Goldman Sachs is in the news again [April 2010] after the US Securities and Exchange Commission (SEC) charged the bank with fraudulently misleading investors. The UK and German governments want the bank to be investigated by their own regulatory arms
It used to be that banking was a relatively simple business not even requiring a degree to enter the profession, let alone an MBA or a PhD in financial economic modelling. For years banks made their profits from the “spread” – the difference between interest income, typically from loans, offset by interest expense on savers’ deposits. This led to the old joke about the 6, 9, 3 rule of banking: “If you can borrow money at 6%, loan it out at 9% then you can be on the golf course by 3 pm!” The Loan Officers in banks were kings, and became the branch managers and even managing directors.
But over the last 25 years, banking has experienced seismic changes, whose impact was not always initially apparent in the industry and society as a whole. The vast majority of profits for major banks are no longer the “spread” but increasingly fee-based income (insurance, mortgages, pensions), increasingly own-account trading (Nick Leeson’s foreign exchange trading for Baring Brothers in Singapore in the 1990s), complex financial packages from Wall Street/London asset bundlers/sellers, and the relentless reducing of bank’s costs (bricks and mortar, people, back office clerks).
The traditional “plug figure” in banks’ annual accounts has always been “provisions” for bad debts. So how has this fared? Such an accounting provision was always no more that an estimate and open to serious manipulation to improve the bottom line. How can you really know which companies, and for how much, will default over the next 20 years?
These “provisions” have now escalated from manageable company debt risk to an overwhelming combination of portfolio risk, trading risk, sovereign risk and even personal risk (lending to the man), without the Masters of the Universe realising or understanding. So how does this reflect on recent leadership both strategically and morally? And how does it compare with the past?
There were those who forecast today’s problems
Well certainly the late Sir Brian Pitman, who brought Lloyds Bank from a minor UK bank to one of the top 15 profitable banks in the world within 10 years, would be saying “I told you so. We at Lloyds didn’t really understand things like sovereign debt in Latin America, after catastrophic losses, so in an unfashionable strategic shift at the time of big bang (late 1980s) we went local not global and didn’t follow the herd”.
Prudence used to be the hallmark of bankers and banking
Sir Brian was no intellectual but espoused what he called “shareholder value” (now a theoretical idea in contention) but his approach was mainly what is now referred to as “the balanced score card process” in strategic theory. He was the most successful commercial banker of his generation as was John Reid of Citibank in the US before its merger with Sandy Weil’s Travellers Insurance and his subsequent demise.
In the 1930s, Sidney Weinberg was Managing Partner at Goldman Sachs (note the bank had Partners, not CEOs and VPs in those days) declared the bank’s overarching strategy was “long term greed”. Fine with the Partners’ own money. Nevertheless, all banks and especially his got a clobbering in the US great Depression because banks, the lifeblood of economic activity of any country, were all deemed recklessly greedy.
Today is not a lot different especially in public perception. However it is more complex business-wise for banks, clients, shareholders and investors. So what is legal, what is whole, and what is moral behaviour? Should bankers, especially international ones, be penalised or are they fundamentally doing “God’s Work” in promoting the pursuit of a wealthier happier global society?