The phrase “when in Rome” is most often used to describe how one ought to adapt to local norms and culture. Years ago, a good friend from days on the Salomon Brothers training programme coined a spoof on this: “When in Rome, drive like a Parisian”, no doubt alluring to the fact that inside every one of our Gallic colleagues is a Formula1 Ferrari driver waiting to be discovered. Acting strangely and ignoring local culture is this week’s topic. The anecdote and the lesson learned from it stem from days of Goldman Sachs’ expansion into the storied world of Swiss banking. The impetus to pick this topic comes from the world of football. As a Liverpool fan, I have had to watch with more than some unease, as well as a tad of amazement, as two groups of American owners have struggled to drive the club forward. Front and centre in those mis-steps is a failure to communicate and deliver a long-term strategy and stick to what they say.
In the early ’90’s Goldman Sachs had decided to build up a Swiss private bank and with that, its presence in Switzerland. At one point in that evolution, towards the end of 1993, the great minds planning the Firm’s course decided that an integral part of the the plan would be to become a member of the local stock exchange in Zurich. Apart from just being there, the attraction was that the exchange was in the process of becoming both national and electronic. The latter was the great prize for Goldman; if there was an electronic marketplace, then there were significant new opportunities. Until that point, local exchange membership meant having bodies on the ground in these places and that was quite an inefficient model. What Goldman Sachs was after was access to the Equity Derivatives markets, in particular the warrant markets. Warrants are a like an option, entitling you to buy or sell something at a fixed price up to a point in the future. Where “structured products” have been the darling product of the late noughties, warrants, certainly in Switzerland’s huge private banking market, were the darling product of that era.
Exchange membership at the time, had both its privileges, as well as its obligations. Normal practice was that if you were a member of the Exchange you had a physical presence on each of the six trading rings. Each “ring” was a product group; two each for Swiss equities and warrants, along with one each for Swiss bonds, foreign bonds, The Swiss called them rings rather than pits because quite literally there was a ring of desks for each pit. Each member was expected to be on each ring, and each prospective member had to get two recommendations from persons of appropriate standing. This is a formal way of saying two good old boys from the club. Goldman had three challenges in this; firstly, it did not want to be on all six rings. It was only interested in warrants, for its equity derivative business, and it did not want to hire a slew of folk whom it would not need when the exchange moved to fully electronic trading. It also needed some senior Swiss types to recommend it be allowed full stock exchange license, called an A-license. Lastly, it needed to put all the infrastructure in place for this. The primary concern was avoiding the overhead of having to be present on all six rings. Getting the recommendations from two good old boys was going to be simple enough if you were Goldman Sachs and putting infrastructure in place was a matter of budget and planning. Both doable. So Goldman started lobbying to be a full member but with limited commitment. Fair game and nothing bad about this. Eventually the lobbying and advocacy effort paid off and the reduced commitment was approved. Only then could we and did we start all the infrastructure planning. Two good old boys were found who were willing to write nice things about Goldman Sachs and how much the local marketplace would benefit from this new member. We were off to the races. Quite literally, as we had little time to get it done. we had to race to meet an Oct 15th 1994 deadline; be there or be locked out for about two years until sometime post the launch of electronic trading. In a previous blog, I have recounted some of the fun and games of setting up the infrastructure (see: https://3cadvisory.com/?p=283). We were also able to provide some novelty value down on the exchange floor. At the time, the Zurich exchange was all traders making markets on the fly, without computers, loads of paper tickets, with runners collecting tickets from the floor and taking them to some back-office staff to key punch. Those runners were the source of the jokes often made about the locals and their white socks. Only at Wimbledon could you find more white socks and only in an Essex disco would you find more young ladies in high heels and tight jeans. So true was the joke that we seriously thought about doing white socks as the giveaway for the obligatory launch party. Goldman had plans though and clever ones at that. Our warrant traders on the floor were actually set up to be the extended arm of the head trader in London. Embracing the new technology of the time, we were able to pipe the prices for the warrants all the way from London thru to the floor of the Exchange. The pricing was driven by the live prices of the equity market and the famous Black-Scholes pricing model. Putting that technology in the hands of the floor traders was like giving them a machine gun when everybody around them had a bow & arrow. Added to that, we could book all the tickets electronically with the click of a mouse. No white-socked or tight-jeaned runners for us. So clever was all of this, that on our first live day, the president of the exchange came to see me on the floor, all full of curiosity. “Heard you have something a novelty here dear boy”. So we showed him and he was pretty amazed. So the first session passed, a few tickets were printed and it was off to the obligatory party we had to hold for all the exchange members. Job done.
At the same time as those of us in the Swiss end of Goldman Sachs were having some fun setting up for the Swiss Exchange, things in the rest of the Firm were far from golden. Fixed income markets were very challenging and many of the Firm’s bets were wrong. Chief amongst those a whole series of trades by one Jon Corzine, later to be US Senator and Governor of New Jersey, as well as captain of the good ship MF Global when it went under. So wrong were the bets, that the inside gossip had the Firm losing over 50 million pounds in one trading book in one day. The Firm’s leading economist Gavin Davies, an alumnus of the LSE, had in his Observer column made some loud, vocal and directional pronouncements on what Eddie George, the then governor of the Bank of England, had implied about where UK interest rates were headed. Something to the effect of: “Eddie George could not more clearly have signaled that rates are going up if he had stood in the middle of Threadneedle Street with a bullhorn.” Based on Gavin’s proclamation, one of the prop desks put on a huge directional bet, only to lose the next day when the Bank cut rates. Might have been the other way round, but the loss was a real one. Then, as now, there was widespread delight in Goldman’s missteps and misery. The wags in the press had a field day, since Gavin Davies, this great economist and a partner at Goldman, who was topping up his pension fund with a few bob from the Observer had got it so spectacularly wrong. In a witty re-casting of the joke about economists laying end to end and still not reaching a conclusion, the opinion was offered that even if you put the salaries together of all the economists in the City you still would not get to the number Gavin was on. Goldman also lost one its leaders as Bob Rubin left to become Treasury Secretary in the Clinton Administration, continuing a long & proud history of service amongst Goldman Sachs alumnae generally and in the Treasury specifically. Going to Washington allowed Rubin, then the senior partner, to make the single best trade of his life. Departing Goldman partners do not get to take all their capital in one go, there is no “lump sum” alternative. This is sensibly aimed at protecting the Firm’s capital, as well as its liquidity since not all holdings are equally liquid. Normally it was 50% cash now, with the rest in equal installments over five years. Except,if you went to serve in government, in the which case, you got it all now. Exit Bob Rubin stage left with something over $100 million in his pocket. Meanwhile his fellow partners were struggling to make money and may have even given up some capital, with the Firm by some accounting miracles declaring a profit of just $500mm. The Firm was definitely on some hard times; strong management and cost cutting was called far. The partners got to work. One cause of the loss they found was that all the traders were using the same product as a hedge; JGB’s, Japanese government bonds, I think it was. Goldman were the market. From that moment on, the Firm was very pedantic and prescriptive about hedging. YOu were told what you were aloud to use. As an aside, the $2 billon plus debacle at JP Morgan CIO in May 2012 hints at some similar traits. Some of the cost saving ideas were more than a bit short term and at times some of the partners gave the impression they were worried they were about to land in the poor house.
One of the cost saving ideas involved Zurich. More precisely our very recently acquired stock exchange presence. Budgets had it that this was going to be a net money loser to the tune of $500’000 in the next year, albeit we were buying an entry ticket to the future electronic exchange. Roy Zuckerberg was the Goldman partner in charge of the bank; formally chairman of the board of Goldman Sachs & Co Bank and head of equities. Roy had it mind that he would shutter the business he had to recently started in order to save that $500k. The locals in Zurich and the Swiss amongst were alarmed by this idea, and we asked Roy to come to Zurich to talk us about it. Roy met the seven most senior Swiss in the boardroom, where we started to tell him that this was professional suicide in the marketplace and that we would make it hugely difficult to hire anybody in future, as our reputation as a decent employer would be badly hurt. All seven of us were aghast at the suggestion; it was pointed out that the two references Goldman had used for its membership application were Robert Studer, the then retired Chairman of UBS and Bruno Gehrig from the Chairman’s office of the National Bank. As A-list as you can get amongst the Gnomes of Zuerich. The only story I have heard to top that one was the rumour that Ernesto Bertarelli, the former CEO of Ares-Serono and mad keen saior, apparently had one of his references for Harvard Business School written by the Pope, Anyway, the idea we would now tell these luminaries that we were giving up was seen as a horrid prospect and with some justification. One of the traders was so vehement in his condemnation of the short-term view that he said he would front half the losses in year one in return for half the future profits. Our singular view and determination that this was such a bad move gave our Chairman pause for thought. Somewhat consternated he suggested that most American of next steps; he was going to consult with outside counsel. In this case, the advisor was Thomas Baer, scion of the Julius Bär banking dynasty and chairman of the white shoe law firm Baer & Karrer. Some four hours later, Roy returned and summoned us back to the boardroom. “Guys, having talked with Tom Baer, I have decided we are not going to abandon the Exchange.” We asked him what had been said to change his mind. “Well, Tom told me that if that was what I wanted to do, then we should pack our bags, leave town and not come back for 20 years”. Roy looked happy and content with his efforts. The rest of looked at him amazed with a look that owed something to the Ministry of the Bleedin’ Obvious. All of us thinking: “Brilliant. That’s what we told you and now you have spent about 800 dollars an hour to talk to a lawyer to hear the same advice”. But, of course, what we said was: “Roy, that is good to hear. Sound advice from Tom Baer. Let’s get back to business”
Lessons Learned: Banks have a notorious bias for the short-term. Often hoisted by the very same petard that we use on others; the analysts. Still, when these grander projects are done, there should be a long-term commitment. If there is an attempt to undo the work once you have started, it is advisable to think about the message that sends in the environment you are in. The famous Ossie Gruebel, albeit a German by birth, but an honorary Swiss if not one in name, is rumoured to have once quipped on the subject of loyalty: “If you want loyalty, buy a dog”. This is a funny comment, and if you are a trader, as he is, the past does not matter. However, that view does not fit every occasion. On a trading desk, the only decision that matters is your next one; nobody cares about the decision you made last quarter. That view is one often held by Americans and fans of Liverpool Football Club would be well entitled to make sweeping generalisations about Americans. When you are establishing yourself in a market, it is your reputation that will allow you to attract and retain the best and the brightest over the years. Consistency, as well as persistency are important traits. And of course, if in doubt, suggest your boss uses outside counsel.