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The Cost of Doing Business

Posted by Larry Doyle on July 28, 2010 7:15 AM |

It takes money to make money.

Simple business principle, correct? A basic, fundamental business tenet, right?

Well if the money it ‘takes’ is used to pay inordinate fines and penalties resulting from management’s willingness to jeopardize reputation and principle in pursuit of profit, what does that say about the business enterprise itself?

Will the $550 million fine recently imposed on Goldman Sachs fundamentally change the manner in which Goldman engages clients and operates its business? I have chuckled more than a few times upon reading that Goldman’s mortgage employees involved in the structuring, trading, and sales of the securities at the center of this entire debacle will have to undergo continuing education type classes. These classes are truly nothing more than a ‘check the box’ perfunctory exercise. Honestly, I would love to be a fly on the wall during these classes as I am sure some of the material covered and accompanying discussions would provide real comedic fodder.

The Financial Times addresses this topic in writing Slapped Wrist and Back to Business for Goldman:

…the penalty levied on Goldman, equivalent to a couple of weeks’ profits, is unlikely to have a deterrent effect on the rest of the financial industry.

Robert Khuzami, the SEC’s enforcement chief, called it “a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price”. But the reality is that most banks would gladly give up less than a month’s profits to get rid of the regulators. As one banker told me last week: “It’s just the cost of doing business.”

After the most devastating crisis in generations, taxpayers and investors had the right to expect more than this business-as-usual kind of justice.

The cost of doing business? That is how the industry views this fine on Goldman Sachs? If so, I guess I could have entitled this commentary “If you’re not cheating, then you’re not really trying.”

Goldman Sachs continues to have a serious issue with its reputation. I highlighted this very point on CNBC last March (video clip here) and I reiterate it again today.

LD

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  • Lou

    Perhaps regulators should compel the individual employees and managers to take some personal liability. Think behaviors may change then??

  • coe

    LD – I happen to believe that these problems were surely the inevitable result of a capital markets system that lost its moral compass (and let’s not pretend the travesty was isolated to Wall St)…the old lions of Wall St surely caught the comet – betting public ownership capital on negatively convex bets (i.e. if it worked, they were swimmingly rewarded, if it didn’t, they still were overpaid as the shareholders took the brunt of the hit), became rock stars and multi multi-millionaires, and the next class looked at the behavior and the rewards and said they wanted some of the same pixie dust…leverage increased, product complexities did as well – and until recently, the bonus trough was overflowing…truth is, I suspect many of the newer breed didn’t come up via the school of hard knocks (back office training/years of toiling in relative obscurity learning products and developing personal relationships with key clients) as did their predecessors and mentors – but rather vaulted right from the targeted high end b-schools to valuable seats on trading and sales desks after little guidance and shallow apprenticeships…I also suspect they had very little market history or risk management training, and dare I say, they probably didn’t fully know all the ins and outs of the structures themselves or the clients or the true meaning of the word suitability, or for that matter, the securities laws that were supposed to govern their conduct – but, they did know for sure that there was big money in the zero sum game – they win as long as somebody loses…shameful ethics and pathetic mediocrity on the supervisory front also contributed to the free-for-all…the GS “solution” is less than a slap on the wrist…the “training sessions” will certainly be a farce as you accurately suggest and the fine, though seemingly large, is just a rounding error in the grand scheme of things…the game has always been rigged and remains rigged, despite the ill advised and forlorn attempts of the pinheads in the current administration to “fix” things…trust me, no sooner will the regulators struggle to finish the rule making process dictated by FinReg, than will all the firms on the street find holes and cracks to arbitrage their ineffectiveness…”stark lesson” – please!

    everybody needs a healthy dose of “do the right thing” …sadly, I’m worried we have drifted too far afield as a country to get back to true…too bad…government, industry, law, education, social services, finance, culture, and media all could use some transparency and responsibility in these troubled times…maybe we are wrong – maybe GS will transform itself into a paragon of virtue – sure – and maybe BP will step up for their criminal behavior in poisoning the Gulf!

  • LD

    Coe,

    Your “senseoncentsness” is truly awesome!! I wholeheartedly agree with the change in the Wall Street business models filled with the ‘quants’ who view the industry as a casino game to be beaten as opposed to developing real, lasting, and vibrant relationships to be nurtured.

    Well done, my man!!

  • fred

    LD, Great video clip from Fox Business on Ex ACA exec: we were misinformed by GS. If you’ve already posted it, I appologize.

    My take from the video: if nothng else GS violated a “code of honor” on Wall Street, by not telling the other side what they needed to know to do the deal. The rammifications will probably be felt by GS for a long time as firms take their business elsewhere.

    Success on Wallstreet is all about relationships, and relationships are built on trust.

    • LD

      BINGO!!

  • Hurt by the system

    The price of doing business. How wrong is that. Why is Finra, coming down so hard on the small firms. Look at companies like J P Morgan. They have been around for a long time. They have been playing with all the same products Bear , did B of A all the other big firms but Finra and the SEC, will not go after them. We have 3 big firms on the street that clear for all the top hedge funds. Goldman J. P. Morgan Bear, and Morgan Stanley . Finra , and SEC , only wants to one company. J.P Morgan. Look at J P Morgan prime broker clearing business.

    • LD

      Hurt,

      Well, you have found the right site because I have written extensively about FINRA since January 2009.

      You may be busy, but here is the link to all of my work on FINRA. There will be some overlap, but here is all of my work on Mary Schapiro.

      Share this with your friends and colleagues. If there are other topics you care to review, use the search window in the upper right corner of every page here at Sense on Cents.






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