More Reactions To Greg Smith of ex-Goldmanite Fame

Here is pretty much every reaction there is on the market on reactions towards Greg Smith leaving Goldman Sachs in a very public manner. 

And here is Tyler Cowen's thoughts on the matter:

Everyone is talking about the Goldman guy who quit, he wrote this (reactions here):

"I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival. It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are. 

Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons." 

This strikes me as economically naive. Is it at least possible that the culture at Goldman has changed (I am not myself committing to any assessment here of GS) because profit maximization dictates such a shift? What are a few possible models? 

1. Income from trading has risen in importance, relative to income from clients, and if you can do well trading you will make money, whether or not you are a jerk. 

2. Greater competitiveness lowers levels of service quality for efficiency wage-like reasons. GS can no longer play the role of high mark-up, precommit to high-quality, monopolist. 

3. We have moved to the “used car” equilibrium. You know they are screwing you over, or trying to, but leaving for the guy next door simply replicates the same basic incentives so you stay put and fight back best you can. 

4. The current interest rate spread means they don’t have to try too hard. 

Anything else? Those are possible mechanisms, not factual claims about the world. In any case, I am suspicious of his impulse to blame it all on a sudden shift in the moral propensities of the people he was working with.

Remember Groupon?

I have written about Groupon several times in the past few months or so (Read here, here and here). I think it is clear by now that I am uber anti-IPOs and will remain so for a long long time. If you are still not convinced about the evilness of IPOs, here are more reasons for you:

For the first time since it went public earlier this month, Groupon broke below its offering price of $20 per share. Shares of Groupon fell 16 percent on Wednesday to close at $16.96. 

The popular daily deals site had wrestled with intense scrutiny and volatile equity markets in the weeks leading up to its offering, but its debut was widely heralded as a strong performance. On its first day of trading, Groupon rose as much as 50 percent, before settling at $26.11 per share.

Here is what the chart looks like:

Can you imagine your wealth being eroded by 16% in one day? Yeah, you can tell me that if you had subscribed to the IPO and sold off at USD26, you'd make a handsome profit. But human greed does not work like that. When the price hit USD26, you would have hoped for it to go even higher.

Buying into an IPO is like injecting heroine. It can appear to be fun while the high lasts. And when you are high, you will want more of it. That is, until the high is gone.

How do you like Groupon now?

Volume 3 Issue 47: Two-Cent Economics

Pity The Wall Street?

This particular story makes the Wall Street bankers sound so sad:

Earlier this fall, Steve Ferdman celebrated getting a job offer from Credit Suisse in the usual Wall Street fashion. Over expensive oysters and dark rum cocktails at a trendy Manhattan restaurant with his parents, he toasted landing the full-time position after working six months as a consultant without benefits. 

A week later, Mr. Ferdman, 28, sat alone at the same place and ordered a gin and tonic to lament getting laid off by the bank, for the second time since 2008. When he told the bartender about his misfortune, his next round was on the house. 

... 

The mood is even darker outside the Ivy League. Matthew Slotnick, a senior economics major at Boston College, said that he had sent more than 100 résumés to contacts on Wall Street and received several interviews. But he has not gotten any offers. Mr. Slotnick, who has wanted to work at an investment bank since entering college, is now applying to smaller banks and firms outside of New York. 

“People are saying it’s sort of a 2007, 2008-type hiring climate,” he said. “I haven’t given up, but it’s a bit depressing.” 

Any sympathy for Wall Street’s huddled masses yearning to get rich should be tempered by the fact that financial sector recessions often deal a soft blow. Laid-off financial workers typically get large severance packages, including the use of outplacement services. During their job hunt, many can draw on substantial savings built off past bonuses, on top of collecting unemployment. 

But for those laid-off Wall Street workers whose golden tickets have vanished, the disillusionment is real.

It is always difficult to sympathize with the big bonus-guzzling junkies on Wall Street. There is a reason for Occupy Wall Street. It is an industry which has been "lightly regulated" (more like unregulated) while they make tonnes of profit. As with all "frauds", as long as they keep making money, we allow them to keep doing it. Just ask Nick Leeson or Jerome Kerviel.

Even those who do not have the intention to cheat are given a huge benefit of the doubt, despite taking excessive risks, as long as they continued to make huge profits. Ask LTCM. The excessive risk-takers were probably allowed to roam free because the regulators themselves were possibly having a small piece of the action. With so much money piling up, there is bound to be some spilled over.

As for the smarties who were not able to procure jobs on Wall Street, perhaps in many years to come, they may consider it a blessing in disguise. Because on Wall Street, in the pursuit of the millions and billions of dollars, many of these geniuses lose themselves instead of finding what they were looking for.

Source: Dealbook

Volume 3 Issue 47: Intelligent Investing

Buffett's Insider Advantage Revisited

I wrote about the special treatment that Warren Buffett was given in the previous issue of the Main Streeter.

Here is more: 

The Securities and Exchange Commission usually doesn’t let investors keep many secrets. Except if you’re a major player like Warren Buffett. 

On Monday, Mr. Buffett disclosed that his company, Berkshire Hathaway, had bought a 5.5 percent stake in International Business Machines, his first big investment in a technology company ever. 

But Mr. Buffett didn’t build his $10 billion-plus stake in I.B.M. overnight. He started buying eight months ago, beginning in March. You wouldn’t have known that if you had been studiously reading Berkshire Hathaway’s filings — known as 13Fs — in which companies must disclose stock holdings. There was no mention of I.B.M. in Berkshire’s quarterly filing in April, nor in August. Instead, if you were looking carefully, you might have found an odd footnote that said: “Confidential information has been omitted from the form 13F and filed separately with the commission.” 

Translation: Mr. Buffett received special permission from the S.E.C. to keep secret his investment in I.B.M. — and possibly keep secret stakes in other companies that he is building positions in that we have yet to learn about.

... 

Over the decades, questions have been raised about the S.E.C.’s confidentiality rule, but have been quickly mooted. Back in 1997, Larry N. Feinberg, the founder of Oracle Partners, memorably told BusinessWeek: “I do not think confidential filings are fair. If I’m going to pull down my pants in public I want everyone to pull down their pants, too.”

Isn't demand and supply what the stock market is about? If Buffett wants to increase the demand of a certain stock, then inevitably, he has to pay a higher price. Why does he get the advantage of getting "insider" prices by having the SEC "hold down" the prices for him?

Source: Dealbook