Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down . . . And Why They'll Take Us to the Brink Again [Hardcover]

Suzanne McGee (Author)

Book Description

Release date: June 15, 2010

You know what happened during the financial crisis … now it is time to understand why the financial system came so close to falling over the edge of the abyss and why it could happen again. Wall Street has been saved, but it hasn’t been reformed. What is the problem?

Suzanne McGee provides a penetrating look at the forces that transformed Wall Street from its traditional role as a capital-generating and economy-boosting engine into a behemoth operating with only its own short-term interests in mind and with reckless disregard for the broader financial system and those who relied on that system for their well being and prosperity.

Primary among these influences was “Goldman Sachs envy”: the self-delusion on the part of Richard Fuld of Lehman Brothers, Stanley O’Neil of Merrill Lynch, and other power brokers (egged on by their shareholders) that taking more risk would enable their companies to make even more money than Goldman Sachs. That hubris—and that narrow-minded focus on maximizing their short-term profits—led them to take extraordinary risks that they couldn’t manage and that later severely damaged, and in some cases destroyed, their businesses, wreaking havoc on the nation’s economy and millions of 401(k)s in the process.

In a world that boasted more hedge funds than Taco Bell outlets, McGee demonstrates how it became ever harder for Wall Street to fulfill its function as the financial system’s version of a power grid, with capital, rather than electricity, flowing through it. But just as a power grid can be strained beyond its capacity, so too can a “financial grid” collapse if its functions are distorted, as happened with Wall Street as it became increasingly self-serving and motivated solely by short-term profits. Through probing analysis, meticulous research, and dozens of interviews with the bankers, traders, research analysts, and investment managers who have been on the front lines of financial booms and busts, McGee provides a practical understanding of our financial “utility,” and how it touches everyone directly as an investor and indirectly through the power—capital—that makes the economy work.

Wall Street is as important to the economy and the overall functioning of our society as our electric and water utilities. But it doesn’t act that way. The financial system has been saved from destruction but as long as the mind-set of “chasing Goldman Sachs” lingers, it will not have been reformed. As banking undergoes its biggest transformation since the 1929 crash and the Great Depression, McGee shows where it stands today and points to where it needs to go next, examining the future of those financial institutions supposedly “too big to fail.”

Editorial Reviews

From Booklist

Business journalist McGee paints Wall Street as a utility with capital flowing through the system like an electric power grid, noting why it almost failed. She describes the pressure on the U.S. House of Representatives in 2008 to bail out Wall Street firms, why Wall Street was called an “abstraction,” and how Wall Street morphed from an intermediary (raising capital) into a casino. Goldman Sachs was the master of its universe, generating average return on equity of 25.4 percent in the decade before the financial crisis, compared with 15 percent annually for four other firms during the same period. Other firms' CEOs chased Goldman Sachs, considering it their model for boosting their own personal wealth and keeping shareholders happy. The author reports, “When left to their own devices, financial services firms . . . will focus almost monomaniacally on what is in their own best interest, seeking out ways to take earn sichigher returns and recruit top talent by paying the most lavish bonuses and offering the most enticing perks. . . . They cannot help themselves.” Excellent book. --Mary Whaley

Review

"...masterful...exceptionally lucid, well-written"--Washington Post

“…must-read on the venerable Wall Street firm [Goldman Sachs].”— Dow Jones’ FINS
 
“A disturbing account of how Goldman Sachs Group Inc. became a seductively successful Pied Piper, luring rival banks down a path to destruction.”— Bloomberg
 
“McGee’s book is full of entertaining and enlightening material.” — Financial Times  
 
“McGee has taken it upon herself to make the case less through assertion or argument than through anecdote and appeal to authority.” — New York Times Book Review
 
“…a great look at a current event for the general reader.”— Library Journal

“Excellent book.” — Booklist

See all Editorial Reviews

Product Details

• Hardcover: 416 pages
• Publisher: Crown Business; 1 edition (June 15, 2010)
• Language: English
• ISBN-10: 0307460118
• ISBN-13: 978-0307460110
• Product Dimensions: 4.5 x 1.5 x 6.1 inches
• Shipping Weight: 1.6 pounds
• Average Customer Review: 3.6 out of 5 stars  See all reviews (21 customer reviews)
• Amazon Best Sellers Rank: #706,581 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

43 of 49 people found the following review helpful

4.0 out of 5 stars Enlightening Account of WHY Wall Street Went Hog Wild with Leverage and Risk. June 15, 2010

By mirasreviews HALL OF FAMETOP 500 REVIEWERVINE™ VOICE

Format:Hardcover

In "Chasing Goldman Sachs", financial journalist Suzanne McGee takes us through the changes in the financial industry over the past few decades that transformed Wall Street "from quasi-utility to...profit-maximizing behemoth" whose appetite for leverage and risk nearly destroyed itself and played a key role in the continuing global financial crisis. The book's subtitle -"How the Masters of the Universe Melted Wall Street Down...and Why They'll Take Us to the Brink Again"- is perhaps hyperbolic, and I was pleased to find that McGee's analysis is more balanced and considered than that title might suggest.

First, the history: McGee explains how and why investment banks began to drift away from their core function of enabling capital to flow through the economy in the 1970s, leading to the pursuit of maximum profits irrespective of systemic risk in the 2000s. This includes the evolution of mortgage-backed securities, the deregulation of fixed commission structures, the transformation of banks from private partnerships into publicly traded companies, and refocusing their increasingly complex products to serve hedge funds rather than traditional investment firms. Goldman Sachs was the best and the brightest, which other banks tried madly to emulate, often without sufficient talent or risk management to do so.

Then, the financial crisis: McGee dedicates a chapter each to the "greed, recklessness, and negligence" that combined to create the "perfect storm" that almost brought the global economy to a halt and necessitated an infusion of $250 billion of taxpayer-sponsored liquidity. She explains the history of the executive compensation system whose incentive structures unfortunately encouraged "excessive risk-taking and shortsighted behavior." McGee tackles the limitations of risk management models. These have been discussed to death in more detail in other books, but she focuses on the human reasons that people were blind to risk. And she explores the role that the deregulatory climate in Washington played in enabling and encouraging the housing bubble.

Finally, McGee wonders what Wall Street will look like ten years from now, as boutique investment banks are cropping up to take over some of the functions of the big banks, who are still fighting regulation. This section is a bit repetitive and not as strong as the rest of the book. McGee observes that risk-taking to maximize profits for shareholders is as common today as it was five years ago, and she prescribes a change in "fundamental attitudes toward the financial system" as the only way to effect lasting change on Wall Street. It's difficult to tell people to make money in moderation, though, and it might be impossible when they are beholden to shareholders.

"Chasing Goldman Sachs" recounts Wall Street's role in the financial crisis in terms a layperson can understand. McGee is good chronicler of the history of the financial industry, and she explains why investment banks packaged, sold, and invested in risky CDOs and credit default swaps as well as their need to innovate and to profit in a world where traditional sources of revenue were either insufficient or no longer existed. She thinks things went wrong, however, when banks began to produce products that did not serve their clients well, relied to heavily on proprietary trading desks, maximized short-term profits at the expense of long-term stability, and mismanaged risk.

The credit and housing bubbles certainly showed up the flaws in both the culture and structure of modern investment banks. I wonder, though, what the outcome might have been had many of the loans that were sliced and diced in those CDOs not been fraudulent to begin with. The FBI warned of an "epidemic" of fraud in the mortgage industry in 2004, 80% of which they believed originated with lenders. My point is that blame for the financial crisis does not lie entirely with Wall Street. There was fraud all over the mortgage industry, and the Federal Reserve's pump of cheap money into the marketplace was ultimately what inflated the twin bubbles. McGee touches on these issues in her discussion of the Office of Thrift Supervision's culpability in the crisis, but her focus in on Wall Street shenanigans. The SEC charged Goldman Sachs with fraud as the book was going to press, so the author only addresses that issue briefly in her foreword.

[In compliance with FTC rules, I am disclosing that I received a free copy of this book from the publisher.]

4 of 4 people found the following review helpful

2.0 out of 5 stars Skirting Goldman while sticking to surface events July 27, 2011

By Charles de Trenck

Format:Hardcover

I was looking forward to a book updater about Goldman related issues and the Financial Crisis, though I understood flicking through the book quickly before catching a plane that it would only touch Goldman at the periphery, and that it would be more about how the financial crisis was created by the likes of Merrill Lynch and so many other bulge bracket banks trying to emulate Goldman's performances (ie, high ROEs). What I found though, as I sat down to read and mark-up the book, was more of a generic recap of the Crisis. Looking later through the footnotes I realized this book relied mostly on mainstream accounts. The book is good for people who were not addicted to financial blogs and the few good articles (and there are some good ones I found and listed in prior reviews) out there before, during and after the crisis. And it is ok in terms of offering some sort of reference function.

I certainly don't disagree with the blame meted out at some of the senior bank executives, sometimes referred to as banksters in the blogosphere. On the whole the book is readable and good as a summary. But the book also proved a little too soft and general on developments at the big banks during the Financial Crisis, and a bit too hopeful that the Obama Administration could/can bring about any changes (ie, implementation of the oft repeated Volcker Rule).

Parts of the book were quite readable. Other parts tended to repetition and news recaps. During one of my many breaks reading the book, I happened over to a bookshelf of partly read books, and found new interest in Where Are the Customers' Yachts? The book was written around 1940 (based on experiences of 1929) and has many truisms reminding us of what many brokers [bankers, etc] do for a living. Why would the author of Chasing Goldman hold faith in cosmetic changes and the Obama approach? Why would small excursions to talk to a few ex and current bankers or new independents be enough to establish the mistakes and ethical challenges of the mainstream banking elites?

I liked the first few chapters the best - after the generic introductions which I ignored. I enjoyed chapters 1-3, as there were a few engaging perspectives for me, such as the Silicon Valley bankster phase. And there were a few parts on Merrill Lynch that started getting interesting around pp 152-56. The Merrill Lynch brief critique got me thinking I might find something interesting about Citi. But I was to be disappointed again and again with shallow attempts to critique Citi. There were simply no good stories to be told on Weil, Rubin, Prince, or others. And for the other banks, the stories proved mostly superficial as well. Reasons for the superficiality, I suspect, are that deeper accounts of what went on at Citi are few and far between. This author relies much on mainstream accounts, and the interviews with current and ex industry insiders are never taken to a next level. As a result there is nothing new to learn on most of the big meltdowns.

On the whole this book does not measure up to the likes of Too Big to Fail. It reads like a narrative of what went down over the timespan of a few years, with a few short insights at times. I certainly agree with many of the points. That is until we get to what the author is saying about the future as she talks about 2010+ and Obama. There is some truth. And of course I would like the banks to be more dis-intermediated than what we have seen thus far. So examples of new firms seeking to take business from the banks is welcome. But I am not sure her coverage, in her desire to find alternatives to bulge bracket Wall Street banks, of some firms such as Citadel is deep enough or even accurate. Every once in a while she introduces financial terms such as Value at Risk, noting comments made elsewhere too that Goldman had increased its VaR during the crisis... Not that I even use it much - because I would want to make additional adjustments - but looking at a comparative chart from Reuters on VaR in commodities during 2008, Goldman indeed was right toward the high end of increasing its VaR, but, oops, Citi was actively reducing its VaR in 2008 on the same order as JPM, and, oh, Morgan Stanley, which also almost went down in 2008-09, was reducing its VaR even more. Increasing risk in commodities during the downturn proved to be the right call. The point is VaR analysis is likely pretty involved, and throwing in a few fancy terms in the book does not make it more sophisticated.

All in all, this is not a memorable book I will keep on my book shelf next to Zen Flesh, Zen Bones, Oriental Despotism and Too Big to Fail, among others.

16 of 21 people found the following review helpful

4.0 out of 5 stars Finally, a finance book that's not boring! June 24, 2010

By Richard Derus

Format:Hardcover

Not to put too fine a point on it, but does the world *really* need another book about The Meltdown That Ate Our Jobs? Do we *really* have anything left to learn about these greedy so-and-sos whose pursuit of their own profits gifted us with a huge expansion of the Federal debt?

In a word, yes.

Suzanne McGee assumes that her readers are smart, savvy, and plugged in, so she hits only the highlights of the WHAT about the crisis. Her brief, as the subtitle of the book "How the Masters of the Universe Melted Down Wall Street...and Why They'll Take Us to the Brink Again" makes clear, is analyzing and explaining WHY.

She does this in as honest and non-judmental a way as anyone could. She's not pointing fingers at one person per chapter, she's pointing up the systemic and cultural failings that, quite naturally and seemingly inevitably, led to a culture of no-risk gambling that permeated late twentieth century business. It took until the end of the Aughties for the chickens to come home to roost, but as they always do, they did. And who pays? All of us peons, that's who, which is exactly how the system is set up and remains set up to this day.

Her style is spare, unfussy, and dryly witty. Her story provides its own plot, so I can't say whether she's good at plotting. She knows how to give a telling detail! "'When {the New York Stock} Exchange is public, when people are willing to own it, it's a sign of a stable financial system, argues {a Canadian investment-firm billionaire},' who also owns stakes in publicly traded stock exchanges worldwide, from Europe to Latin America...'The kind of push that come from shareholder-investors to become more competitive and efficient is the best way to make sure an organization is as effective as possible,' he adds." (p137, ARC edition) This comes in a book that traces "efficiency" as the principal author of the megadisaster of 2008...and does anyone remember May 2010, when the "efficient" robo-trading powerslide of the Exchange caused systemic fantods?

McGee states, makes, and supports her points throughout this book with a lifetime's reportorial experience and a skeptic's "prove it" attitude. She's done the financially semi-literate a huge and signal service in writing this book. It's a good, involving, and deeply frightening read. Recommended to all who aren't mouth-breathing Fox News watchers.