P4Capital is beginning a series of Podcasts and interviews featuring our executive team, who will be discussing pressing concerns for the Canadian financial industry.
Hello everyone and good morning. Welcome to another edition of the P4Capital round table discussions. I’m your host Amanda, and I’m sitting here with our executive team once again. We meet every week to discuss pressing concerns for the Capital industry in Toronto and beyond. Today’s topic – Goldman Sachs and the importance of reputation.
Jim: My name is Jim Carlson, I’m a partner in the firm and have been interested in working the Capital Market scene for the last 30 years
Archana: Hi, my name is Archana Ravinder. I’m an Account Manager with P4Capital.
Jeremy: Hi Jeremy Paczuski here, Client Executive with P4Capital
Shaheerah: My name is Shaheerah Kayani, I’m an Associate Recruiter with P4Capita
Jim: Today’s topic about Goldman Sachs is literally a discussion on, is a financial institution’s reputation it’s number one asset? And Archana, Jeremy, Sharheerah and myself will discuss, and possibly debate that subject in the following moments
Archana: The recent move by Goldman Sachs where it banned employees top trading, the company chief actually went on air to say that it’s partly an effort to improve the banks image, and just reiterating the point that Jim just talked about. So yes, the banks image with their clients and the public is of paramount importance to them so, the recent move to ban employees top trading is regarded as a step towards that.
Shaheerah: So the new policy will help Goldman Sachs to prevent any, conflicts of interests like how they had in the past. For example, many incidents that tarnished their reputation. Number one when they had the controversy of Kinder Morgan acquiring El Paso. And then number two when Goldman Sachs when actually sold mortgage based securities to clients in 2010, when the housing market crash was happening. And then thirdly, there was Greg Smith who was the former sales man at Goldman Sachs, and he resigned in March 2012. He actually publicly claimed that the company’s environment was very toxic and destructive and then he actually went on to write a book where he wrote ‘ Why I left Goldman Sachs. ‘ Finally, there was also an article published in 2013, a Money Morning article that stated a few reasons to actually doubt the Goldman Sachs conviction buy list. The article stated that the stocks that are dropped from the list, some of them actually end up doing well and out performing the market, and as well some stocks that are doing bad will actually remain on the list for quite some time until they’re finally dropped. This may suggest that maybe Goldman Sachs doesn’t always have the clients best interest in mind.
Jeremy: I think the catalyst for this rule as Shaheerah mentioned, was the Kinder Morgan deal in which Goldman Sachs was advising El Paso, the Energy pipeline company that bought Kinder Morgan for 2.1 billion in 2011. It was later revealed that a Goldman Banker who was working on the deal had a 340 000 dollar stake in Kinder Morgan. There was later a lawsuit that was brought forward by El Paso that was settled for 20 million dollars, I think.
Jim: Essentially Goldman Sachs is a broker. It is the preeminent broker in the world for investment banking and its alumni head to central banks, again throughout the globe. So when we look at a hit of reputation that Shaheerah and Archana were mentioning, and Jeremy further discussed we turn ourselves back, in times of history, back to the 30’s and the collapse of multiple financial institutions, and essentially the collapse of the dirty thirties as it was known, was a collapse of reputation. People no longer trusted the banks to put their money in, people no longer trusted financial institutions to do business dealing such as buying of stocks. So I think that the problem is quite severe, Goldman Sachs would not have taken this unprecedented action if they didn’t believe it was that severe, and the confidence of the markets is buy and large everything in trading.
Jeremy: I think this decision by Goldman Sachs can be seen as an extension of the Volcker rule, part of the Dodd frank regulation, which is a ban on propriety trading by investment banks. Rather a separation of trading and banking entities.
Archana: There’s always been a belief in the market that there is this underlying nexus between the Feds that actually suppose to regulate the big banks, and the big financial institutions themselves. What came to light in the industry followers are in fact sort of pointing that the recent move by Goldman Sachs actually comes on close heels to a revealing report by one of the Wall Street lawyers that was actually engaged by the Feds, and she was assigned to the Goldman Sachs account. What came to light was about 46 hours of secret recordings that she did where she found the Feds essentially, very meek and sort of succumbing to what the banks had to say, rather than taking a stand. So she went public with her report, and so the industry followers are sort of saying that this move by Goldman Sachs follows that.
Jim: With that said, it then puts further spotlight on other investment bankers as well too. We at P4Captial see the speed, and to borrow Archana’s words, the nexus of speed, and so Goldman Sachs cauterized their reputation wound instantiously. Are others aware of why they did it and how quickly they reacted to what was kind of boiling in the pot? I’m not sure, and this is where we look at the engineers in the technology world and say they can be both helpful or harmful depending on which way the organizations moving at the time.
Jeremy: I think it will be interesting to see if other banks replicate what Goldman Sachs is doing. Goldman Sachs definitely fashions themselves as a market leader and I think they are the preeminent name in banking. Most people, whether they’re working on Bay street or Main street have heard of Goldman Sachs at this point. Probably it was something bad back int he 2008 crisis that got them on most people’s radar. But, they do have a long standing reputation, probably about 150 years with the business. Definitely a gold star name in investment banking.
Archana: The 2008 meltdown definitely has the market sort of closely following these investment banks. And, like my colleges here alluded to the fact that banks reputation is first and foremost. So yes, I have a feeling that a lot of the other players are going to follow suit. But only time will tell.
Jim: And I’ll bring it back again to venerable institution as Goldman, as Jeremy alluded to 150 years prominence in the worlds finances. What place does social media have in destroying reputation? If the social media coordinators don’t control the message, and allow this kind of bad dealing as its perceived to be on the market place. As recently as two to three weeks ago we saw a sports industry that dominates the North American headlines fall from a very lofty perch, that being the NFL because of reputation, or misbehaviour or bad behaviour of some of its employees. So the question kind of jumps off the table at you, why can it affect the NFL and not affect financial institutions. Our take, or at least my take is, it can just as easily
Shaheerah: So in the past Goldman Sachs did not actually have a company wide policy on how they would deal with conflicts of interest. My question is, do the other banks, such as Citigroup Morgan Stanley, do they actually have a company wide policy on how they’re going to deal with conflicts?
Jim: I think that is THE relevant question. Do other financial institutions in the top 50 top 100 of the world actually have a policy like that. Because trust, and you can see that on the back of any paper note the word trust, because that’s really the only value that paper has, is in play now. So Shaheerah asked, can reputations fail at other financial institutions. Personal take, is yes they can. And everyone needs to be aware of this now and going forward. Especially with the speed that we talked about, of the digital world. The analogies that were drawn to Ray Rice and others that are in the current events headlines. So yes, very much so – they should have a policy in place today.
Jeremy: Since Jim mentions the NFL, I have to bring up Michael Lewis quote. He’s the author of Big Short and Flash Boys, who calls the secret recordings Segarra made of her interactions of colleges the Ray Rice Video of the financial sector
That was the P4Capital round table discussion. P4Capital, helping you and your company reach digital velocity quickly. Want to know more, check out our website at www.planet4it.com. Thanks and see you next time.