It has become popular sport to gang up on Goldman Sachs Group Inc. this week, ever since a high-level employee wrote a scathing resignation letter in the New York Times, lambasting the bank for, among other things, a decline in its moral fiber. The letter seemed to confirm some of the suspicions among critics of Goldman Sachs – mostly, that it is putting its own interests well above those of its clients – and that has sent investors running.
On Wednesday, the shares slumped 3.4 per cent, knocking billions from its market capitalization. It is rebounding on Thursday, up 2.4 per cent in late morning trading. But is there really much to criticize here? Barry Ritholtz makes some interesting points, suggesting that Goldman Sachs isn't so unusual, and the fallout from this latest critical note might not have much of an effect in the longer term. Here are his thoughts:
• Publicly Traded Banks: When firms shifted from Partnerships to publicly traded banks, their priorities changed.
• Profits First: Meeting quarterly profit estimates became job 1; everything else, including the corporate culture, was secondary.
• Not Just Goldman: GS may have lost $3-billion in cap yesterday, but I doubt they will lose many clients. Where are they going to go, to the choirboys who work at Morgan Stanley, or to the philanthropic organization known as Deutsche Bank?
• Derivatives are Opaque: The issue with complex products is lack of transparency. Derivative fees are opaque, the products are complex, and muppets clients do not understand how much margin is built in.
• Counter-Party vs Fiduciary: The complexity of these products often leads to clients relying on their salesman. They shouldn't — they are not your adviser, they are your counterparty.
Meanwhile, for another view, be sure to check out my colleague Boyd Erman's column in today's Globe and Mail.