Goldman’s Fiddler-Crab Clawback

Resembling fiddler crabs, senior Goldman executives seem to take with the giant claw, and to give back with the tiny one.

A previous post described Goldman Sachs getting hit with over $5 billion in fines and disgorgement sanctions. These penalties relate to two senior Goldman bankers’ participation in a multi-billion-dollar bribery and embezzlement scheme.

Taking with one claw, and giving (back) with the other

Later press reports state that Goldman will claw back about $174 million in compensation from current and former senior Goldman executives. This clawback represents about 3 percent of the hit suffered by the bank.

Resembling fiddler crabs, senior Goldman executives seem to take with the giant claw, and to give back with the tiny one. One wonders what percentage the clawback represents of the total compensation taken by these executives.

Entertainment v Lessons Learned

It’s easy to kick someone when they’re down. When that someone is as rich, powerful, and smug as Goldman, it’s fun, too. There’s a reason why beheadings at the Tower of London drew such large crowds.

But, there’s a larger purpose to discussing Goldman’s woes. We need to distill lessons learned. Otherwise, we may also find ourselves on the ground, at the toe end of other people’s boots.

Goldman Sachs used to be a partnership. The managers were the owners. Reputational and financial blows fell entirely on the people who ran the firm.

Rightly or wrongly, Goldman in its partnership days enjoyed a reputation for teamwork and probity. If nothing else, Goldman’s partners had to back their and their partners’ behavior with their own pocketbooks.

Goldman’s going public (ostensibly because the firm needed more capital to compete) undermined the economics driving cohesion and long-term ethical behavior.

Cui bono? Cui plagalis? (Who gains? Who loses?)

Being a partnership doesn’t guarantee ethical problems won’t befall an organization. Witness now-defunct Arthur Andersen LLP, once the Goldman Sachs of accounting. That firm was a global partnership which sank almost overnight after hitting the iceberg of its corrupt audit client Enron.

The underlying economic incentives that drive culture, rules and behaviors may not always be determinative, but they do matter. The constant challenge of business ethics is matching risk-taking with skin in the game.

The wrongdoers at Goldman may be gone, and some of the negligent senior people, a little lighter in their large wallets. But, unless Goldman changes how it does business, the problems will remain because the underlying economics will have stayed the same.

And maybe clients need to rethink what services they should be buying from what types of advisors.


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