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Goldman Is Evil But McKinsey Is Worse

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Goldman Is Evil But McKinsey Is Worse

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It is remarkable the way that McKinsey goes from train wreck to train wreck yet manages to depict itself as some sort of Corporate America Zelig: ever on the scene but not doing much of anything in particular. This is despite the fact (for instance) that McKinsey was singularly responsible for the biggest value destroying deal of all time, save maybe Bayer’s purchase of Monsanto, which was the Time Warner acquisition of AOL. McKinsey pitched AOL to the Time Warner board five times and the board had the spine to reject it only four times.

Or how about the Enron bankruptcy? McKinsey was all over Enron every bit as much as Arthur Andersen had been, but didn’t leave fingerprints at the crime scene like signing off on Enron’s financials…even thought it was widely acknowledged as having approved of the accounting treatment that sank Arthur Andersen.1

But as McKinsey has gone from sleazy…its former head of the firm and a then-current partner convicted of insider trading….to sleazier…the moving force in a major South African bribery scandal, the firm has managed to outdo Goldman at the height of its financial crisis disrepute. There is no question McKinsey’s advice killed people, a level of damage that is much harder to credibly pin on Goldman.

My most cold-blooded interlocutors, the sort that react to news of corporate misdeeds with a “Gambling in Casablanca?” shrug, are seething over the fact that no one at Goldman was indicted over its role in stoking opioid sales in the US, nor was the firm charged either. And it isn’t due to class loyalties; they all have advanced degrees and are either in the 1% or the top half of the 10%.

For those of you who managed to miss this story, which was the lead item at the Wall Street Journal when it broke, McKinsey agreed to pay $573 million to settle claims with 47 states and the District of Columbia related to the recommendations it provided to Purdue Pharma and other drug companies for their opioid businesses, with no admission of wrongdoing. Most of the money is to be paid in the next 60 days.

The Journal gave some examples of McKinsey’s advice:

Memos McKinsey sent Purdue executives in 2013 that have been made public in bankruptcy court filings included recommendations that the company’s sales team target health care providers it knew wrote the highest volumes of OxyContin prescriptions and shift away from lower-volume prescribers. McKinsey’s work became a Purdue initiative called “Evolve to Excellence,” which the U.S. Justice Department described in papers released last year in connection with a plea agreement with Purdue as an aggressive OxyContin marketing and sales campaign.

According to bankruptcy court records, McKinsey sent recommendations to Purdue in 2013 that consultants said would boost its annual sales by more than $100 million. McKinsey recommended ways Purdue could better target what it described as “higher value” prescribers and take other steps to “Turbocharge Purdue’s Sales Engine.”

Not to put too fine a point on it, but other disclosures about Purdue Pharma showed that the company set out to create addicts. One approach was that it encouraged doctors to switch from a version of OxyContin that lasted 8 hours to a supposed 24 hour version. But the 24 hour version actually provided only 12, at best 14, hours of relief and Purdue Pharma knew that. When patients came back to their doctors complaining that they were in pain, rather than tell them to go back to the 8 hour formulation, Purdue instead told MDs to increase the dose, when that would clearly not solve the problem.

It’s inconceivable given how much McKinsey probes what its clients are currently doing that the firm somehow missed that Purdue’s sales practices were bound to kill patients. In other words, McKinsey was setting out to “turbocharge” clearly criminal practices.

Oddly, both the Journal and the Financial Times skipped over proof that McKinsey knew its clients were exterminating some of their customers, recounted in the New York Times last November:

The [2017 McKinsey] presentation [to members of the Sackler family] estimated how many customers of companies including CVS and Anthem might overdose. It projected that in 2019, for example, 2,484 CVS customers would either have an overdose or develop an opioid use disorder. A rebate of $14,810 per “event” meant that Purdue would pay CVS $36.8 million that year.

From a New York City legal aid lawyer:

Let’s do a little math. McKinsey advised both Purdue Pharma’s and Johnson & Johnson’s opioid businesses. McKinsey said it stopped giving opioid-related advice in 2019. The Financial Times kindly provided this data:

According to the US Centers for Disease Control and Prevention, the number of deaths each year from overdoses involving prescription opioids rose fourfold between 1999 and 2018. More than 232,000 Americans died from prescription opioid overdoses in that period.

Recall that among its recommendations, McKinsey encouraged Purdue to push more drugs through doctors who sure looked like pill mills. So let’s assume that McKinsey’s turbocharging resulted in 5% more than if Purdue had had to stumble around for more aggressive sales tactics on its own.

That’s nearly 12,000 deaths.

And opioids aren’t the only instance of McKinsey having blood on its hands. McKinsey also advised ICE on cost cutting. As ProPublica exposed, in 2017, McKinsey’s recommendations on reducing spending on detainee food and medical care were so aggressive that the ICE staff were uncomfortable with it:

The consulting team became so driven to save money, people involved in the project said that consultants sometimes ignored—and even complained to agency managers about—ICE staffers who objected that McKinsey’s cost-cutting proposals risked jeopardizing the health and safety of migrants…

In what one former official described as “heated meetings” with McKinsey consultants, agency staff members questioned whether saving pennies on food and medical care for detainees justified the potential human cost.

McKinsey in a public whinge (after refusing to comment on materials ProPublica sent in advance of publication) tried claiming it was just helping ICE negotiate better prices, which led ProPublica to publish additional documents showing ICE staff complaining at the time that there was no procurement fat to be cut:

What is McKinsey looking to find? They are looking for ways to cut or reduce standards because they are too costly and to achieve cost savings through edits to the standards without sacrificing quality, safety and mission.

Some immigrant advocates lay six deaths of children and teens in the year after the McKinsey-mandated budget cuts at the giant consulting firm’s doorstep, such as:

A 16-year-old Guatemalan boy’s lifeless body was left near a toilet on a cold hard concrete cell floor from approximately 1:30 a.m. until 6 a.m. in May this year. He was supposed to have been taken to a hospital with a 103 degree fever, but instead was chucked into a cell at the McAllen immigration detention center in Texas.

Footage from an immigrant detention center in Texas obtained by Pro Publica and published online on Thursday, Dec. 5, showed the final hours of the young soccer player, Carlos Gregorio Hernandez Vasquez, who died from complications of the flu while in U.S. Immigration and Customs Enforcement (US ICE) custody.

McKinsey made over $20 million from its work with ICE, which included accelerating deportations, to the degree that, as ProPublica put it, “provoking worries among some ICE staff members that the recommendations risked short-circuiting due process protections for migrants fighting removal from the United States.” In other words, when ICE is the most dogged defender of immigrants in the room, you know its bad.

Oh, and how about probable deaths in Saudi Arabia due to McKinsey helping the kingdom persecute critics on Twitter? McKinsey identified that Twitter was giving heavier and much more critical coverage of austerity measures introduced in 2015 that the conventional press. McKinsey identified three Twitter accounts that were driving most of the negative commentary. One account owner and two brothers of another account owner were arrested. McKinsey incredibly batted its baby blues and said it has no idea that the information might be used to hurt people….in this case, toss them into Saudi pits, um, prisons.

Well, you might say, Goldman has done really horrible things! I challenge you to identify Goldman misconduct that is anywhere near as directly linked to deaths, let alone so many.

Yes, Goldman was a huge and initially very well remunerated player in the 1MBD scandal. But McKinsey was all over the South African Eskom bribery scandal. The McKinsey haul was not as big but the scam was similar: taking a cut from helping government officials loot.

Yes, Goldman was the firm that gave Greece the currency swap that made 2% of its debt appear to go poof (again Lloyd Blankfein, who also approved the 1MBD deal, was in charge her; IMHO the Goldman acquisition of commodities trader J. Aron over time took the firm’s conduct down several notches; commodities traders are know as just about the sleaziest in finance, which is saying a lot). This deal might not have been quite as dreadful for Greece as it turned out to be; currency and interest rate moves after 9/11 worked against Greece. But Goldman was not uniquely evil here. JP Morgan did a similar deal for Italy.

What about the Great Vampire Squid? The financial crisis? If you go back and read Taibbi’s 2010 classic, you will quickly see that once Taibbi gets past the dot com era, the sins he attributes to Goldman are actually those of powerful Goldman alumni, and not the firm. Goldman was not a major player in subprime or in CDOs1, even if it sold some particularly rancid late in cycle CDOs like Timberwolf. Goldman did buy a sleazy abusive servicer, Litton, right before the crisis (some firms who should have known better, including Merrill, bought servicers when subprime was tanking, as if they’d be able to make a quick buck when the market turned. Ooops). But even so, Litton wasn’t in the top ten in servicing back in the day of Peak Foreclosure, so even the damage it did that was wasn’t as bad as that of the leading actors. Bank of America’s servicing book was also vastly bigger than anyone else’s.

But more important, the central theme of all of Taibbi’s colorful takedown of Goldman is that it’s a master of financial pump and dump schemes. But Goldman is an institutional player; its smallest “retail” clients (until a recent plan to go further down-market and I’m not certain how successful it is) are very high net worth. In other words, whatever redistribution Goldman is doing on its own behalf, ex exercises like the runup to the 1929 crash, where Goldman was a major creator of systemically disastrous highly leveraged trusts, is within the ranks of the investing classes, from other monied, usually very highly monied interests to itself. That’s why there isn’t a readily identified Goldman body count. Unlike for McKinsey, which really has destroyed some people’s lives, Goldman instead severely dents their bank accounts.

How about the rise in inequality? Isn’t that more the fault of Big Finance than McKinsey? In case you missed it, neither Goldman nor McKinsey have been the most prized employer among newly-minted MBAs, and that reflects where the big money prospects really lie.  Private equity has long been the hot spot, along with other posts in the money management biz that work off the private equity/hedge fund fee formula. My contacts claim that since the early 2000s, half or more of the billings at all the top three consulting firms, McKinsey, Bain and BCG, come out of private equity.  So who is the bigger collaborator?

McKinsey has been promoting higher pay for executives since the 1950s, when partner Arch Patton accounted for 10% of the firm’s revenues. McKinsey hasn’t often created management fads but has regularly legitimated them and greatly accelerated their adoption.

In my day, McKinsey did do cost cutting studies, but reluctantly and in recessions. Consultants then hated firing workers and McKinsey had the good sense to wonder if head-count-cutting might create future enemies. Now I gather, as the ICE example above attests, that McKinsey has no concern about damage to little people in the interest of firm and (typically) client executive enrichment.

McKinsey did invent the sort of retail financial firm nickel and diming that Elizabeth Warren later called “tricks and traps”; I know the manager on that Citibank study personally and her type of fee and product rejiggering was quickly rolled out to other financial firm clients.

McKinsey most certainly didn’t invent securitization but was a zealous promoter; I recall numerous “If you’re not on this bus, you’ll be under the bus” analyses back in my day. More generally, McKinsey was an aggressive advocate of bank deregulation long before Rob Rubin got his fingers in that pie. McKinsey partner Lowell Bryan touted the idea that banks were all going to go broke (see his 1992 book Bankrupt) and therefore they needed all sorts of gimmies from regulators.

More generally, McKinsey has made it all too clear that it will look the other way as far as client abuses are concerned. As Will Bunch pointed out in the Philadelphia Inquirer:

Imagine that you’re a Hollywood screenwriter, and you have this idea for a movie that would somehow bring the concept of the James-Bond-type-spy-saves-the-world-from-diabolical-evil-genius thriller into the 21st century. Given the grim realities of late-stage capitalism, you labor over your script to create an arch-nemesis that the audience will really hate — a multinational conglomerate with its slimy hands in just about everything.

It’s a given that your villainous firm (your script calls it simply “The Firm”) will advise the world’s absolutely worst dictators — helping Saudi Arabia’s  autocrats identify dissidents, advising Turkish strongman Recep Tayyip Erdoğan on running his brutal regime more efficiently, working closely with the state-run businesses and banks in repressive nations like Vladimir Putin’s Russia and Xi Jinping’s China, even aiding Beijing to flex its expansionist muscles through building islands in the South China Sea.

But that sounds too plain vanilla in an increasingly corrupt world, so you spice things up. Your screenplay introduces The Firm as hosting a lavish party n a remote, exotic corner of China — literally, the other side of the world — with guests arriving on camels and feted in red-carpeted tents surrounded by sand dunes. The camera slowly pans back to reveal the soiree is just a few miles from a vast concentration camp where Chinese guards are cruelly mistreating thousands of Uyghur Muslim detainees.

Before you say that having a party (a partners’ multiday offsite) near the Uighur concentration camp doesn’t amount to endorsement, people who are close to the firm and know China well agree with Bunch. A highly regarded McKinsey alum who built a factory in China in the early 2000s and continues to do business there wrote the firm’s managing director to call out McKinsey’s approbation of the Uighur, um, settlements. As he said to me:

McKinsey has clearly lost a significant amount of its moral compass. My favorite example is China. Last fall my wife and I went to Xinjiang, the westernmost province of China, where the silk road enters China. That region and its capital, Kashgar, has gotten lots of recent press because of the oppression of the Uighur minority. It’s worse than most press describe. It’s a police state like the storm troopers of Star Wars. Last fall (after we were there) McKinsey held its annual senior partner meeting in the desert near Kashgar. For that to have been done was, to me, a clear signal to the Chinese government of McKinsey’s tacit approval of their actions there. It was appalling. No other part of China, including Tibet, is even remotely as oppressive.

The lesson here is perverse. Even with deregulation, even with the revolving door, there’s still enough oversight in finance to catch at least some abuses, even if too many of them result in mere fines as opposed to people going to jail or at least being barred from the securities industry for a while. If nothing else, the existence of regulations means victims can also tell the press and legislators about violations, as opposed to merely depicting themselves as having been treated unfairly (contracts, unless they are between big fish and therefore negotiated, will not be of much help to ordinary Janes and Joes).

And there actually is little tolerance in finance for actual stealing (perversely outside of private equity, a disconnect I do not understand). Look at the outrage over Wells Fargo’s fake accounts scandal, even though the bank took only small amounts from many customers. Wells suffers to this day. I know many people who say they’d never open an account with them. So a second lesson is that dropping below industry-standard sharp practices runs a very large business risk in finance.

By contrast, McKinsey has long had a business model of invading at the fingertip and going for the brain. In some case like ICE it’s a near complete success; the ProPublica account describes how ICE management had become dependent on McKinsey and thus wasn’t at all like the mythical client hearing McKinsey’s ideas and going off and having a robust internal debate about what if anything to implement. By contrast, the Sackers were no doubt confident of their independence yet McKinsey sussed out how to play into their greed in the interest of its fees. So you can get to the position of McKinsey having undue influence via very different routes.3

McKinsey has enough confidence in its abuses not coming to light all that often and, as with Enron, being able to make a credible enough claim that they weren’t influential, that they have far fewer checks on their behavior than even big notoriously greedy financial firms. So don’t expect the opioid fine to slow down McKinsey’s moral decline.

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1 Some of you may recall that McKinsey wunderkind Jeff Skilling had Enron as his client and then jumped ship to become an exec and later CEO. At a McKinsey alumni partners gathering in the mid 2000s, one person addressed the room: “How many of you worked with Jeff Skilling?”

About 1/3 of the hands went up.

Next question: “How many of you are surprised that he was involved in something that didn’t pass the smell test?”

No hands went up.

2 The top CDO arrangers though 2008, in order, were Bear Stearns, Merrill Lynch, Wachovia, Citigroup, Deutsche Bank, and Bank of America Securities. Goldman was prominent due to it apparently having intermediated AIG CDOs with Middle Eastern investors. I’d have to check my archives, but I think it is highly unlikely that Goldman would leave itself in a position to eat AIG losses in the event of a default; the firm is famous for having its interests extremely well covered. But it would also be just like Goldman to intimate it might get in a bit of pain so as not to have to burn some rich and stupid customers.

3 Even in my day, there were certain clients that were widely recognized within the firm as being so dependent on McKinsey as having limited capacity to function on more than inertia if McKinsey were to abandon them. And as one wag put it, “The most profitable clients are the most diseased.”

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