Seriously, though, I think both Brooks and Lewis are wrong about the shape of things to come. Goldman’s role, from the origins of the firm, has been to be the smartest guys in the room. They were the scrappy Jewish firm that, when it couldn’t get into the club, started its own. They have been the leaders in financial innovation for more than one economic cycle. But I rather doubt that “promote innovation” is going to be the rallying cry of our financial system going forward.
Who are the new titans?
JPMorgan Chase (market cap: $141 billion), the result of combining the largest and most boring domestic banking empire with the whitest-shoe firm on Wall Street; and Bank of America (market cap: $156 billion), another boring banking colossus, the result of combining West Coast old money with New South new money, to which we will now add Mother Merrill, queen of old-time brokerage. Each of these firms is 50% greater in value than Citigroup (the firm that tried to become the financial supermarket of the future) and roughly three times the market value of Goldman Sachs. Neither has been notable as an engine of financial innovation.
If there’s a new establishment a-borning, it’s not going to be composed of the smartest guys in the room, but the old-fashioned bankers who are worried about being fleeced by the smartest guys in the room.
Seriously: if you were a regulator in 2004-2005, the best way to identify likely problems would simply be to look at which areas are making too much money on Wall Street. Any profit center showing extraordinary growth, extraordinary margins, and/or an extraordinary Sharpe ratio in its returns was likely to be a place where risk-management was not adequately capturing the tails of the risk distribution. The more evidence that risk management had looked at everything and nothing could be found, the more worrisome that should be for regulators.
Now, to be fair, the big losses were not incurred by Goldman Sachs – that’s why Goldman is still standing. They were incurred by people who were imitating the super-smart guys, but weren’t smart enough to get off the train before it crashed. But even so, let’s say the regulators actually use this rule of thumb going forward: when someone’s making too much money doing something new, our job is to figure out how to stop them. Who rules in that world? Goldman Sachs? Really?