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Reflecting on culture of capitalism as former Goldman Sachs executives charged

Ben Paul
Ben Paul11/11/2018 08:58 PM GMT+08  • 9 min read
Reflecting on culture of capitalism as former Goldman Sachs executives charged
SINGAPORE (Nov 12): Lloyd Blankfein, who stepped down as CEO of Goldman Sachs at the end of September, once said in an interview with London’s The Sunday Times that banks serve a social purpose and are doing “God’s work”. The way Blankfein saw it,
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SINGAPORE (Nov 12): Lloyd Blankfein, who stepped down as CEO of Goldman Sachs at the end of September, once said in an interview with London’s The Sunday Times that banks serve a social purpose and are doing “God’s work”. The way Blankfein saw it, “We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth.”

In the same interview, which was published in November 2009, only a year after Lehman Brothers had collapsed and the whole world had plunged into a massive financial crisis, Blankfein also defended plans by Goldman Sachs at the time to pay more than US$20 billion in bonuses. “[Other banks] made no money and still paid large bonuses. Some are not around anymore. I wonder why?”

Blankfein was, of course, well aware of the hostile sentiment at the time towards bankers and their off-the-rails risk-taking that had tanked the global economy. “I know I could slit my wrists and people would cheer,” he said, in the interview. Even today, with the global financial crisis an increasingly distant memory, many people might still find it hard to swallow the idea of Goldman Sachs being an agent of God.

Malaysia’s Prime Minister Dr Mahathir Mohamad, for one, has said he wants to recover some of the fees paid to Goldman Sachs for organising bond sales on behalf 1Malaysia Development Bhd while his predecessor Najib Razak was in office. Goldman Sachs raised US$6.5 billion in three bond sales for 1MDB over the course of 2012 and 2013, from which it earned some US$600 million in fees and commissions. A large portion of the proceeds from those bond issues were found to have been diverted.

On Nov 1, US prosecutors announced criminal charges related to the 1MDB scandal against former Goldman Sachs bankers Tim Leissner and Roger Ng, as well as the chubby Penang-born wheeler-dealer Low Taek Jho. US prosecutors said that Leissner, who was a partner of Goldman Sachs in Asia, had pleaded guilty to conspiracy to launder money and violate the Foreign Corrupt Practices Act, and agreed to forfeit US$43.7 million.

Now, there is some speculation as to how high up at Goldman Sachs the 1MDB scandal will go. The Wall Street bank has reportedly placed Andrea Vella, its former co-head of investment banking in Asia, on leave. Meanwhile, Financial Times has reported that more than 30 officials at Goldman Sachs — including Blankfein and his successor David Solomon — had reviewed the firm’s deals with 1MDB. “You’re not going to find that what happened… [was] because there wasn’t an appropriate level of oversight,” the FT quoted one banker.

Another FT source was quoted to have said, “There was no concern that the money was going to be stolen. The concern was that this is a new sovereign wealth fund; the concerns expressed were ‘do they understand [the fundraising]?’” Goldman Sachs CEO Solomon, in an interview with Bloomberg this past week, seemed to sidestep the issue of his firm’s possible complicity in the 1MDB scandal. “It is obviously very distressing to see two former Goldman Sachs employees [go] so blatantly around our policies and so blatantly [break] the law,” Solomon said.

When asked whether he could provide assurances that neither he nor any other senior officials at the firm suspected illegality or compliance breaches in dealings with 1MDB, Solomon said: “We take compliance and control in our firm extremely seriously we always have... We are going to continue to cooperate with the authorities and there’s a process in place and that process will proceed.”

While Solomon might feel distressed about the whole affair, there seems to be little risk of Goldman Sachs being hurt too much in financial terms. The company has a market value of more than US$89 billion ($122 billion). For 3QFY2018 alone, it reported revenues of more than US$8.6 billion, and earnings of nearly US$2.5 billion. That financial heft dwarfs its deals related to 1MDB. And, going by news reports on the matter, the firm does not appear to be suffering client defections as a result of the scandal.

Controlling corporate capitalism This brings to mind the Keppel Corp bribery case in Brazil. Just before Christmas last year, Keppel said its offshore and marine arm had reached a global resolution with authorities in the US, Brazil and Singapore in relation to corrupt payments made by a former agent that would see it pay fines of more than US$422 million.

According to the US Department of Justice, beginning by at least 2001 and continuing to at least 2014, Keppel Offshore & Marine conspired to violate the Foreign Corrupt Practices Act by paying about US$55 million in bribes to officials at the Brazilian state-owned oil company Petrobras and to the then-governing political party in Brazil to win 13 contracts with Petrobras and another entity. US DOJ officials said in a statement that the defendant companies earned some US$350 million in profits from the business corruptly obtained in Brazil.

The deferred prosecution agreement with the US authorities and hefty fines seemed an appropriate way to curb the excesses of corporate capitalism. Companies exist primarily to make money for its shareholders. Simply bringing charges against executives who were guilty of wrongdoing would not change the fundamental nature of the company that employs them. But hitting the companies with fines that more than offset the gains from their illicit behaviour might well lead to pressure from shareholders to change their ways.

Indeed, the threat of an even larger fine probably motivated Keppel to quickly make amends once the Brazilian scandal came to light. According to documents made available by the US DOJ, based on the appropriate “offence level” and “culpability score”, the fine would have ranged from just under US$563 million to more than US$1.1 billion. But Keppel received a 25% discount off the bottom of the fine range because of its substantial cooperation with the investigation and for taking extensive remedial measures. This included taking disciplinary action against 17 current and former employees.

While the fines were seemingly large, Keppel’s share price, however, barely wobbled on the news. And, less than a year on, the whole matter seems to have been simply forgotten. As with Goldman Sachs and its 1MDB-related deals, the fallout from its wrongdoing does not appear to have caused it any real financial damage.

Nobody is doing God’s work

Milton Friedman, the great proponent of free-market capitalism, asserted in a famous essay published in The New York Times Magazine in 1970 that the social responsibility of business is to increase its profits (indeed, that was the title of the piece). There is no room for a corporation to purposely pursue desirable social ends. Social responsibilities and philanthropy should be left to individuals, made wealthy by businesses focusing only on maximising their profits.

In one portion of the essay, Friedman sums up the role of a corporate executive this way: “A corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.”

What if the corporation that employs the executive operates in countries where corruption is endemic? Would the corporate executive be derelict in his duty if he did not grease some palms to drive the corporation’s profits? Interestingly, even as Friedman’s ideas about capitalism and freedom were shaping the views of a generation through the 1970s and 1980s, the US government was going after companies that were advancing their business interests by paying off foreign government officials and politicians. In 1977, the Foreign Corrupt Practices Act was signed into law by US President Jimmy Carter.

However, the law has been criticised from time to time for adversely affecting the competitiveness of US companies when they venture overseas. In 2012, current US President Donald Trump said that “the world is laughing at us” for enforcing the law. And, as Keppel and Goldman Sachs’ Leissner have demonstrated, there is plenty of temptation to break the law.

Is the imposition of tougher laws the only way to ensure that companies and the people who run them do not resort to bribery in places such as Brazil and Malaysia? Does the same apply to limiting other adverse effects of free market capitalism, such as inequality and environmental degradation?

Inspired by Blankfein’s once likening the business of Goldman Sachs to doing God’s work, I thought the answer might lie in imagining how God would organise the business sector and global economy. Last year, in a speech at a meeting organised by the Focolare Movement, Pope Francis warned against capitalism making the pursuit of profit its only purpose, and encouraged the giving of one’s self. “The first gift of the entrepreneur is of his or her own person; your money, although important, is too little,” he said. “Capitalism knows philanthropy, not communion.”

Pope Francis also called for a form of capitalism that creates wealth without “discarding” people. “Aircraft pollute the atmosphere, but, with a small part of the cost of the ticket, they will plant trees to compensate for part of the damage created. Gambling companies finance campaigns to care for pathological gamblers that they create. And the day the weapons industry finances hospitals to care for the children mutilated by their bombs, the system will have reached its pinnacle. This is hypocrisy.”

He went on to call for an economic system in which there are ever fewer victims. “We must work towards changing the rules of the game of the socio-economic system,” he said. “One must imitate the merciful father of the parable of the Prodigal Son and wait at home for the children, workers and co-workers who have done wrong, and there embrace them and celebrate with and for them — and not be impeded by the meritocracy invoked by the elder son and by many who deny mercy in the name of merit.”

Even as heavyweight companies such as Keppel and Goldman Sachs confront their failings, it seems clear to me that the world of business is a long way from being able to claim it is doing God’s work.

This story appears in The Edge Singapore (Issue 856, week of Nov 12) which is on sale now. Subscribe here

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