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Blame bad managers, not the banking system, Op-Ed, The Times (London) by Michael Sherwood, October 23, 2009

When Goldman Sachs came to Europe in the early Eighties, the company chose to establish itself in London. When I joined in 1986, we were barely a few hundred people. Big Bang was upon the City, and merger after merger created a handful of very large financial powerhouses.

As a private partnership, we chose a different route. People are our only tangible asset. That is why we handpick them, one by one. We have built our business organically here in London, where we now employ 5,500 people.

As an investment bank, Goldman Sachs’ mission is to match the capital of its investment clients — who aim to grow the savings of millions of people — with the needs of its corporate and Government clients — who rely on this finance to generate growth, create jobs and deliver products and services.

Recently, however, there has been a sizeable outpouring of anger against financial institutions. "Banks" are seen as having caused the financial crisis that led to the economic downturn, with devastating effects on communities across the world. More recently, there has been concern that institutions are returning to the practices that created the problems.

The truth is that the financial crisis has not been the result of any particular type of financial institution failing. What is common to the investment banks, commercial banks, mortgage banks and insurance companies that failed in the past year is poor management practice. This is particularly true in risk management. In this area, it was too easy for company bureaucracy to overcome personal accountability; too much reliance was placed on one business line; and less-than-effective risk models and accounting treatments undermined management’s ability to make timely decisions.

We understand the concerns some have with respect to risk. It is important to recognise that the vast majority of the risk we undertake is on behalf of our clients. This means helping a company finance a merger or acquisition; it means helping a pension fund reduce or increase its exposure on a particular investment; it means guaranteeing the price of oil or wheat for a company heavily dependent on commodities. Simply put, much of the risk we assume allows our clients to fund innovation and achieve their growth objectives, creating jobs in the process.

The ability to commit capital and provide funds to the marketplace is important at any time during the economic cycle, but particularly so when those lubricants of economic growth are scarce.

We recognise our obligations, and part of that is managing our risk. That is why we believe strongly in knowing our financial position every day and maintaining the strength of our firm to withstand the toughest of market conditions.

From recently recruited graduate to senior leader, we all believe in the same values: our clients come first, our reputation is paramount and our business principles must ensure the safety and soundness of our firm. It is no accident that our senior leadership team has remained broadly intact throughout this period. We rely on each other, not on any expectation of outside assistance.

At the same time, we fully appreciate the role that governments and central banks have played in restoring confidence to financial markets in the past year. Those whose business it is to lend should be in a position to lend, and those who provide advice and access to the capital markets should stand up for their clients and accelerate the economic recovery.

Pay is the most emotive topic in this whole debate. It must reflect the company’s activities and the risk they present to the overall financial system. While Goldman Sachs has this year reported three strong consecutive quarters, the firm has reported an average return on shareholders’ equity of approximately 21 per cent since going public in 1999. More than anything else, the firm’s consistent returns for the past ten years have been part and parcel of broad economic growth.

There is a view that Goldman Sachs has set aside too much for pay and benefits despite the rebound in financial conditions. Here, it is worth noting that, consistent with the firm’s remuneration principles, which are available on its website, deferred income for its senior people will include a significant portion of shares which they must hold for at least three years. Senior executives are required to retain 75 per cent of the shares they have received until they retire. If conditions deteriorate, the value of those shares may fall.

Our job, as stewards of our company, is to provide a good return for our shareholders.We need to maintain a long-term remuneration structure, consistent with G20 guidelines, that encourages appropriate behaviour just as much as it disincentivises bad behaviour.

This is not the time to throw out the whole market-based capitalist system. In my 23 years at Goldman Sachs, all but two of them in London, I have seen how markets have a remarkable ability to heal themselves. They are still the most effective mechanism yet invented to allocate capital where it is most needed, to promote long-term prosperity for the vast majority of the population. Markets are not perfect, however, which is why we fully support Government and regulatory efforts to raise capital, liquidity and risk-management standards.

Michael Sherwood is vice-chairman Goldman Sachs group and co-chief executive officer Goldman Sachs International.