Q&A: Suzanne McGee on Chasing Goldman Sachs

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In the hierarchy of Wall Street, Goldman Sachs has become the top dog: the cool, smart kid who finance geeks want to be. And, although Goldman’s top brass gets dragged down to Washington, D.C., every so often—Gary D. Cohn, president and chief operating officer, will testify about derivatives trades before the Financial Crisis Inquiry Commission on Wednesday, for instance—the bank still reigns, at least financially. In the first quarter of 2010, Goldman’s earnings went up 91 percent from the first quarter of 2009.

But in their rush to emulate Goldman’s success, many banks have bankrupted themselves. That’s the premise of Suzanne McGee’s new book, Chasing Goldman Sachs, in which she argues that “Goldman Sachs envy” was at the heart of what drove Lehman Brothers and Merrill Lynch to make the risky bets that ultimately cost them everything. McGee, a contributing editor at Barron’s, spoke with NEWSWEEK’s Matthew Philips about Goldman’s reputation, its financial bets, and the possible successor to Lloyd Blankfein, the bank’s chief executive. Excerpts:

How did Goldman Sachs become such the gold standard of finance?
They forged a deep, lasting relationship with their clients. There used to be a time when they would talk to small and midcap companies. They were incredibly loyal to their clients. They defined their best people not by who made the most money, but by who had the highest client service. And they did not represent hostile takeovers.

How did Goldman turn into a firm that’s seen largely as a hedge fund that bets against its clients?
Goldman was initially slow to enter the hedge-fund business. But by the 1990s they’d caught up, and there’s a sense that they began treating themselves better then their clients. The push to go public obviously changed things, as traders began taking a bigger role in running the firm. Lloyd Blankfein is just the latest person to have come out of the trading ranks and risen to the top. All that reflects is the increased importance of capital over labor, and that you can’t make a high enough profit margin off the core businesses. You can only make the kind of returns investors demand if you’re trading very aggressively.

And sometimes that means trading against your clients?
Sometimes, yes.

You trace a lot of what’s happened to investment banking back to some changes that happened in the 1970s.
The decision in 1975 to demolish fixed commissions for stock trading was key. Till then, it had been a very stable source of revenue for investment banks. At the time, Goldman totally miscalculated and said that commissions might fall 10 percent. But they plunged 50 percent overnight. In trying to replicate those returns, banks started getting innovative and pushing out all these new investment products.

Most of these products—CDOs, credit default swaps—were useful at one time?
They had very benign origins. But they got pushed beyond the point of being useful to clients, pushed by this constant pressure to find new ways to make money, to the point where they became these commoditized products that caused a tremendous amount of damage.

How did going public change the nature of the big investment banks?
In the second half of the 1970s, the firms at the heart of the financial grid were transformed from partnerships into publicly held companies. By going public, they opened themselves up to much larger amounts of capital, but they also essentially shifted the risk from themselves to their public shareholders.

Which banks would you say had the most Goldman envy? Which pursued it most aggressively?
Merrill Lynch, for sure. Former CEO Stan O’Neal explicitly set out to beat Goldman. The saying there was to not go near him the day Goldman reported its earnings. At Citigroup, Bob Rubin actually had people put together a report on how Citi could generate more Goldman-like returns. They came back and basically said they needed high risk, and high talent. And then at UBS they commissioned a similar study to increase market share and return on equity. Their recommendations were to dial up risk.

How do you think history will look back on this period of time of investment banking and the role Goldman played in our society?
I’d like to think we’ll look back and say that was a period when everything got completely out of whack, when the normal greed that is essential to capitalism got taken to absurd extremes. As for Goldman, we’ll need more than just one lawsuit for them to be remembered as this evil institution. That’s the Wall Street equivalent of the grassy knoll.

Your timing is perfect. Where were you when you first heard about the SEC lawsuit?
I was literally delivering the final edits to my publisher. I was standing in the lobby of the Random House building at Broadway and 56th Street when someone ran over to me and asked if I’d heard that the SEC had just sued Goldman. I nearly dropped my package of edits all over the floor.

Do you think Lloyd Blankfein will survive this? Will he be Goldman’s CEO in three years?
I would be surprised if he’s there in three years. I don’t think he can leave until the suit is settled. I think he’ll wait for a respectable and decent interval to step down.

The firm is essentially run by traders. Is this as a chance for Goldman to realign itself with its client-based past?
No, it’s not what the firm is these days. It’s been built as a trader’s firm that generates as much profit as possible, and I don’t think you can really put that genie back in the bottle.

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