Chasing Goldman Sachs

McGee, a financial journalist, argued that Wall Street abandoned its economic function and that the crisis followed from that abandonment rather than from any single product or decision.

Her framing is that the financial system exists to perform a utility function: connecting people with capital to people who need it, allocating that capital, and managing risk on behalf of clients. She argues that this function generates modest returns, and that from the 1980s onward the major firms progressively replaced it with activities generating higher returns, principally proprietary trading, principal investment and the manufacture and distribution of complex products.

The Goldman Sachs of her title is the reference point. She argues that Goldman's returns, achieved substantially through principal risk-taking, became the benchmark every other firm measured itself against, and that firms without Goldman's risk management capability, its client franchise or its culture nonetheless pursued the same returns, which is how Bear Stearns, Lehman, Merrill Lynch and others ended up with balance sheets they could not manage.

The structural argument covers the shift from partnership to public ownership, which moved the risk from partners' own capital to shareholders; the compensation structures that paid on annual revenue regardless of the position's eventual outcome; and the movement of talent toward the highest-paying activities regardless of their economic function.

The book is journalism built on interviews with practitioners and it does not model the economics. Its central framing, that finance has a utility function and that departing from it caused the crisis, is a position rather than a finding, and readers may argue that principal risk-taking is part of intermediation rather than opposed to it. The account of how one firm's returns set an unattainable benchmark for its competitors is the most useful part.