Leadership in Banking: Was Goldman Sachs “doing “God’s work”?

Dr Jeffery Ramsbottom

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.

Seismic changes

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?

4 Responses to Leadership in Banking: Was Goldman Sachs “doing “God’s work”?

  1. Lawrence Baker says:

    An “octopus wrapped around the face of humanity” as one journalist put it; the New World Banking Order has arrived. In 2009 speculative, uncontrolled derivatives were the Worlds largest market at an estimated 600 Trillion. The Worlds total economic output was an estimated 58.07 Trillion and the total World bond market was an estimated 82.2 Trillion. Yet, there is no “crime” that the bankers can be charged with as they bankrupt citizens and Nations into the New World Order?
    The appropriate criminal charge should be Treason to the American People and our Democratic Republic and Constitution. The members of the Trilateral Commission and the Bilderberg Group in government and banking who conspired to overthrow our soverenity as an independent nation, who conspired to bankrupt our Treasury with three unjust Wars and multinational corporate “rolling” bailouts, conspired to control mass media “free Press” propaganda, conspired and manipulated “financial crisis” for their own gain, conspired to “relocate” American industry and technology, conspired to offshore “American Income Tax”, and who have conspired to enslave American citizens with National debt (about $64,000 per citizen) and personal debt. Deserve the death sentence by firing squad for Treason.
    Obama, your New World Order is Totalitarian and we Patriots, American free citizens, will fight for our Democracy, Independence and Freedom.

  2. davidburkus says:

    I wouldn’t say it has just now arrived. The concept of a mutually assured economic destruction is about 50 years old.

  3. Lawrence Baker says:

    I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country. I believe that banking institutions are more dangerous to our liberties than standing armies. Leave no authority existing not responsible to the people. No government ought to be without censors; and where the press is free no one ever will. Truth is certainly a branch of morality and a very important one to society. Honesty is the first chapter in the book of wisdom. If the American people allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive people of all property until their children will wake up homeless on the continent their fathers occupied … The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs. A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor and bread it has earned – this is the sum of good government. Force is the vital principle and immediate parent of despotism.
    Every generation needs a new revolution. The spirit of resistance to government is so valuable on certain occasions that I wish it to be always kept alive. Every citizen should be a soldier. This was the case with the Greeks and Romans, and must be that of every free state. We are not to expect to be translated from despotism to liberty in a featherbed.
    Thank You, Thomas Jefferson (all quotes assembled)

  4. Tudor says:

    Honestly expressed. I would add that there has been a fine struggle which you partly hint at between the great Thomas Jefferson, and (to my mind) the equally gifted Alexander Hamilton. Their ideas on the implications of a powerful banking system have informed the thoughts of others around the world since their times.

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