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Gulf divides gold bugs from those only bullish about gold
By Matthew Lynn
Bloomberg News Service
Monday, June 5, 2006
http://quote.bloomberg.com/apps/news?
pid=10000039&refer=columnist_lynn&sid=aGS6lvr8ipiw
Forget "The Da Vinci Code." If you want to get to grips with a real
conspiracy, take a look at all the Goldman Sachs Group Inc. staffers
taking over important economic positions around the world.
The U.S. Treasury, the Bank of Italy, and the Bank of England have
all recently poached key policy makers from the world's most
profitable securities firm.
While no one would dispute that New York-based Goldman Sachs is a
money-making machine full of alpha-brains, it isn't healthy for so
many decision-makers to be drawn from one source.
It is hard to ignore the trend for appointing Goldman employees to
big government-appointed jobs. In the information technology
business, they used say, "No one ever got fired for buying IBM." In
politics right now, the motto seems to be, "No one ever got fired
for hiring Goldman Sachs."
U.S. President George W. Bush has just appointed Goldman Sachs Chief
Executive Officer Henry Paulson as his new Treasury secretary, one
of the most powerful economic jobs in the world.
In January, Goldman Sachs Managing Director Mario Draghi became the
new governor of the Bank of Italy. In Britain, David Walton, who was
chief European economist for Goldman in London, last year joined the
Bank of England's Monetary Policy Committee, which sets U.K.
interest rates. In Canada, Mark Carney, formerly managing director
in Goldman's Toronto office, is now a senior official in that
country's Finance Ministry.
It's not just economic jobs, either. Gavyn Davies went from Goldman
to become chairman of the British Broadcasting Corp. for a few
years. When someone was needed to run London's preparations for the
2012 Olympics, where did they turn? Goldman of course. Paul
Deighton, a chief operating officer at the securities firm, was
appointed in December. When politicians need a job filled, it seems
they just shout at their secretaries: "Get me the Goldman phone
directory."
... Goldman advisers
The traffic goes in other directions as well. Among the firm's
advisers are three former European Union commissioners: Mario Monti,
Peter Sutherland, and Karel van Miert.
"Goldman is plugged into the powers that be in the United States,"
said Patrick McGurn, executive vice president at the Rockville,
Maryland-based Institutional Shareholder Services. "There are going
to be areas where the interests of the Treasury Department and the
U.S. and Goldman intersect. On balance, it's got to be a plus for
Goldman, especially outside the U.S."
The polite word for that is "network." The impolite word
is "cronyism."
In many ways, the desire to hire Goldman people is completely
understandable. In recent years, Goldman has proved itself a
formidable organization. Its profits are strong. It constantly
reinvents itself. It has talent in abundance. Plenty of former
Goldman staffers have done well in government. Robert Rubin, the
Treasury secretary to U.S. President Bill Clinton was probably the
most spectacular example.
... Four Issues
Still, there are four issues that are worth thinking about.
First, it is starting to look like a bandwagon. Politicians will
appoint a Goldman employee because they know the decision will get
them great press. Some of the firm's success will rub off on them.
Yet just as International Business Machines Corp. wasn't always the
right choice for your technology department, Goldman isn't
necessarily the best source of candidates for a government job. The
risk is that better talent is overlooked.
Next, Goldman Sachs managers are likely to have a world view
dominated by trends in financial markets. In the last decade, that
might well have been right. The economy was grappling with
globalization and market liberalization. Yet the next 10 years may
be a period in which asset- and commodity-price inflation are the
main focus. That would require policy makers who weren't groomed on
a trading floor -- and you won't find them at Goldman.
... Set of Preconceptions
Third, the concentration of power is starting to look unhealthy. A
clan of former senior Goldman staffers is now in a position to help
steer the dollar, the euro and the pound. There needn't be anything
sinister about that -- though financial conspiracy theorists could
have a field day with some of the connections. The issue is that
they are likely to have a uniform set of preconceptions and
prejudices. In any area of endeavor, it is healthy to have a wide
diversity of views. Global monetary policy is no exception.
Lastly, there may be the potential for conflicts of interest. For
example, policy makers might need to think whether oil speculation
has to be brought under control. And Goldman is a participant in
that trade. Would a former Goldman manager hammer one of his old
firm's most profitable lines of business? And would they form an
objective view on whether hedge and buyout funds are amassing too
much influence? Maybe not.
... Damage to Reputation
Goldman may not benefit from the recent appointments. Rubin presided
over an era of exceptional economic strength, but Paulson won't be
so lucky with the U.S.'s record budget and current-account deficits.
Draghi will have to deal with an Italian economy still in a
shambles, and Walton is helping set interest rates after the United
Kingdom boom has passed.
If the Goldman staffers mess up, the reputation of the firm they
came from may be damaged.
Politicians should call a moratorium. At the very least, the next
time they have a big job to fill they could consider candidates from
Morgan Stanley or UBS AG. Or perhaps someone who isn't an investment
banker at all.
--------
Matthew Lynn is a columnist for Bloomberg News Service.
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