Flash back to 2007 and this excerpt from A Decade of Delusions, page 343:

…First, a combination of factors has given rise to some huge but so far largely disregarded risks in the financial services sector, as addressed in the [July 2007, Martin Capital Management] Quarterly Capital Markets. Unprecedented technology and communications developments, copious amounts of leverage made possible by sometimes fleeting liquidity, and the increased complexity in financial innovation and “tight coupling” have created a Demon of Our Own Design—Markets, Hedge Funds, and the Perils of Financial Innovation, the title of the book by Richard Bookstaber that captures poignantly the systemic nature of the risks. The reality that they are woven together informally but with an unavoidably tight interdependence among similarly constituted firms, particularly in times of crisis, can result in highly irrational behaviors. These excitable emotional responses, exacerbated by the self-perpetuating nature of informational feedback loops, can have potentially dramatic effects on the prices of those securities. The companies about which I am writing are the major investment banks on Wall Street: Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, and so forth. Unlike the portfolio insurance scheme of 1987, an unwinding of the above may not impact the security markets as a whole as they did in 1987. It’s hard for me to imagine, however, that the major players on Wall Street can avoid a body blow to their balance sheets and income statements should the system under which they are operating malfunction in unison. Should that occur, I would expect their shares to drop dramatically. [1]

As the global Financial Crisis erupted in 2007, investment banks unwittingly found themselves at the epicenter. Once burned, it appears they, with some notable recent exceptions,[2] have offloaded many of the conspicuous risks that brought them to their knees, but not to jail, more than a decade ago. Undaunted and unrepentant, the emblematic 2.0 version is back: Today the investment banks are the enablers, the sellers of picks and shovels to the digital-age incarnation of Gold Rush miners.

On April 14 Goldman Sachs released its quarterly report, which Bloomberg summarized thusly: “Goldman Sachs Equity Traders Fuel Record Quarter Amid Reddit Mania.” In the post-Financial Crisis animosity toward Wall Street in 2009, Rolling Stone famously disparaged Goldman as a “giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” In retort, then-CEO Lloyd Blankfein invoked the highest of endorsements, claiming the bank was doing “God’s work.” In Vanity Fair, 2013, Michael Lewis scathingly spotlighted Goldman’s blasphemous hubris. Ten years on, we share his sentiments. Even a polished and buffed bad penny is still a bad penny. Chalk that up to our commitment to full disclosure.

Let’s work backwards from the mother’s milk of aberrant behavior. Dollars-without-sense incentives help explain why people opt for willful blindness or unconscionably throw others under the bus. As any detective trailing the mob knows, you must “follow the money.”

According to its 2021 Q1 report, Goldman set aside $6 billion for compensation and benefits, an 87% surge. (As a point of reference, the bank’s total revenues for the quarter were $17.7 billion.) The equity trading group registered its best performance since 2010. Embracing the companies known as “meme stocks,” it monetized the madness of the day-trading Reddit crowd and turned the first quarter of this year into one of the wildest periods for the stock market in modern history. Think picks and shovels.

Not to be outdone, fees from deal making rose 43%, to $1.1 billion. Add to that $1.2 billion in equity underwriting. Total investment-banking revenue was propelled to a record $3.8 billion. Surely everyone remembers the conundrum of the conflicted rating agencies—Moody’s and Standard & Poor’s, to name the two leading malefactors —within the fetid bog of mortgage securitizations (attribution: Reddit) that spawned the Financial Crisis. An insatiable feeding frenzy of “more for the sake of more” fanned outward in its wake. Bonuses suppressed morality and narcissistically trumped virtually everything else that would’ve been prized more highly in a different time.

The proliferation today of marginal IPOs and SPACs (special purpose acquisition companies) owes its very existence to the same preeminence given to greed and avarice. The only aspect of this ageless sleight-of-hand that seems new is that a critical mass of people still thinks it’s new. So, one might logically ask, who buys the IPOs, SPACs, and other less-than-stellar merchandise spewing out of Goldman’s 24/7 sausage grinder? According to the report, asset-management revenue surged to a record $4.6 billion, backed by a burst in equity investments. Owing to the misalignment of incentives, it’s no doubt wishful thinking to hope the bank’s captive portfolio managers pass on the financially fattening sausage links.

Rumblings from the serfs at Goldman tell us that the gold does not glitter for all behind the walls of the feudal lords’ estate. A group of junior bankers took to social media this month, protesting the exploitation of 100-hour work weeks, publicly pleading for mercy: “Goldman Bankers Beg to Work Only 80-Hour Weeks.” Envy or resentment among the underlings is not the exclusive source of angst. Attrition continues within Goldman’s senior ranks, most notably in its nascent consumer-banking division—a bank holding company remnant of the Financial Crisis quasi-bailout.

In the spirit of full transparency, we admit to being moved to write in response to an anxiety and dread that have elbowed their way into our consciousness. It’s high time to again take to the soapbox, to speak up for—and frankly to—the guy who ends up footing the bill, the patsy at the poker table. If investors are having trouble figuring out who is in their camp and who is bent on relieving them of their savings, peel back a layer or two of the onion to see if you can figure out which way the incentives are skewed. It won’t be easy. Someone whose incentives are closely aligned with yours will be transparent. But for the player whose gain is your loss, you’ll have to pile-drive through a brick wall to get to the truth.

Putting it in the most plain-spoken way: If you enter a poker game and you don’t see a sucker in 30 minutes, get up and leave. You’re it.

[1] Martin, Frank K., A Decade of Delusions: From Speculative Contagion to the Great Recession (pp. 343–345), Wiley.

[2] Goldman had managed to avoid the fallout from the collapse of Bill Hwang’s Archegos Capital Management, even as competitor Credit Suisse Group AG announced it expects almost $5 billion in losses from its exposure to the family office. Goldman was one of the banks able to offload its Archegos holdings relatively quickly, allowing it to emerge unscathed from the debacle. Advice to aspiring investigative journalists: Dig deep into the manure; there must be a pony in there somewhere.

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