Wall Street, Goldman Sachs And China

Goldman Sachs Headquarters, New York City

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When I joined Paine Webber, fresh out of Harvard Business School in 1973 as a new investment-banking associate, Wall Street was a kinder, gentler place. Most firms — even the largest like Morgan Stanley, Goldman Sachs and Lehman Brothers — had less than $75 million of capital and would be considered boutiques in today’s world. Merrill Lynch had just gone public, but no one knew quite what to make of it. In retrospect, it was a sign of things to come, but no one at the time thought that it marked the beginning of a significant new trend. In the opinion of most, Wall Street firms, which were primarily partnerships then, were simply not suited to be publicly-traded companies.

Wall Street firms offered financial advisory services to governments, companies and individuals, and only in a few instances, traded securities for their own account. Some firms didn’t even underwrite the securities of their clients, and the thought of establishing a trading position that might be contrary to the interest of a client never entered anyone’s mind. Investment bankers were akin to corporate doctors, whose job it was to advise CEOs on capital raising and the occasional acquisition, which was always a friendly deal that was negotiated by the investment bankers and the leaders of the two companies. In the Wall Street of the 1970s, hostile, or unwanted, takeover offers were unheard of.

While it varied by firm, the professional atmosphere at most was collegial. A bit of an outlier was Lehman Brothers, which had the reputation of being extremely cutthroat internally. If you were a partner at Lehman, it was said, you were just as likely to be stabbed in the back by one of your partners as you were by one of your competitors.
At the other end of the spectrum was Goldman Sachs, which stood as the epitome of teamwork. As the mergers and acquisitions business began to grow, other firms would produce celebrity-like “M&A Stars,” but at Goldman, the emphasis was always on the team — and the client. Even as M&A became the biggest profit center for any firm, Goldman was one of the last to have a stated policy of not representing any company in the hostile takeover of another company, foregoing tens of millions of dollars in fees in the process.

Wall Street began to be a very big business in the 1980s, and all firms, including Goldman Sachs, began to change as a result. Although the Glass-Steagall Act of 1933 limited securities activities by commercial banks, the banks were anxious to get into the securities business and began to encroach on turf once reserved for their investment-banking brethren. The repeal of Glass-Steagall in 1999 irrevocably changed the Street. To secure profitable M&A and underwriting business, it was now necessary to have a big balance sheet. With an ability to leverage its capital, it didn’t take long for all firms to recognize that proprietary trading — trading for one’s own account — could be the most lucrative business of all.

I’m not in a position to judge whether Goldman Sachs is any better or worse as far as how it treats its clients than the other large firms that operate in the business today. My guess is they aren’t. Unfortunately for the firm, though, the publication of the New York Times editorial last week by Greg Smith, the executive director and head of Goldman’s United States equity derivatives business in Europe, the Middle East and Africa, singled Goldman out as the poster child for an industry that has lost credibility everywhere, including in China.

When I first came to this country in 1992, everyone was fascinated by Wall Street. While most had heard of names like “Morgan,” no one knew much about what happened in lower Manhattan and what Wall Street firms actually did. In fact, the Party Secretary at one of the local governments where we had a factory asked me to give a presentation to 100 of his top officials in 1996 to explain what went on.

As China continued on its development path through the 1990s and into this century, government officials and the heads of China’s big state-owned companies began to be courted by all of the large firms, hoping to secure mandates for lucrative initial public offerings and equity deals. In many cases, the sons and daughters of top Chinese officials went off to Harvard and Yale, and came back to China as new business representatives for the leading firms. By 2008, senior Chinese executives and government officials were very familiar with the workings of the capital markets.

There is no doubt that the global financial crisis of 2008 tarnished the reputations of all of Wall Street’s leading players in every part of the world, and this was certainly the case in China. In 2010, Li Delin, a Chinese financial journalist who is well-known for his outspoken writings, published a sensationalist bestseller in China, the “Goldman Sachs Conspiracy,” in which Delin argued that Goldman’s ultimate goal is to “kill China.” “Like a fox chewing a bone, Goldman Sachs knows the rules of the game and when to go for your neck,” he says in his book.

The controversy surrounding Mr. Smith’s editorial has received widespread attention in China. Last Friday, a morning financial news show on national radio reported on Smith’s editorial and interviewed Mr. Li. Needless to say, the comments and the opinions expressed in the press have been universally negative.

China’s capital markets are now where the U.S. capital markets were in the late 1970s/early 1980s, and merger and acquisition and financing activities are about to explode in the years ahead. As is the case for most products and services, China is likely to become one of the largest markets for investment banking services over the next 10 years.

In a land where trust is at a premium and where relationships are all important, my guess is that Chinese executives would be more comfortable dealing with the Wall Street of the 1970s than the Wall Street of today. The Chinese government and Chinese companies will turn for advice to firms that they trust, and will favor those that respect the client relationship. Firms that can get back to the core values that permeated Wall Street in that earlier period will have the best chances for success here, and will be in the best position to capitalize on this next big trend.

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