I’ve spent most of my life attempting to wipe out vestiges of judgment. It’s not that judgment is necessarily bad. I’ve just always felt that observation tended to be more accurate, because it was judgmentally neutral.
But, I do have to say, that my fundamental bias away from judgment and towards observation was severely strained as I listened to the Goldman Sachs hearings this past week.
Obviously, the testimony is driven by people who had been substantially lawyered – after all, there is an SEC civil suit and there is always the possibility that the charges could escalate based upon additional sworn testimony or disclosure of emails. Hence, the individuals involved were probably cautioned to be as minimally responsive as they possibly could.
However, a cliff notes summary of the consolidated testimony no doubt indicates, based on what’s come out so far, at least the following:
1. Goldman was obviously in a long position initially premised upon the assumption that all was well in the mortgage and housing market.
2. Perceptions began to change towards the latter part of 2006 as certain Goldman traders started to identify trends, at least in the subprime market, suggesting that not all was right with the world.
3. Based on those discussions and ongoing conversations and analysis – apparently daily, Goldman eventually transformed its entire trading position to embrace a hedging strategy against its long position. That strategy consisted of creating financial instruments to short the market, selling the instruments, and accelerating the shorts. In option (and gambling) terminology, they were “doubling down” on their initial trades. And, based on the testimony on Capitol Hill, they didn’t just double down, they used every potential leverage point available to redirect the risk profile from their initial long positions.
4. They found out in less than two months, according to the testimony, that the strategy was working. In fact, they discovered that the strategy was working so well they were making money hand over fist. Based on the corporate commitment to that strategy, Goldman not only wiped out its exposure to its long position in a faltering housing market at every level (not just the subprime level), but they also happened to stumble on a strategy which was making substantially more money on the short position than they had initially been making on the long position. In light of that, they put on the gas and continued to short the country’s residential market, bagging record quarterly profits thereafter.
5. Of course, nobody at Goldman took personal responsibility for doing anything wrong, by legal or ethical standards, towards themselves, the country, investors, or their clients.
I’m still processing how I’m feeling with all of that.
The slippery slope at Dynetech began to be felt in early 2007. It’s not that our numbers were particularly bad (we were still very profitable), but we were not, on a seasonable basis, producing the numbers that we would have expected for that time of year. In fact, the metrics we typically track were relatively weak for Q1 2007.
Frankly, I thought that it was us. I beat up operational people. I beat up the managers. I took personal responsibility. I launched more initiatives with more acronyms than I can even recall by name. But my thesis at the time was that we had to right the ship because something we were doing was wrong.
By the end of Q2 2007, we were losing money on just under half of our teams. With 34 teams on the road, we had at least 16 that were consistently showing negative weekly performance.
As we all know, the real estate bubble burst in September 2007, which cut our 34 teams down to 22. By that point, our retail operation (which is what we used for new customer acquisition) was losing close to $750,000 a month. We were still making money across the board because of our latent customer base, but continuation of the customer acquisition process became problematic.
As I discover today in the Goldman hearings and as I read through Michael Lewis’ new book, The Big Short, during the first half of 2008, as the entire financial sector melted down, Dynetech, the company that had been built on America’s prosperity, was melting down too. Our 34 teams went down to 16 teams and our 600 employees were cut in half. The terrible thing is that, even based on that, we weren’t able to right the ship. It went from bad to worse.
By October, 2008, the month American consumers went on strike, Goldman made record profits. In our neck of the woods, Dynetech hit a wall. As the numbers were flowing in from the remaining teams we had in the field, it was obvious that we were about to be overrun by a tidal wave.
2009 was the year of that tidal wave. The real estate meltdown in America had wiped us out because it had wiped out the real estate wealth Americans had created. The financial meltdown wiped out a significant balance because it had also wiped out a significant balance of America’s financial wealth. And the final straw wiped out the purchasing power of consumers nationwide.
So, as I sit here and listen in real time, I find myself literally sick to my stomach…but wondering why.
• Is it because I realize that they are just so much smarter than I am?
• Is it because I saw all of the evidence, but never looked at the right places in the economy to find the real reaons (something Goldman did)?
• Is it because hundreds of millions, if not billions of dollars, of our customers’ wealth had been wiped out in the great Tsunami?
• Is it because I allowed myself to lose so much control that I wasn’t able to make the adjustments as fast as the very smart financial pros were at Goldman?
• Is it because so many people across the country lost so much?
• Or that there was so much pain and suffering close up in the lives and families of our laid off associates?
I will always refuse to be a victim. And I will always refuse to complain. But I must say that I am still sick to my stomach.
Here’s what I do know for sure. I just simply wasn’t smart enough to see it coming, understand why, and protect myself and the people in my sphere of influence enough to have protected themselves. I’m not beating myself up over it, but I do know that it will never happen again!