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Henry Thornton - Corporate: A discussion of economic, social and political issues Goldman Sachs and JB Were: A Case Study in Natural Selection Date 20/02/2003
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A new contributor tells it like it is in the mooted "merger" of the House of Were and a giant American investment bank
By Jack C. Stiglitz* Email / Print

Well, howdy folks! Welcome to the first instalment of what I hope will be an enduring and sometimes exciting dialogue. But before I begin, allow me to introduce myself. Jack C. Stiglitz is the name, and absolute return strategies are my game. Truth be known, I am a Bermuda-based hedge fund manager who just happens to hail from the Antipodes. Old man Henry and I bumped into one another while lounging by a hotel pool during his latest US jaunt, and, for better or worse, I accepted an offer to lend a hand with the occasional effort in the literary domain.

Now, between you and I, Henry can be a cantankerous curmudgeon – yes sirree, as cranky as can be! So I have to be careful with what I do and don’t say. It’s also been suggested that I’m a rather harsh critic, having something of a propensity to polarise people…Certainly my two traders – Jessie and Janine – think that I am a tough taskmaster. But I suspect this is more a reflection of my low tolerance of ineptitude: Stiglitz & Sons execute exceedingly complex strategies, and if one is not diligent, market impact costs tend to consume the gains from trade. Delivering alpha is, at the end of the day, our bread and butter!


So without further ado, let us turn our minds to a recent development that the girls found especially interesting: that is, the mooted merger between Goldman Sachs and JB Were. At the outset, I should probably make one point clear: irrespective of which way you slice and dice this transaction, it will not be a merger per se. Make no mistake, JB Were is being acquired, plain and simple (think of a blue whale that decides to scoop up a school of unsuspecting plankton while casually cruising down the eastern seaboard). The ‘firm’, which for many years was viewed as the most mysterious force on Wall Street, has always had a distinct aversion to diluting its gene pool – and rightly so. It has, after all, served as a Mecca for the very best brains in the business (e.g., Fisher Black, Jon Corzine, Steve Friedman, Robert Rubin, Malcolm Turnbull, and John Whitehead, to name but a few).   


Goldmans is undoubtedly a remarkable institution, whose heritage is not at all dissimilar to that of the House of Were. Nonetheless, I would probably counsel the powers that be to exercise some degree of caution. Sadly, the firm’s culture is not what it once was, and there is, to be frank, now very little to differentiate it from the other bulge bracket behemoths (e.g., CSFB, Deustche Bank, JP Morgan Chase, Merrill Lynch, Morgan Stanley, and Salomon Smith Barney). They all seem to resemble the same sprawling franchise, which places a mercilessly high premium on the short-term profit motive, to the detriment of the softer socio-economic considerations that many hold dear.


To be sure, the firm's old partnership structure once endowed it with a rare ability to ignore the myopic whims of the market, and adopt an especially long-term view of the world. In turn, this engendered an extraordinary ethos of excellence, and a commitment to sacrificing self-interested pursuits in order to capitalise on a more durable and prescient strategic imperative. Indeed, I like to think that Goldman Sachs once held a position analogous to the Microsoft of the investment banking industry.


Unfortunately, this is no longer the case. Of course, there is little doubt that Goldman Sachs remains an exceptionally impressive institution, which will continue to wage its relentless war for financial market supremacy. But do not believe the hyperbolic posturing vis-à-vis ‘pastoral’ points of distinction. The regrettable fact of the matter is that these defining attributes were sacrificed as part of the IPO. It is now an entirely different entity, one that is difficult to distinguish from the likes of, say, Morgan Stanley. I think that many alumni would agree that in 1999, the partners threw the baby out with the bathwater.


Such intangible qualities would be one of the more obvious costs of this initiative. That is to say that unless JB Were can somehow preserve the unique characteristics that its partnership imbues, they will surely be lost forever. Yes, before too long, Campbell & Co. will find themselves subject to the onerous dictates of quarterly earnings statements, with the munificent motivations of days gone by hastily consigned to the annals of history. But I suppose when you dance with the devil, you expect to sell your soul.


Now this is not to suggest that it would be an inappropriate path to pursue. On the contrary, there are many compelling reasons as to why the two firms might amalgamate their activities. It is just that management should be attuned to the fact that the decisions they make today will have consequences that ripple right throughout the ages.


As a final point, it is worthwhile reflecting on who actually benefits as a result of this process. Such events generally constitute an inter-generational transfer of wealth, with those presently in power harvesting rich rewards from fields sown by their forbears. In 1999, the likes of Aisbitt, Corzine, Paulson, Thain and Thornton, made hundreds of millions of dollars by cashing in their partnership interests. This was, unambiguously, a once in a lifetime wealth creation opportunity. But it is unlikely to be an experience that is ever repeated again; that is, similar favours will be not be supplied to the next generation of leaders.


In sum, JB Were, as it stands today, is an epic Australian institution. While this may in fact be the right decision to make, I would encourage all stakeholders to think very carefully about the merits of the transaction. Assimilating the two disparate constituencies is likely to be a challenging task, with wholesale redundancies in asset management, equities, corporate finance, private clients, and the back-office. Consider also that the Goldman Sachs of the past will emphatically not resemble the firm of the future…


Notwithstanding the sentiments above, the proposed merger is predicated on sound strategic logic. Combining the bluest Australian blood with the world’s most respected investment banking franchise will give rise to an extremely formidable force, the likes of which has not been seen before. Moreover, one should never underestimate the quality of the intellectual capital that resides within the hallowed halls of this venerable US institution.

The leadership team has an enviable track record of making successful forays into previously unchartered territories, with important precedents aplenty. In Frankfurt, London, and Tokyo, the barriers to entry were seemingly insurmountable, but the firm persevered and ultimately vanquished all contemporaries. There is an explicitly stated objective that it must dominate each and every market in which it operates.

To date, Australia has proven to be a surprisingly prickly proposition. In part, this has been an artefact of the erroneous belief that Goldman Sachs’ reputation would precede it and eventually propagate the requisite deal flow. Fortunately, the mistakes of yesteryear have now been learnt. And as long as John Thornton makes it his personal mission to secure success in the domestic domain, the firm’s time will surely come one way or another. Of course, all this trouble could have been avoided if Goldman Sachs had just bought Macquarie Bank ten years ago (an idea that was seriously considered at the time). Nevertheless, without the publicly traded scrip they probably didn’t have the financial wherewithal to pull off such an ambitious endeavour…


Well folks, that wraps up my missive. I hope you have enjoyed your time here, and I look forward to touching base with you again in the not-too-distant future.


Sincerely yours,

Jack Stiglitz



* Jack C. Stiglitz is a hedge fund manager based in Bermuda, who has previously studied at MIT. He may be contacted at jackstiglitz@financier.com. Female members of the audience are advised that he is single, extremely eligible, and partial to the prospect of entering into relationships with suitably qualified candidates. Key criteria include a valid passport, a desire to live between Bermuda and Monte Carlo, and a high libido. Seriously.

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