BOOK REVIEW: 'Chasing Goldman Sachs'
Finally, a Book That Explains the Culture of Wall Street and How, Unless Culture Is Changed, We'll Have More Financial Shocks
Reviewed By David M. Kinchen
By a remarkable coincidence, I finished reading Suzanne McGee's "Chasing Goldman Sachs: How the Masters of the Universe Melted Down Wall Street...and Why They'll Take Us to the Brink Again" (Crown Business, 416 pages, $27.00) on the same day -- Thursday, June 15, 2010 -- that Congress passed a comprehensive Wall Street reform bill and sent it to President Barack Obama for his signature.
When I started reading McGee's book I thought that it would be yet another explanation of the 2008 meltdown that turned out to be the biggest shock to the financial system since the Wall Street crash of 1929 and the subsequent Great Depression.
First impressions were wrong: In her comprehensive and thoroughly researched tome, McGee provides a penetrating but relatively easy to understand (translation: no math: It's so math-free that even an English major [moi] can understand it! Of course, I've been a financial journalist for many decades and even worked as a business news editor on a daily newspaper.) look at the forces that transformed Wall Street from its traditional role as a capital-generating and economy-boosting engine into a behemoth operating with only its own short-term interests in mind and with reckless disregard for the broader financial system and those who relied on that system for their well being and prosperity.
What McGee doesn't do is give a blow-by-blow account of the meltdown a la former Treasury Secretary (and former Goldman Sachs CEO) Henry M. Paulson Jr. in his book "On The Brink" or whistle-blowing financial analyst Harry Markopolos in his engrossing account of his attempt to warn the Securities and Exchange Commission (SEC) about the Bernard Madoff Ponzi scheme in his true-life financial "thriller" "No One Would Listen." (I've read both books and recommend them.)
Primary among these influences on the "big swinging dicks" of Wall Street was “Goldman Sachs envy”: the self-delusion on the part of Richard Fuld of Lehman Brothers, Stanley O’Neal of Merrill Lynch, and other power brokers -- egged on by their shareholders -- that taking more risk would enable their companies to make even more money than Goldman Sachs. That hubris — and that narrow-minded focus on maximizing their short-term profits — led them to take extraordinary risks that they couldn’t manage and that later severely damaged, and in some cases destroyed, their businesses, wreaking havoc on the nation’s economy and millions of 401(k)s in the process.
By a largely partisan vote of 60-39, with only a few Republicans voting for it, the U.S. Senate's July 15 vote passed a sweeping bank regulation bill that will make major changes to the U.S. financial system. The legislation cracks down on banks and Wall Street in the hopes of avoiding another major financial meltdown. The Senate's vote came nearly two years after a financial crisis (caused in part by "Goldman Sachs Envy") knocked the U.S. economy to its knees, according to news accounts.
The bill has been Obama's top domestic priority after the passage of health care legislation, and in some ways, the bill is tougher than what he sought. I'm guessing that McGee -- judging by her book's subtitle -- isn't any more sanguine about the latest government effort at financial reform than I am.
The 2,300-page legislation that goes to the Oval Office for Obama's signature, among other things:
• Gives the government new powers to break up teetering companies which if allowed to fail would threaten the economy.
• Creates a new agency to guard consumers in their financial transactions.
• Shines a light into shadow financial markets that have escaped the oversight of regulators.
McGee discusses financial reform and its failures in her book, basically saying that unless reform addresses the Gordon Gekko "Greed Is Good" mantra, the guys of Wall Street -- and they're almost all guys -- will find ways around the regulators. She also notes that regulators at the SEC and other agencies -- thinking about their future working on Wall Street -- have largely failed to play hardball with Wall Street companies that could be their future employers.
One of toughest financial reform bills of the Great Depression, the Glass-Steagall Act of 1933, was more honored in the breach than the observance, she says. Glass-Steagall aimed to separate "boring" commercial and "risky" investment banking, and also created the Federal Deposit Insurance Corporation (FDIC), which was retained with the repeal of G-S in 1999 during the Clinton Administration. Glass-Steagall was replaced by the Gramm-Leach-Bliley Act -- also known as the Financial Services Modernization Act of 1999 -- which repealed the G-S prohibition of any one institution from acting as any combination of an investment bank, a commercial bank and an insurance company.
McGee compares and contrasts Wall Street's similarity to an electrical power grid, with capital, rather than electricity, flowing through it. Just as a power grid can be strained beyond its capacity, so too can a “financial grid” collapse if its functions are distorted, as happened with Wall Street as it became increasingly self-serving and motivated solely by short-term profits.
Through probing analysis, meticulous research, and dozens of interviews with the bankers, traders, research analysts, and investment managers who have been on the front lines of financial booms and busts, McGee provides a practical understanding of our financial “utility,” and how it touches everyone directly as an investor and indirectly through the power—capital—that makes the economy work.
Wall Street is as important to the economy and the overall functioning of our society as our electric and water utilities. But it doesn’t act that way. The financial system has been saved from destruction but as long as the mind-set of “chasing Goldman Sachs” lingers, it will not have been reformed, McGee says. As banking undergoes its biggest transformation since the 1929 crash and the Great Depression, McGee shows where it stands today and points to where it needs to go next, examining the future of those financial institutions supposedly “too big to fail.”
BREAKING NEWS: The Securities and Exchange Commission reached a $550 million settlement with Goldman Sachs Group Inc. that will resolve its lawsuit against the firm alleging that it misled investors in a subprime mortgage product, the agency announced Thursday, July 15, 2010.
Goldman Sachs agreed to pay $550 million to settle a civil fraud suit brought by the Securities and Exchange Commission, tackling a legal problem that had threatened to undermine the investment bank's client relationships.
The SEC sued Goldman in April, charging it with fraud in marketing of a complex financial product called Abacus 2007-AC1 that was based on mortgage-backed securities. The suit is the highest profile of a number of inquiries regulators are making into synthetic collateralized debt obligations.
In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman, headed by Lloyed Blankfein, also acknowledged that its marketing materials for the subprime product contained incomplete information, the SEC said, according to The Wall Street Journal.
Goldman denied any wrong doing in the SEC lawsuit but has been under pressure from shareholders to reach a settlement on the fraud lawsuit and other SEC probes.
About the author: Suzanne McGee is a contributing editor at Barron's. Previously, she was a staff writer at the The Wall Street Journal. A veteran reporter, she has written for Institutional Investor, the New York Post, Financial Times and Portfolio.com.
Publisher's website: www.crownbusiness.com