Today, Greg Smith, a Goldman Sachs employee in London, suddenly shot to fame, at least in the banking world. He is leaving Goldman because he thinks its environment is “toxic and destructive.” But instead of just leaving in silence he penned a resignation letter as an Op Ed piece for the New York Times, published today, on his last day at work. It might well have been the most read serious piece in the media today.
He’s uncomfortable with the bank’s business ethics: Goldman sees nothing wrong in selling junk and rubbish to its clients, making the clients lose while the bank makes money. A lot of it. In the infamous Abacus case, Goldman actually ended up paying $550m to settle claims – without admitting it did anything wrong – when it failed to disclose that the product sold was designed to fail. A favoured Goldman client was allowed to make money on it, with the bank. Everyone else was magnanimously allowed to lose on it. But this case and other similar haven’t taught Goldman’s managers any humility, according to Smith. “Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.”
Now, it’s normal in business that some lose, others gain. But, as Smith points out, it’s interesting if there is a pattern to it and if a bank thinks nothing of clients’ predictable losses. One of the striking thing about the Icelandic banks is to consider who lost and who profited. Or, in the Goldman thinking, who were the muppets?
There were quite a number of muppets among the clients of the Icelandic banks. There were for example plenty of ordinary people who trusted the banks with their savings and invested in the banks’ money market funds, not knowing that these funds were used to buy bonds and shares in failing holding companies. These clients didn’t know that the Icelandic banks ran their money market funds quite a bit differently from what is the acknowledged banking practice (even with Goldman). This is one of the many bad banking practices stories in the SIC report – a story the Special Prosecutor might one day show an interest in.
Then there are those who put some savings into shares in the banks – Kaupthing had some 33.000 shareholders. These people didn’t know that the banks were buying shares off some shareholders shortly before the collapse. These people were just allowed to lose the savings they put into the shares.
The most striking muppets were possibly the pension funds. They lost heavily because they could be led to manage their investments against the interest of the funds and their owners but in the interest of the banks and their largest shareholders. This is particularly clear from the fact that the funds invested in unlisted companies – and from the fact that the funds hedged their foreign assets (that in themselves hedge the funds’ domestic assets) with the banks. A report* from February on the pension funds concludes that after mid 2007 currency hedges turned very risky, the pension funds should have sought advice – and the banks should have warned the funds. But they didn’t. Losses from currency hedges are about 12-15% of the total losses – some have yet to be settled with the banks’ Winding-Up Boards.
It’s safe to conclude that much of the funds’ losses were incurred because the banks gave the pension funds (as others) wrong or misleading information. In a recent report (only in Icelandic) by an expert group, on behalf of VR, one of the biggest Icelandic pension funds, the experts conclude that VR “and other pension funds should consider suing those who possibly played a role in giving wrong information to shareholders, bondholders and others with an interest. Those who could possibly be sued are the managers of the banks and companies and their auditors. … It can be critcised that the pension funds haven’t taken the initiative here or shown any interest in doing so.”
The pension funds report shows close personal relationships between the banks and the funds though more work could have be done on that issue. The banks are no longer pullings strings – but perhaps personal relations and the wish to move on and away makes some people behave as if the strings, holding the muppets, were still in place.
*The English summary starts on p. 29. See here for an earlier Icelog on the report.
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