by Andy
September 11, 2013
In 1896, the Dow Jones Index was created to provide a snapshot of how the market was performing based on the price-weighted average of 30 significant stocks across various key sectors (consumer, industrial, oil/gas, etc.). Since then, many companies have been part of this Index and are still represented today including GE (over 100 years), AT&T, DuPont, Exxon, P&G, United Technologies (all 70+ years) to more recent entrants like Microsoft, Disney and Home Depot (all less than five years).
Today, Goldman Sachs enters the Index and displaces Bank of America. Nike and Visa also entered today, replacing Alcoa and H-P – three firms that have taken on hard times at a rate far faster than other mega firms within their respective sectors. Poor performers are typically forced out because they create an inaccurate group reflection of what’s truly happening in the market. That, plus market sentiment prefers winners to losers as the emotional downer they bring can impede growth and the flow of capital. As Rolling Stone so accurately said, ‘perception is reality.’ Downers must go.
I digress.
What’s troubling for me is the new inclusion of Goldman Sachs. Goldman Sachs certainly provides a service the market wants. Among other things, Goldman analyzes the market better than just about anyone, wields extreme influence in how the market operates, and expertly creates and negotiates deals and opportunities that are good for shareholders and the economy alike.
And for that expertise, Goldman Sachs rakes in a ton of money. I have no problem with success, financial or otherwise. My concern is that a disproportionate amount of profit is taken by leadership and not given to shareholders. Arguably, their bottom line should be even better than reported. And the negativity surrounding Goldman Sachs (greed, market manipulation, secrecy) confers upon it a personality that is different from the other 29. While various levels of corporate malfeasance likely exist at any large firm (intentional or not), the other 29 firms seem to wear a white hat – or at least approaching white – as their perceptions are mostly strong, above-board, caring.
That’s arguably not the case for Goldman Sachs. For Goldman Sachs, inclusion in this prestigious club is a great opportunity for them to scrub off some of these perceptions and legitimize leadership payouts. They’re now one of the good guys. But will Goldman Sachs taint the good reputations of the others?
Beware of the company you keep.
When the Department of Justice declined to prosecute Goldman Sachs and its execs, ABC reported:
“The investigative report by the Senate’s Permanent Subcommittee on Investigations, chaired by [Senator Carl] Levin, found that Goldman Sachs ‘used net short positions to benefit from the downturn in the mortgage market, and designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm’s clients and at times led to the bank’s profiting from the same products that caused substantial losses for its clients.’ . . . Goldman has faced stiff penalties from the Securities and Exchange Commission. In April 2010 the SEC filed a civil charge against Goldman Sachs and Fabrice Tourre, a vice president, for making misstatements and omissions from financial records in connection with CDOs that Goldman Sachs marketed to their investors. CDOs played a significant part in the financial crisis in 2008. . . . Goldman Sachs reached a settlement with the SEC in July 2010, paying a $550 million fine . . . .”
Goldman and companies like it not only took advantage of the lax regulations that existed before the meltdown, but they violated the securities laws repeatedly. They escaped without criminal liability, and the civil fine was a drop in the bucket compared with their enormous profits. I agree with you, Andy, that this latest event will help Goldman don that white hat, and the fickle public will forget the past and regard Goldman as a pillar of the business community–at least until its executives do something else to show their true colors.