The Vampire Squid Lives Fast and Dies Young
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Long thought to be a giant blood-sucking machine, the mask has come off the vampire squid.
Greg Smith resigned with a scathing editorial after 12 years at Goldman Sachs (NYSE: GS), revealing clients were referred to as "muppets" and treated with disdain, all the while Goldman fattened their pockets by pawning off assets to Kermit the Frog, which their analysts believed had poor outlooks.
If you hold stock in Goldman or another Wall Street "paragon," the question is how does this affect your investment?
In business, we live and die by our reputations. If a restaurant has enough customers reporting bad service, a friend who's never been there might dissuade you from going based on what he's heard, and you in turn might do the same. It's why many business owners go to great lengths to ensure satisfied customers, to protect their reputation. If this was an isolated case, Goldman could easily spin it as a disgruntled employee, but Smith's NY Times editorial is merely a strong echo of public suspicions, further fueling sentiments brought to the nation's consciousness by the Occupy Wall Street movement. When the echoes are loud enough, with knowledgeable voices like Greg Smith's having far greater volume than a bum's on the street, a tipping point is eventually passed, and reversing the process becomes exceedingly difficult.
It's merely an example of "game theory," a predictive model of human interactions based on the presupposition that people are inherently selfish, and will act in a "moral" manner only if the benefits of doing so outweigh the consequences associated with immediate gratification.The minds' of human beings are conditioned, and respond to pain and pleasure, the carrot and the stick. Since Goldman became a public company, the incentives have changed to reward more short term, immediate profits; to a degree it is the same for every public company, where beating expectations by a few pennies can send the value of employee stock options up by millions. Forget the golden egg, let's cook the goose now.
Go to NYC and meet some of the young guns at Goldman. They make great money in a pressure cooker of a job, and a decent portion of them relieve stress partying, knowing unless they produce, they could easily be out of a employment tomorrow. Live fast, die young.
Brought to light, and the possible consequences of losing a lot of business, I am positive that Goldman will be reviewing their current incentive model and making alterations. These people are extremely intelligent, and the revelation that multi-million dollar clients are referred to as Miss Piggy is absolutely certain to affect them in the short run.
Why would any sane, wealthy individual want to give Goldman their money with with the loud cacophony of voices out there shouting that not only is Goldman not acting in the best interest of their clients, but looks upon them as a rubes.
Executive coming home to his house wife.
Wife: "How was your day?"
Exec: "I'm pretty sure we got screwed by Goldman Sachs."
Wife: "What are you a rube? Everybody at the club said it was a den of wolves."
No one wants to take the part of the moron after being warned; it's the 'fool me once, shame on you, fool me twice, shame on me' syndrome.
It also doesn't help that Goldman Sachs has been accused of front running (click here for a brief video which explaining what it is), adding gigantic profits to their bottom line, stealing from other investors in a positively un-level playing field.
So look for JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC), Morgan Stanley (NYSE: MS), Citigroup (NYSE: C), and other firms offering investment banking services to pick up some added business. Look for them to publicly proclaim the customer is king, and actually take steps ensure that is the case. They see the repercussions facing Goldman and hope to avoid the same mistakes.
So is the vampire squid dead? No, not yet. I don't believe the tipping point has been reached, but if a few more bombshells drop, watch out. Plus as long as Congress green-lights their no consequences thievery, excuse me, front-running business, Goldman will always have a way to make a few billion.
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