What separates the winner -- Goldman Sachs Group (NYSE: GS) from the losers -- such as Morgan Stanley (NYSE: MS) -- in this year's Wall Street money-making game is the way information flows among decision-makers. The winning firm encourages vigorous information flow and intense debate about decisions across different levels of the organization. The losing firms shoved decisions from the top down the throats of traders who executed them.
This came to mind in reading a story about Morgan Stanley's recently departed co-president in today's Wall Street Journal [subscription required]. Cruz reportedly "set a tone in which she didn't welcome dissent once higher-ups made decisions about trades. Communication broke down among some of the key decision makers involved in vetting the mortgage trades." The lack of communication contributed to Morgan Stanley's decision to make a largely unhedged bet on Collateralized Debt Obligation (CDOs) -- one that cost it $9.4 billion in write-downs.
By contrast, as I discussed on CNBC on Tuesday, Goldman encouraged debate between its CFO and COO and a then-lowly proprietary trading desk. This debate led to the successful decision to bet heavily on a decline in the ABX which helped Goldman generate $4 billion in profits -- more than offsetting the $1.5 billion to $2 billion worth of losses from its CDO holdings.
Like Stanley O'Neal, Morgan Stanley's John Mack also suffers from Goldman envy. But they both misunderstood Goldman's secret sauce -- it wasn't so much the proprietary trades as the process of debate that led to those money-winning bets. And that's an advantage that any competitor will find hard to copy.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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