While the mainstream media debate is around Goldman Sachs, their Collateralized Debt Obligations (CDOs) and the breaking or not of the law (they have just agreed to pay $500 million in damages) the issue that will/should impact Goldmans in the long term is the “tone at the top” of this Wall Street icon. Case histories show that corporate ethical breaches often lead to illegal activity and company implosion. In most cases, management does not set out to defraud it’s stakeholders, but the “tone at the top” or ethical behaviour of upper management, suggests that legally sound but unethical breaches are acceptable* – just ask the senior teams at Enron, WorldCom, Lehman Bros and Andersons. Oh wait, there aren’t any! Or better still, find a model that is sustainable and works, such as that of Handelsbanken, Sweden.
What happened in the Sachs case?
In late 2006, Goldman Sach’s executive, Fabrice Tourre – the “Fabulous Fab” – was approached by John Paulsen to find enough people to bet that the mortgage boom would continue… so he could bet against it. Paulson is said to have approached Goldmans with a group of subprime mortgage pools that he felt were likely to fail, and he paid Goldmans US$15 million to find him investors who would bet the other way. The problem was that nobody was going to bet against them, so Goldmans had to find a reputable third party to deem the mortgages a reasonable risk – ACA Capital Holdings Inc.
ACA was allegedly led to believe that Paulson’s intention was to invest in the mortgages, not bet against their success. ACA suggested to Paulson that Wells Fargo should be added to the list but Paulson rejected the suggestion as he must have feared that the mortgages would have less chance of failing if this higher quality subprime loan originator was included. Paulson subsequently purchased through Goldman Sachs insurance that would pay out if the CDO failed. Paulson is said to have made US$1 billion, and Goldmans is said to have made US$15 million in fees.
As a Goldman Sachs internal memo predicted, they were able to “leverage ACA’s credibility” and find the investors to bet that the mortgages were good. The SEC alleges that Goldman lavishly promoted and invited investment banks, insurance companies, pension funds etc to invest in Abacus 2007, the residential mortgage-backed security that was hand picked by ACA Management. The document contained no mention of Paulson.
It is said that all but 1% of the mortgage packages failed within 6 months. The Investors lost US$1 billion. Paulson made US$1 billion.
The “Tone at the Top”?
This case raises questions about how Goldmans resolves conflicts of interest; handles transparency; the reward system used; the value of the Code of Conduct; the excecutives’ ethical responsibility to clients, and institutional integrity. In essence how did their values play out in practice? In order to address this question it might be useful to look at another bank far distant from Goldman Sachs both geographically and philosophically.
Handelsbanken is a traditional Swedish Bank offering corporate transactions, investment banking and trading as well as consumer banking, including life insurance. Its stated aim is to provide a first class banking service to clients who value what might be described as old fashioned banking. The Banks overall goal is to have a higher return on equity than a weighted average of comparable-listed Nordic and British banks. This is to be achieved by having the most satisfied customers and being more cost effective than peer banks.
In global terms the company is relatively a small bank but in terms of the key measures that count, it performs remarkably well. Handelsbanken’s business model is simple and highly effective: ‘the branch is the bank’ and the corporate slogan clearly defines the philosophy ‘banking is global – business is local.’ Handelsbanken made personal service and decentralised decision making the cornerstone of its banking strategy and each branch is an independent profit centre.
“If a bank posts record results during the worst quarter in living memory for financial markets, it could have been a quirk. When the same bank has produced higher than average returns on equity compared with its peers for a number of years, it deserves a closer look. And when it has a business model that appears to answer some of the main governance concerns afflicting the industry, it repays much wider attention.”
In the Handelsbanken’s 2009 Annual Report, it states that one of Handelsbanken’s most important assets is the confidence of customers, public authorities and the general public, and the Bank’s success in the market is dependant on that confidence. The Bank’s ethical guidelines state that operations must have high ethical standards and employees must conduct themselves in a manner that upholds confidence in the bank. It is a fundamental that the bank’s employees must comply with the law. Financial advice must always be based on the customer’s needs, and financial position, and should provide the customer with the tools to choose the most suitable product from the Bank’s suite of product, irrespective of the Bank’s short term needs. As a guide, employees are encouraged to ask themselves, “can I account for my actions to the other employees, …to the press… and the general public without having the slightest doubt as to whether my conduct was ethically acceptable?”
The salary and pension system, combined with the Oktogonen profit-sharing scheme help to promote lifelong employment. Customers should never have to suspect that the bank’s actions are steered by its’ employees receiving commission on certain products. With the long-term approach to customers and employees, employees feel a sense of security in that they can always offer a customer the Bank’s best advise without affecting remuneration.
Question: What stops other banks from copying the Handelsbanken model of success?
All data and information provided on this blog is for information purposes only. Managing Values makes no representations as to accuracy, completeness, suitability, or validity of any information on this blog and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.
