This week, Greg Smith announced his resignation as an executive from Goldman Sachs in a highly publicized Op-Ed piece for the New York Times, aptly titled “Why I am Leaving Goldman Sachs.” The letter describes a transformation in the “culture” of the giant investment firm that has gone from a business with integrity to one which is now “as toxic and destructive” as Smith has ever seen it during his twelve year tenure. “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Such behavior being tied to a Wall Street firm is not exactly surprising. And in Goldman's case, one wonders where Mr. Smith has been. In the last few years, a number of Goldman's clients have sued the bank, including ACA Financial Guaranty, Basis Capital, an Australian hedge fund, and ABP, a Dutch pension fund. Each argues that Goldman materially harmed them by selling them bad products. And Goldman already paid out $500 Million dollars to settle the Abacus case, in which Goldman was accused of illegally profiting by deceptively selling worthless paper to its customers.
There is a sense in which one looks at Mr. Smith's holier than thou revelation that Goldman was not the noble corporation he once thought it was and asks: really? Haven't you read anything Michael Lewis has written over the last 10 years? Not to mention Matt Taibi—the author of a take down of the mythic Goldman Sachs culture that was published two years ago.
Smith derides his former employer for focusing on profit above the well-being of the client. He puts this is stark business terms. He writes:
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
What Smith takes as a simple truth, is anything but. Trust is in short supply, and yet people work with Goldman and others because they believe that Goldman will make them money. As long as they think that Goldman will make them money, they don't really care that Goldman will make more money or that Goldman is looking out for itself. Clients continue to flock to Goldman because making money is what everyone cares about, not trust. One client of Goldman Sachs was even quoted as calling Smith “naïve” for believing that the business he is in was ever about anything but profit.
Frank Portnoy, writing in the Financial Times, argues that what is really at stake here is the definition of a client. Goldman is now a huge public firm with a few big clients it serves as advisors, and then thousands if not millions of smaller clients who simply buy its products. Goldman needs to have the trust of its major clients, but not is smaller ones. Just as Coca-Cola has an obligation to make sure that what it is selling is actually Coca-Cola, Goldman has a responsibility to sell you what it tells you it is selling you. But neither Coca-Cola nor Goldman are obligated to tell you that their products aren't healthy for your body or your wallet.
The Goldman myth is just that, at least today. After Goldman went public it transformed from a small investment bank with $1.4 billion in investments in 1998 to a huge corporation with investments of $13.96 billion in 2008, using a leverage ration of 26 percent. Does anyone really think that such a company is not driven by the bottom line?
Reconciling ourselves to reality—telling ourselves the truth—is one of the first demands of ethical life.
One such truth is that business today is very different than it used to be. One needs to confront and comprehend such a truth, especially if you want to resist it. And that is the problem with too many of the responses to Greg Smith's letter.
Yes, Smith seems naive and snarky. And why did he give us his resume at the end of his letter? He clearly has some issues. But the basic point he raises—that business should be conducted with some basic ethical standards beyond that of minimally following the letter of the law—is one worth discussing. There are some clients who want to work with bankers that treat them both kindly and respectfully, and they should know to avoid swimming with the sharks. And there is a real question whether pension funds and other institutions are sophisticated enough to swim in the waters with the likes of Goldman. And finally there is the worry that so many of our brightest young people want to work for firms at which the unmitigated search for profit—restrained only by the letter of the law—is the cultural demand. We need more discussions of such questions. So, as distasteful as I found Smith's letter, I must admit I am happy he published it.
A better airing of many of these same issues happened at the Hannah Arendt Center's 2009 Conference, The Intellectual Origins of the Financial Crisis. A number of our panelists touched precisely on this question of the cultural change in business and Wall Street in particular. The book of essays based on that conference will be published this year.
In the book is included an interview with Vincent Mai, at the time the Chairman and Partner of AEA Investors. In this interview, Mai offers an insiders' perspective on the cultural changes that the financial world has undergone. With more eloquence and also more awareness than Greg Smith, Mai offers an account of an inverted world, one in which trust, reputation, and respect have been replaced by a whole new set of values.
I don’t mean that everybody was a saint and today they’re all sinners. Far from it. But there was a set of ground rules that governed the way you did business which imposed a discipline which was central to the way Wall Street worked. It was the same in all the firms. And I’ve watched with a combination of fascination and horror at the way the world has changed, turned upside down.
Mai's story of the way the world of Wall St. has been turned upside down is fascinating reading, and worth more of your time than another 10 commentaries on Greg Smith. The book with Mai's interview won't be out for a few months still, but for now you can read it here. I recommend you do so for your weekend read.