1/31/09 Part 1: Carlos from Goldman Sachs, solving the financial crisis

Up at 6:30am again ugh. Headed over with the other SU kids to the Goldman Sachs office here in Geneva to see Carlos, a 1990s graduate from SU who works for Goldman Sachs in asset management for private clients in South America. He started off by talking about his personal experience studying abroad, moving from his home in Brazil to live in Selinsgrove, PA which is basically the biggest cultural shift someone could have. Carlos pointed out that studying abroad isn't for everyone, but it allows you the opportunity to rebuild yourself in a new place and really discover who you are. He also talked about the benefits of going to Susquehanna, a small university, which were great access to professors, and enhancing important communication skills.

Next he discussed his personal experience with the process of interviewing for competitive jobs like with Goldman Sachs was that you need to know the content well, maybe even study it ahead of time. More importantly, you need to be able to communicate well, which also helps if you don't know some content. Also if there is something listed on your resume, you better be ready to fully back it up and discuss it.

Then Carlos went into an overview of the structure of an investment bank, which is divided into 3 areas: Trading (proprietary, for clients), Investment Banking (IPOs, M&A, etc), and Asset Management (mutual funds, private clients). This was interesting because I got a quick tour of his trading desk office after his talk, where he pointed out the teams for different regions like France and South America, and where 6 people out of the 40 total had just gotten laid off.

I asked Carlos several very difficult questions about the financial crisis and his perspective on it, especially regarding potential government intervention and the solvency of banks. His opinion was that the US govt needs to step in and capitalize the banks more and create a bad bank to buy up troubled assets.

Carlos's position:
He elaborated that the US government needs to step in and make a market for troubled assets (like subprime) which currently do not allow for insitutions to purchase them, even if they wanted to. I asked him for his outlook on the stock market and he said he expected the government stimulus to create a market bottom in the first half of 2009.

My position:
This financial crisis will rival the Great Depression in scale and will take years to get through. The stock market will not bottom for years, and it will be at levels below DOW 5,000. Excessive borrowing, levaraging, and risk taking is what got us into this mess... so how can the government borrowing excessive amount of money to try and spend its way out of this depression work? You don't cure a heroin addict (market with extreme excess of borrowing) by giving him more heroin and telling him to take it all (govt borrowing excessively to stimulate economy).

This plan is inevitably doomed to fail... and despite what politicians and media would like you to think, the government does not have an infinite amount of money to constantly bailout the banks with. The US govt must borrow funds from somewhere, mainly China and other nations. We may reach a point of no return where the government can't borrow any more money... and then we are in big trouble. This could very well destroy the economic and political viability of the US govt, as it is unable to borrow money to finance its day to day activities.

The only way to resolve this crisis is to force the banks to stop lying about their losses and tell the truth about their financial state. Many banks will fail and many people will lose their jobs. However, this is much better than the collapse of the US govt, whose future is increasingly tied to that of the big banks as more and more taxpayer money is given to them.

I proposed that the government force banks be to mark their assets to market and admit their losses. If they go bankrupt because of it, than so be it. If necessary, the government could also use the $250 billion in leftover TARP bailout money to spin off new banks with a clean slate in order to get lending in the economy restarted.

We will not fix this crisis by just throwing money at these terribly managed banks and rewarding their bad business decisions with billion dollar bailouts. If we make the banks admit to their losses and they fail for their bad business decisions, just like capitalism is supposed to work, good banks will take over the business of the failed banks and the economy can get back on its way to recovery.