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Story of the Day: Goldman Sachs hates its clients, calls them 'muppets'
A bomb went off on Wall Street this morning when Greg Smith, a now former London-based executive for Goldman Sachs, published an op-ed in the New York Times saying that the firm has completely betrayed its responsibilities to its clients. According to Smith, who worked at Goldman for over a decade, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."
It's the resignation email to end all resignation emails.
And just what Goldman needs! Another PR crisis, hot on the heels of yesterday's good, share-price-improving news that it had passed the latest round of Federal Reserve stress tests. As Smith puts it:
Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
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.
Fed stress test results for banks come two days early
The Federal Reserve has released the results of its latest "stress tests" of the country's biggest banks — two days early. Why two days early? Marketplace's Heidi N. Moore had the best quip: The Fed didn't have much choice, after J.P. Morgan Chase jumped the gun on the planned Thursday announcement and showed Wall Street its report card.
Four banks flunked the test: Citigroup, Suntrust Banks, Ally Financial and MetLife, which isn't really a bank but an insurance company with bank-like businesses. Citigroup is the most worrying of that group, as some advance handicapping had it sailing through the Fed tests. Not so, as it turns out. This may remind some of the revelations, from Ron Suskind's controversial recent book about the Obama economic team and the financial crisis, that the White House at one point wanted to shut Citigroup down. Treasury Secretary Tim Geither reportedly stalled the President to avoid executing that decision.
Dodgers sale: It's all about the money!
We're getting down to the wire in the bidding for the Los Angeles Dodgers. Owner Frank McCourt is expected to conduct a final auction in time to announce a winning bidder by the first week in April, with the money changing hands and the team officially emerging from bankruptcy by April 30.
Right now, with the bids all in, the various parties who want to buy the team are being vetted by Major League Baseball. Some of the final bidders have fallen by the wayside — notably surprise late entry Jared Kushner, who owns the New York Observer and is Donald Trump's son-in-law. Grant Brisbee has the most recent lowdown. Seems that five bidder-groups are likely to pass MLB muster.
I was a bit stunned to learn that Magic Johnson and Stan Kasten — the local favorites after Rick Caruso and Joe Torre dropped their bid — have put up the highest dollar figure at $1.6 billion. I didn't think anyone would outbid Steven Cohen, the hedge fund guy who's reportedly worth $8 billion on his own. Cohen's bid is evidently $1.4 billion, according to Brisbee. But Forbes thinks — as I do — that Cohen is the only bidder with enough money essentially already in the bank to write Frank McCourt a big check. That's the way Forbes' Mike Ozanian is spinning it, anyway.
Quote of the Week: Greek debt crisis edition
I just discovered Tony Alfidi's blog and have been enjoying his uncensored views on a variety of tech and finance subjects. I agreed with him on Apple's mastery of planned obsolescence and now I'm tempted to agree with his verdict on credit default swaps (CDS) — a number of which just kicked in as Greece "defaulted" on some of its privately held sovereign dealt.
Some people think that CDS, despite their role in the financial crisis (they brought down AIG), remain useful, as a means of hedging risk and as a relatively recent example of financial innovation that was sadly misused.
Alfidi says un-uh:
I've always believed that credit default swaps are meaningless and even dangerous. [There's your Quote of the Week!] Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency. The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.
Expanding payday loans make case for banking the unbanked
The L.A. Times ran a piece a few days ago about how banks and credit unions are getting into the lucrative but ethically dicey business of payday loans — short-term, high-interest loans that, until recently, were aimed at customers who don't have typical relationships with banks or credit-card issuers. This morning, KPCC's "AirTalk" with Larry Mantle did a segment on the issue.
Payday lending is rife with problems — and the potential for big returns. Here's the LAT:
[M]any people can't repay the loans when they come due. Instead, they simply roll the loans over from payday to payday, or take out new loans to cover the old ones, piling on additional costs that can result in interest charges of 300% or more over the course of a year.
The move by banks into payday lending — or direct deposit advances, as many of them call it — led about 200 fair-lending, consumer, religious and labor groups to write federal regulators last month and call for prompt action to stop "this inherently dangerous product."
"There are people who wouldn't walk into a payday loan store but think that if a bank is doing it, it must be safe," said Lauren K. Saunders, managing attorney with the National Consumer Law Center. "If you take a look at these products from a consumer protection standpoint, they raise serious red flags."