How is Goldman Sachs Like Crassus?

In the Middle Ages, many works of art like paintings and sculpture and tapestry were unsigned. It wasn’t the name of the artist that mattered anyway. It was the art object itself. The artist wasn’t the center of attention. What he was tying to communicate was.

Today, some people are famous for being famous, like Paris Hilton or Donald Trump, who is also famous for his hair and for pretending to be a businessman. Some art is popular for being inscrutable, or meaning whatever the observer wants it to mean. This is a good deal for mediocre artists, who don’t have to put any thought into their creation. But it makes for mediocre art. That’s not to say that every piece of art should teach a lesson or tell a story. But sometimes a soup can is just a soup can. And there is nothing divine or sublime about chicken soup.

A barrel of oil, on the other hand, is always a barrel of oil, no matter how you paint it. The price, however, does change with perception. Crude oil is back over $58. But here we suggest the perception is finally catching up with reality. Maybe the cold weather sobered up oil traders in New York to the long-term realities of oil demand and oil supply. Or maybe oil was just over sold. Or maybe the 3.5% fourth quarter GDP growth in the U.S. is spurring the belief of increased energy demand in 2007. Or maybe all of the above. Whatever the case may be, you haven’t seen the last of higher oil prices.

Has Goldman Sachs (NYSE: GS) become an unelected branch of the American government? And if so, is this a good thing for investors? Henry Paulson, the U.S. Treasury Secretary, comes from Goldman. George Bush’s chief of staff, Josh Bolten, is (or was, or will be again) a Goldman man. The chairman of the Commodity Futures Trading Commission, Jeffrey Rueben, has a Goldman background. And the former director of the White House National Economic Council, Stephen Friedman, was with Goldman before he left for the White House. He’s back at Goldman now.

Maybe working at Goldman uniquely qualifies a man to run the finances of the American government. Robert Rubin, a Goldman through and through, is the case study in favour of letting private bankers run public finances. But let’s not forget that Goldman is a money-shuffler, trading paper for profits and clipping tickets to bring the public what it wants, more stocks, although these days Goldman makes more money trading for itself than brining companies public.

Take Goldman’s Global Alpha fund, a $10 billion hedge fund for friends and family of the Goldman elite. Last year the fund generated about $700 million in fees for the company. Not bad for a year in which the fund lost six percent. But that was the first loss since 1990. Generally, Goldman’s own are well-served by the Alpha fund and its manager Mark Carhart.

“Carhart, a former assistance professor of finance at the University of Southern California, helps oversee other hedge funds, for mutual funds, and scores of other accounts,” according to Richard Teitelbaum at Bloomberg. “In all he and [his co-manager] Iwanowski have $101.5 billion at their command. Carhart and Iwanowski use math-heavy trading tactics that fund consultant Sol Waksman likens to counting cards in a casino. The two lead a corps of computer-loving traders, statisticians, and finance and economic Ph.D.s.”

Great. We’re not saying the Bush administration has been taken over by traders at Goldman Sachs who live to make each other rich by counting cards. That would be too obvious and clumsy and innaccurate. But we are wondering if what’s good for Goldman is really good for anybody else but Goldman. It only really matters if what’s good for Goldman somehow becomes the main force behind U.S. monetary and fiscal policy. And our study of history shows that central banks usually do what is good for the private banks that make up central bank governing boards. The are exceptions, but they are, by definition, exceptional.

Of course the guys running the Alpha fund probably don’t care much about America’s twin deficits. They are out seeking Global Alpha, wherever they can find it. And in that sense, they are in the vanguard of this modern version of American capitalism that makes money allocating capital and evaluating risk. So good have times been for Carhart and crew that he’s comfortable telling a room full of investors that Warren Buffet has it all wrong.

Maybe Carhart is right. But we remember the last time people on Wall Street felt bold enough to knock Buffett off the pedestal he’s occupied as “the world’s greatest investor.” It was in December 1999, when Barron’s ran a cover story titled, “What’s Wrong Warren?”

The article began, “after more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch…Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passé. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.”

That article was published on December 27th of 1999. Six days earlier Berkshire’s A shares traded for the meager sum of US$58,400. They closed yesterday over $110,000. If you’re scoring at home, that’s a 90% pre-tax return. In that same time, the Dow is up 15%. And the tech-stock laded Nasdaq? It’s down twenty-two percent since then.

We’re not saying Carhart is wrong. Frankly, we don’t understand most of what he’s up to. But he does remind us of Crassus. That minor in history is paying off yet again. Crassus was a rich Roman who managed to buy his way into government, eventually forming a triumvirate with Julius Caesar and Pompey. Later, Crassus overreached on a military expedition east of the Euphrates and had his head cut off by the Parthians, but not before they poured gold down his throat. Gold: it’s not just ancient money.

Crassus made his fortune, ironically, in silver and real estate. You might call him a buyer of distressed assets. His slave brigades would chase their way to house fires around Rome, buying up the property after the fire at low prices. We’re not sure this is the origin of the term fire-sale, but you get the idea.

Crassus bought low, sold high, and used his gold to gain power. Eventually, his ambition exceeded his good sense and cost him his head. Plutarch, who chronicled the ambition, folly, comedy, and tragedy of Rome’s leading politicians and thieves (often, if not always, one and the same), has more to say about Crassus and his wealth-building ways.

“Moreover, observing how extremely subject the city was to fire and falling down of houses, by reason of their height and their standing so near together, he bought slaves that were builders and architects, and when he had collected these to the number of more than five hundred, he made it his practice to buy houses that were on fire, and those in the neighbourhood, which, in the immediate danger and uncertainty the proprietors were willing to part with for little or nothing, so that the greatest part of Rome, at one time or other, came into his hands.

“Yet for all he had so many workmen, he never built anything but his own house, and used to say that those that were addicted to building would undo themselves soon enough without the help of other enemies. And though he had many silver mines, and much valuable land, and labourers to work in it, yet all this was nothing in comparison of his slaves, such a number and variety did he possess of excellent readers, amanuenses, silversmiths, stewards and table-waiters, whose instruction he always attended to himself, superintending in persons, while they learned, and teaching them himself, accounting it the main duty of a master to look over the servants that are, indeed, the living tools of housekeeping; and in this, indeed, he was in the right, in thinking, that is, as he used to say, that servants ought to look after all other things, and the master after them.

“For economy, which in things inanimate is but money-making, when exercised over men becomes policy. But it was surely a mistaken judgment, when he said no man was to be accounted rich that could not maintain an army at his own cost and charges, for war, as Archidamus well observed, is not fed at a fixed allowance, so that there is no saying what wealth suffices for it, and certainly it was one very far removed from that of Marius; for when he had distributed fourteen acres of land a man, and understood that some desired more, “God forbid,” said he, “that any Roman should think that too little which is enough to keep him alive and well.”


Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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Teresa Molinaro

Thank you for this wonderful, intelligent article. It made my day!

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