For the love of Goldman...

This week´s edition of the Sunday Times has a supplement dedicated to understanding the particularly polarising topic that is Goldman Sachs. The Times Online website has one of the articles from the supplement at the top of its "most read" list - an article in which the Goldman Sachs CEO Lloyd Blankfein apparently uttered the immortal line "We do God´s work." Boris Johnson recently suggested that Goldman suffered from a form of collective Asperger´s syndrome - which at the time seemed a bit harsh, but on reading this there does seem to be some truth to the comment, and by the looks of things it starts at the top of the organisation. There´s nothing surprising about this article being the "most read" - this particular phrase is likely to take the venomous anger at Goldman to new levels.

Most of this venom is poorly directed. While I´ve written before about the grievances I have with some of what Goldman does, by-and-large I have a sincere respect for this institution. My past criticisms are related to specific representations about events – Goldman would not have been in existence had they not received government money as part of the AIG bailout for example, but the way Goldman represents this is as though it was an insignificant event, and that they did not need this money. That being said, they basically outperform their competition in what is a poorly regulated and often less than entirely moral industry, and I think that it´s sad if success is a reason to object to a person or institution. In the UK people should be considerably more angry about the plight of RBS, which is now 84% owned by the taxpayer, than Goldman Sachs.

If Goldman does eventually pay out in 2009 bonuses to its London-based employees what it indicated last week then HM Revenue & Customs stands to pick up £2 billion of it in income and corporation taxes. That is £2 billion that will not be needed from the rest of us; and given this country’s disastrous shortfall between tax revenues and public expenditure all help should be duly appreciated. This is not to mention the significant trickle-down effect of these bonus funds - many London based jobs, from chefs in restaurants to salespeople in retail stores will see the benefit in increased consumer spending as a result of this new discretionary income. It´s a sad fact that this country pays out more in social security benefits than it receives in income taxes, and yet lambasting the contributors seems to be higher on the agenda than addressing the receivers.

My chief grievance with Goldman is that as the bastion of the industry, with the best and brightest, it is they who should be leading the moral uprising that is required to get the world financial system back on track, as that should be in their own long term self interest. In reality what I believe happens is that they try to kid the outside world that they are something that they are not.

Specifically in relation to the article in the Sunday Times my issue is with the notion that Lloyd Blankfein has of his own organisation. While I´m sure his comments were media orientated, there was a clear insensitivity to the comments. When Blankfein claims to be "doing God´s work" he clarifies; "We´re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This is turn, allows people to have jobs that create more growth and more wealth. It´s a virtuous cycle. We have a social purpose."

There once was a time when there was a high correlation between earnings of banks, and the earnings of companies in "the real economy". When real businesses making cars or widgets or iPhones did well then the banks that facilitated their endeavour did well too. Similarly when those businesses struggled, so did their bankers. In theory there never should have been a time when the banks were doing well, while the real businesses of their clients were struggling. Blankfein´s notion of doing social good in that context I believe to be absolutely correct. My personal admiration is for a form of sustainable capitalism, engendered by the “social purpose” that Blankfein describes.

The real problem with his comments are the fact that they simply don´t represent reality. Goldman will have coined it this year, against a backdrop that isn´t particularly good in the real economy. While Goldman participates in the economy in the way that Blankfein speaks of, they also use their access to these companies and governments that are their clients, and the information that they gather from them in a way that often is less than socially optimal. Goldman is making money despite their clients situation – helping undercapitalized companies, and governments raise funds and then trading “the other side” of those markets. They are the great controllers of information flow.

Goldman has benefited from the upside of all the recent booms – dot.com, commodities, housing and while they are excellent at managing risk they play their part in inflating the bubbles in the first place – handling share and debt offerings for big clients, trading these securities and then pulling back.

The global economic context isn´t particularly good – unemployment in the US running at all time highs, budget deficits in countries like the UK, US, Spain and Ireland are at staggering levels, and a long term perspective that all this will add up to tax rises or inflation or both. The world´s middle classes will likely pay for this economic crisis as a consequence. These are the sort of people who rely on their monthly wages to pay their mortgages, their gas bills and their children´s education – the sort of “real economy” workers that Blankfein claims to be helping. They will be the ones who are hit by tax increases, and won´t be protected from inflation by a “diversified portfolio”, in the way that Blankfein´s well financially educated “social workers” will be.

Over the long term there are serious issues to address as to how the “real economy” will get itself on track. Instead of manipulating the current environment to its own short term advantage, Goldman if it truly is the great organization that it believes itself to be, should be helping to address the fundamental issues that befall the world economy.

Blankfein is conscious of this fact and what is disappointing is that he is trying to represent Goldman as something other than what it is. Good for him and his disciples if they can succeed in the money machine that is Goldman Sachs, but don´t patronize the rest of the real world by suggesting that the role that they are playing is one built around a social conscience.