “new new product thing”, the next product or strategy that will help firms such as Goldman Sachs and its rivals earn massive profits in the short run while creating new risks for the financial system… The financial system has been saved from destruction, but as long as the mind-set of “chasing Goldman Sachs” lingers, it hasn’t been reformed.’ We should be very, very afraid.
McGee believes that Wall Street’s primary purpose has always been to serve Main Street, that it was a ‘public utility’ for providing the liquidity to investors that fuelled American and global business enterprise from the late 18th century onwards. Likening what she calls the ‘money grid’ to the electricity grid, she observes that when it failed it almost led to the equivalent of a universal blackout. Wall Street’s regulators were found to be ‘asleep at the switch’.
Fixated on generating short-term profits for shareholders, banks such as Morgan Stanley and Citigroup followed Goldman Sachs down the road of proprietary trading. ‘You’d think that the bank’s directors and top managers would see that their fiduciary duty would stretch to include the well-being of the financial system as a whole,’ one anonymous Citigroup executive tells the author, ‘since without a Wall Street, who cares who’s on top of the heap? But then, where is the evidence that that is happening?’
Regulation is one thing — and McGee welcomes the Volcker Rule, whereby banks with federally insured deposits will be prohibited from engaging in proprietary trading or owning hedge funds and private equity divisions — but what is needed more than anything else is a change in Wall Street’s mind-set.
Instead of chasing Goldman’s rate of return or outsized bonus pool, McGee argues, its rivals should seek to emulate its capacity for strategic planning. She cites the decision in 2009 by one investment boutique, Greenhill & Co, to spin off its proprietary private-equity investment division, Greenhill Capital Partners. ‘At least one firm, it seemed, had decided that trying to replicate Goldman Sachs by becoming bigger and more diversified and doing more proprietary deals wasn’t the only path to success.’
Again in 2009, Citadel Investment Group, the Chicago-based hedge-fund group, announced its plan to create a new investment bank that would serve as an intermediary, not as a principal, preferring to earn fees rather than generate a return on the equity portion of its balance sheet. ‘Not everyone gets it,’ explains one of the new investment bank’s founders, Todd Kaplan, who has since retired. ‘When guys I talked to about a job asked me what our ROE target was, I had to explain we’re not going to be managing the business that way.’ Kaplan explained their objective as being ‘to win, and winning means being best client service provider’.
Peter Solomon, an ex-Lehman executive who runs his own boutique investment bank, Peter J Solomon & Co, has suggested that Wall Street should look at curbing destructive risk-taking separating casino banks from retail banks (as has been suggested by the UK’s coalition) and also at the possibility of reviving private partnerships: ‘Our firm is a throwback to the era of the early 1960s when investment banks functioned as agents and fiduciaries advising their corporate clients. We do not act as principals or take proprietary positions. We do not trade and we do not lend.’
Such initiatives are too few, McGee believes — at least, thus far. Of all the books that have been written about the global financial crisis, Chasing Goldman Sachs seems to have given the most thought to how such a crisis might be avoided in the future, and yet its author is not confident that Wall Street has got the message.
‘Something needs to provide Wall Street with a wake-up call and remind it that shocks like those of 1998 and 2008 will not be aberrant events as long as the risk-taking culture remains so central,’ says Ralph Schlosstein, CEO of boutique investment bank Evercore. McGee’s lithely argued book should be embraced as just such a wake-up call.