The Point

How Toyota and Goldman Sachs Stumbled — and We Could, Too

May 4, 2010

Powerful and wildly-successful institutions sometimes act like teenagers and addicts, unable to recognize their own self-destructive behavior. This year’s top two examples are Toyota and Goldman Sachs. After investing decades to develop a sterling reputation for safety and quality, Toyota squandered its brand not by accident, but by myopic design: In a benighted chase for higher profits, Toyota’s top brass demoted vehicle safety from its long-time perch as the firm’s number one operational measure, to number four. Everyone inside the firm got the message — and now consumers around the world have as well. So, Toyota will spend years working to reclaim part of the worldwide market share it threw away.

Goldman Sachs may pay an even dearer price. It, too, spent a very long time building a world class reputation that married extraordinary market acuity with honest dealing. The self-immolation of that brand probably began with its principals’ decision to jettison their partnership and become a publicly-held company. This shift in the firm’s legal organization not only allowed them to cash in; it also transformed Goldman’s business and culture. Its flagship business of investment banking — giving advice and assembling financing for mergers, buyouts and takeover — receded so sharply that in recent years, it has accounted for just 10 percent of the firm’s revenues. In its place, Goldman became a giant hedge fund that creates and trades exotic financial products for both its clients and itself. What we know now is that once the top brass’s financial positions were no longer tied to the firm’s long-term value, as it would be under a partnership, a seemingly insatiable drive for huge, short-term profits led them to create products which they simultaneously hawked to their largely institutional clients of pension funds, endowments, banks and other financial institutions, even as they took financial positions against the very same products.

Coming back will be harder for Goldman Sachs than for Toyota. Toyota has to reengineer its operations — a serious challenge — in order to restore the core position of safety and quality. But automobile recalls are routine, even if the extent and reasons in Toyota’s case were not; and several years from now, a reconfigured Toyota could be back on top. But Goldman faces years of civil suits by government regulators, their own shareholders and their former clients, as well as possible criminal charges — and not just in the United States. Goldman faces the same treatment in other countries — starting with Greece, whose fiscal problems Goldman allegedly helped to hide using financial maneuvers like those employed by Enron in its final, desperate year. Based on what has happened to other firms that found themselves caught up in extended legal problems, the most important costs to Goldman will not be the legal fees, fines and settlements, but the “distraction factor.” For years, its top executives will find themselves absorbed in defensive moves and stratagems to beat their various raps — while their rivals at other firms focus on the subtle shifts in markets and the economy that can presage large changes. And this doesn’t even count the herculean task of rebuilding a brand that now stands for both self-dealing and double-dealing.

Without realizing it, administrations, congresses and political parties also can turn self-destructive. The GOP brand in economic stewardship, for example, certainly suffered serious damage from the policies of a Republican President and Congress that ultimately culminated in the worst economic crisis since the 1930s. Yet, even with 60 percent of the country still blaming the Bush administration for the bad economic times, and the public directing the worst of their outrage at Wall Street, Washington Republicans remained committed to a “strategy” of stopping the Obama administration from reforming Wall Street.

Then there’s the matter of the national debt. Eighteen months ago, in this blog, I warned that Wall Street’s meltdown was only the first stage. Stage two was the deep recession triggered by the financial meltdown; and stage three would be the fiscal crises created by the bailouts and stimulus used to address the first two stages. That all has come to pass; the open question is how self-destructive our response will be. We pulled the financial system back from a collapse that would have ushered in another Great Depression, with only a normal quota of self-inflicted wounds — like letting Goldman and JP Morgan Chase claim full payment on deals with AIG which the taxpayers rescued, and not forcing them and other bailed-out institutions to use their new, taxpayer-financed capital to expand lending to businesses. The American brand is successful pragmatism: Figure out what needs to be done, and then go do it. But what needs to be done here is to reconfigure the tax system so it produces more revenues while leaving the economy more efficient — think of tax simplification that jettisons lots of special interest tax breaks — and to reshape current “entitlement” spending for not only elderly people, but also for influential industries and for districts and states whose members of Congress have risen to the leadership.

If we cannot get past the partisan warfare, the United States in a few years could find itself in Toyota’s place, with a tainted brand and smaller political market share. Our Treasury bills and bonds are very unlikely to ever default, as Greece nearly did this week (and still could do, if the bailout fails in any significant way). But the normal politics-of-least-resistance will never reconfigure taxes or reshape spending. Instead, it will lead us to a place where we have to pay out more and more to attract foreign investors, and those higher interest rates could consign the American economy to years of very slow growth. That’s what can happen to a great nation that insists on acting like a child or addict, blind to its own self-destructive behaviors.

Read Dr. Shapiro’s related Huffington Post piece: Goldman Scandal Erodes Case for Cap and Trade, April 28, 2010.

One thought on “How Toyota and Goldman Sachs Stumbled — and We Could, Too”

Comments are closed.