How Toyota and Goldman Sachs Stumbled – And We Could, Too

Powerful and wildly-successful institutions sometimes act like teenagers or addicts, unable to recognize their own self-destructive behavior. This year’s top two examples are Toyota and Goldman Sachs – but the administration and Congress are vulnerable as well to the kind of self-inflicted downward spiral that captured those two industry leaders

Toyota invested decades to develop a sterling reputation for safety and quality, and then squandered this 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 carelessly threw away.  

Goldman Sachs may pay an even greater price. It, too, spent a long time building a world class reputation that married extraordinary market acuity with honest dealing. The self-immolation of that brand may have begun with its principals’ decision to jettison their partnership and become a publicly-held company. This shift in the firm’s legal organization allowed them to cash in, but it also transformed Goldman’s business and culture. Its flagship business of investment banking – giving advice and assembling financing for mergers, buyouts and takeover – contracted so sharply that in recent years, it has accounted for just 10 percent of firm revenues.  In its place, Goldman became a giant hedge fund that creates and trades exotic financial products for 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, while itself taking 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 Goldman faces the same treatment in other countries – starting with Greece and other European governments that bought Greece’s bonds after Goldman allegedly helped to hide some of the country’s fiscal problems, with financial maneuvers much 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 may not be the legal fees, fines and settlements, but the “distraction factor.” For years, its top executives will be absorbed in defensive moves and stratagems to beat the various raps – while their rivals at other firms focus on the 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 their outrage at Wall Street, Washington Republicans remain 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 the Wall Street meltdown was only the first stage of an extended crisis. 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 has all 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. What needs to be done now to defuse the ticking bomb of our fast-rising national debt 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 reshape current entitlement spending not only for elderly people, but also the “entitlement” programs for influential industries and for districts and states whose members of Congress have risen to the leadership. 

If we cannot get past our current 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 unlikely to ever default, as Greece nearly did this week (and still could do, if the bailout fails in any important 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 buyers for our debt, 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 blind to its own self-destructive behaviors.