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Unformatted text preview: y-traded entity is owned by its
shareholders, who demand qu arterly profits. A bank that is oriented towards
qu arterly profits is going to pu t short-term financial incentives above the
long-term interests of its clients. When it comes to investment banks, not all
profit motives are created equ al.
Goldman’s 1990s partners did ju st fine. At the time of the Goldman IPO, the
largest partnership interest belonged to Jon Corzine. Corzine converted his
0.9 percent partnership interest into $305 million. Bu t Goldman’s clients
were not as well-served by the change.
Goldman wasn’t the first major investment bank to convert from a
partnership into a pu blic company. Indeed, it was one of the last. It was John
Gu tfreu nd, the former kingpin of Salomon Brothers, who pioneered the
conversion of investment bank partnerships into pu blic corporations. Indeed,
one can make the case that one of the primary cau ses of the financial crisis
was Gu tfreu nd’s innovation. “No investment bank owned by its employees
wou ld have levered itself 35 to 1 or bou ght and held $50 billion in mezzanine
C.D.O.’s,” observed Michael Lewis in 2008. “I dou bt any partnership wou ld
have sou ght to game the rating agencies or leap into bed with loan sharks or
even allow mezzanine C.D.O.’s to be sold to its cu stomers. The hoped-for
short-term gain wou ld not have ju stified the long-term hit.”
So what can be done abou t this problem? The stock left-wing answer is: tax
the rich. If you redu ce bankers’ profits, the thinking goes, you redu ce their...
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This note was uploaded on 01/27/2014 for the course FINA 2010 taught by Professor Wangyan during the Winter '11 term at CUHK.
- Winter '11