The "Jack Flack" column at the New York Times Dealbook blog dispenses reputation management advice for Lloyd Blankfein, CEO of Goldman Sachs. The column notes that, while Goldman has avoided the massive writedowns taken by its i-banking bretheren, it is still guilty by association from the perspective of reputation. The very act of registering as a bank holding company raises the question of what is going on at Goldman and is the jig up.
All the counsel offered by Jack Flack to Goldman is directly applicable to hedge fund managers: tell 'em what you've learned, be careful about compensation, tell people what the future of your institution is, have honest discussions about risk and risk management.
Speaking of risk, the issue of risk for hedge funds and risk for investment banks (or whatever we're calling them now) is not the same thing. Everyone knows hedge funds are risky and their core business is taking and managing risk. What the media and the public don't fully appreciate or admit is that the level of risk, how risk is managed and investing strategy of hedge funds is shared (in non Madoff funds, at least) with investors and investors can meet with managers to have detailed discussions on risk.
Not so for the banks. In fact, the banks, like Goldman, upon becoming publicly owned, offloaded the risk to investors (who don't have the ability to discuss risk management with the instition). Goldman execs retain the lions share of the upside when the bank does well (see the bonuses for the last few years) and bear virtually none of the downside during bad years. Bonsuses, temporarily, go by the wayside, but salaries are paid. Goldman partners may frown in public, but at home they gotta be smiling for the years they spent laughing all the way to the bank. Jack Flack doesn't speak about this fact and risk to reputation. Probably because there is no way around it.
I wonder if the CDO/CDS crisis would be this large if Bear Stearns, Lehman, and the other investment banks were privately held and the risk been owned directly by the partners, instead of shareholders.
All the counsel offered by Jack Flack to Goldman is directly applicable to hedge fund managers: tell 'em what you've learned, be careful about compensation, tell people what the future of your institution is, have honest discussions about risk and risk management.
Speaking of risk, the issue of risk for hedge funds and risk for investment banks (or whatever we're calling them now) is not the same thing. Everyone knows hedge funds are risky and their core business is taking and managing risk. What the media and the public don't fully appreciate or admit is that the level of risk, how risk is managed and investing strategy of hedge funds is shared (in non Madoff funds, at least) with investors and investors can meet with managers to have detailed discussions on risk.
Not so for the banks. In fact, the banks, like Goldman, upon becoming publicly owned, offloaded the risk to investors (who don't have the ability to discuss risk management with the instition). Goldman execs retain the lions share of the upside when the bank does well (see the bonuses for the last few years) and bear virtually none of the downside during bad years. Bonsuses, temporarily, go by the wayside, but salaries are paid. Goldman partners may frown in public, but at home they gotta be smiling for the years they spent laughing all the way to the bank. Jack Flack doesn't speak about this fact and risk to reputation. Probably because there is no way around it.
I wonder if the CDO/CDS crisis would be this large if Bear Stearns, Lehman, and the other investment banks were privately held and the risk been owned directly by the partners, instead of shareholders.
Justin Fox, writing in the January 19 issue of Time, examines the link between outsized risk taking and public ownership of investment banks.
