Reminders on the Risks in Gold(man Sachs)

If you work in or care about finance, and you don’t live in the stone age, odds are you’ve seen the Goldman Sachs resignation letter. If you haven’t, read it now. And pay attention, because this is important.

The letter highlights a change in culture at Goldman Sachs, from client focused to bottom line driven. This kind of change is alarming, to be sure, but Josh Brown over at The Reformed Broker makes a very, very good point:

The “culture” of Goldman Sachs was, is and always will be about making money, often at the expense of a client.  Do you even know where the term “wirehouse” originally came from?  Let me help you out with that.  In the 1920’s, there was no CNBC or internet – there was only news delivered by wire and cable, stock market news and prices included.  The “wirehouse” firms like Goldman would transmit stock and bond prices to their far-flung offices around the country from Wall Street where the action was taking place.  it is a peculiar and yet telling fact of history that during the Crash of 1929, not a single major Wall Street brokerage firm went under.  Wanna know why?  Because when the sell-off began, they dumped all their holdings prior to wiring the news out to the rest of the investing public and their clientele across the country.

Now, Brown’s ultimate point is that people can stop writing these op-eds if they work at a place where the culture is quite obviously flawed to everyone else, and while we won’t go that far (partially because it’s amusing and partially because it’s at least some kind of insight into company culture, which is hard to come by when the company gets big enough), we will agree with the takeaway that this problem was there long before the New York Times ran that op-ed. And it goes much further than Goldman. It goes further than MF Global.

It is the whole mindset in America that bigger is better. We love our gas guzzling Hummers and 80inch 3D plasma TVs, which is all well and fine if you’re of the Texan persuasion, but the mindset, at some point in time, bled into our investing decisions, and that’s when things got complicated. The top four banks in the U.S. control over 60% of commercial assets- an even higher concentration than was seen before Bears Stearns, Lehman and AIG were making headlines. And all of this happened despite the cry for more regulation and the end to the “too big to fail” banking model. For whatever reason, we are drawn to safety in numbers and the safety of a big name brand institution for some reason, despite the constant reminders that it may not be in our best interest to go with the biggest (who knew the Credit Crisis would slip from our memories so quickly).

Sorry- bigger isn’t better.

Maybe this guy actually thought things were client focused from where he was sitting. Maybe the people he was working with were trying to do the right thing. But in a sprawling company like that, it’s all too easy for poisonous perspectives to slip under the radar. Or perhaps more correctly – for the behemoth to mask the true nature of their radar. That’s sort of the point, right? If you’re trying to be shady, you don’t broadcast it.

And it’s not just a problem for idealistic hopefuls trying to change the climate within the behemoth financial institutions of our time- it’s a problem for the clients. Even in a world where they have complete faith in the handful of individuals at such institutions that they have contact with, they can’t know the sprawling beast behind them, and how that’s impacting them and their interests. They may not know, for example, that the behemoth is spending millions of dollars lobbying congress to get rules passes which take away customer rights in the name of the behemoth. Those risks, in a post-2008 world, are known, but rarely fully appreciated.

There are days where we feel like we’re continuously repeating ourselves, but we’ll say it again- know who you’re working with – both at the individual level AND the firm level. If you don’t, or you can’t figure it out, the risk you take on is on you. In our minds, this is the benefit to working with a smaller firm- you have the chance to know the people and the culture and their operations. At Attain, you can pick up the phone and talk with one of the founders in one ring… that likely means we aren’t complex enough to be able to craft a portfolio of crappy mortgages you can bet against, but again, that’s the point, isn’t it?  When you don’t know who is pulling the strings, and whether the strings being pulled are your own- in our minds, at least- it may be time to reconsider who you are working with.

When did investors decide that small, focused, and efficient would come in second to sprawling, shallow and bureaucratic? All we’re saying is that now may be the time to take another look at the small guy or gal who you can shake hands with and look in the eye. We understand the inclinations of some high net worth individuals or advisors to align themselves with the larger institutions. Big names, big money- it just looks better on the surface. But the discerning investor should know that if they scratch just below the flashy top coat, there’s a good chance they’re facing more risk in that arena than they would be in working with a group they can trust, even if it’s not a Goldman.

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Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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