In the 1980’s and 1990’s, one often heard the only semi-facetious phrase that “investment bankers are short-term greedy, but lawyers are long-term greedy.” One of the few exceptions to “short term greedy” on the I-Bank side of the Street was always Goldman Sachs, which, under the leadership of people like John Weinberg, was the epitome of long-term greedy.
I was put in mind of this by a front page piece in today’s New York Times, “As Goldman Thrives, Some Say an Ethos Has Faded.” Here’s the gist.
Lloyd Blankfein has led Goldman Sachs since 2006, and “has surrounded himself with a tight circle of executives drawn from Goldman’s trading operation.” The business model of Mega I-Banks has traditionally had two components, trading for the firm’s own account, and counseling corporate clients on strategy, M&A, and so forth. But if you believe the article (I do, fundamentally), this balance has shifted at Goldman:
Interviews with nearly 20 current and former Goldman partners paint a portrait of a bank driven by hard-charging traders like Mr. Blankfein, who wager vast sums in world markets in hopes of quick profits. Discreet bankers who give advice to corporate clients and help them raise capital — once a major source of earnings for Goldman — have been eclipsed, these people said.
To my way of thinking, the smoking gun is a 2006 change in compensation for measuring investment bankers’ value to the firm. That year, Goldman instituted banker “profiles,” which are daily (yes, daily!) P&L’s showing how much business its employees and clients are doing. As the article writes, this change–quelle surprise–had two effects. First, Goldmanites focused on clients who might generate the most revenue in the very near term, and second, it “prompted bankers to fight more aggressively for credit for their deals.” (Sound familiar?)
Regular readers know that I place great stock in compensation: Read, incentives. Econ 101, and Econ X01 through Y01, relentlessly teach the importance of incentives in molding behavior. And the i-bankers at Goldman are surely smart enough that they don’t need to be told twice how to bring home more of what they surely feel entitled to.
Here’s another window on the change the firm may have undergone:
“Would John Weinberg ever be in this situation?” [offering vague apologies for “mistakes” leading up to the financial crisis], asked one former partner, referring to the legendary senior partner who ran Goldman for many years. “No way. He would have thought about the firm over 50, 100 years, not what people will get paid this year.”
Since the modern Goldman emerged during the Depression, its executives have cultivated a ruthless professionalism tempered by what might best be described as Goldman Sachs Exceptionalism: a sense that Goldman stands apart from, if not above, Wall Street rivals.
This sense, strengthened by a tradition of government service among senior executives, runs deep inside the bank’s headquarters at 85 Broad Street in Lower Manhattan. Indeed, from the day they arrive, employees are steeped in the firm’s 14 principles. No. 1 is: “Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow.”
If you perceive an analogy to Law Firm Land, the line forms to the left.
Surely, surely, your firm has stated core principles akin to Goldman’s: Put the interest of your clients first, and the firm will take care of itself.
But do you also have long-lasting origination credits? And how important are they?
To what extent does your compensation model reflect a zero-sum game where one partner’s hoarding gain is another’s failure to collaborate loss? Do you measure performance daily, weekly, monthly, quarterly, annually, or over three to five-year rolling cycles?
In other words, how short-term greedy are you and how long-term greedy are you?
I fear that too many firms became too short-term greedy in the past decade.
Were there reasons for this?
In hindsight, of course, we know that the reasons espoused at the time look more like pretexts or thoughtless obeisance to the common wisdom than they actually look like hard-boiled, unblinkingly analytical Reasons.
- Why lend promiscuously to subprime borrowers? Because housing prices only go up, never down.
- Why pinch clients for more immediate revenue with less regard to cultivating a long-term relationship? (a) Because we’re Goldman Sachs and we can; and (b) because we have eaten the fruit of the poisonous quarterly- and annual-results tree of knowledge.
- Why resort to financial acrobatics and structural contortions to boost your profits-per-partner figures for benefit of The American Lawyer? Because no one wants to finish last in a beauty contest and because everyone else is doing it (and everyone else knows everyone else is doing it, so wink-wink).
Those that became short-term greedy are now faced with the consummate challenge of rebuilding their business model at the same time they need to re-educate their partners and their associates and re-invigorate a lost culture of client service first. All while the “Great Reset” threatens to derail the entire train.
But if the design of your compensation system, evidently like that of Goldman’s, encouraged short-term-itis, do not blame your partners. Blame yourself.
Lloyd Blankfein
Update from a reader in the UK (December 22):
Fascinating and
provocative as usual, Bruce. The question, though, is of course: is it possible
for law firm management to be “long-term greedy” in the age of the
lateral partner? Even public companies have institutional long-term
shareholders who may exert some pressure to not throw the future out in the
quest for quick returns. Law firms strike me as almost unique, in that the
firm’s talent are also the shareholders and can exert enormous pressure on
management to do things their way; and, once you add a febrile talent market to
the mix, you end up with partners able to effectively hold their firms to
ransom: “short-term profit or I’m out of here”. Of course, the Wall
St law firms (ironically enough given what’s happened to their clientèle) cling
on to lockstep, relatively low levels of lateraling, etc. But any economist
presumably knows “culture” is an inadequate bulwark against
misaligned incentives
