A bomb went off on Wall Street this morning when Greg Smith, a now former London-based executive for Goldman Sachs, published an op-ed in the New York Times saying that the firm has completely betrayed its responsibilities to its clients. According to Smith, who worked at Goldman for over a decade, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."
It's the resignation email to end all resignation emails.
And just what Goldman needs! Another PR crisis, hot on the heels of yesterday's good, share-price-improving news that it had passed the latest round of Federal Reserve stress tests. As Smith puts it:
Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
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.
Ooof! Muppets? I'm not sure even retiring Goldman uber-flack Lucas van Praag can spin that one in a positive way. "Well, really, when we say 'muppets' we mean admired cultural icons like Kermit the Frog, certainly not Animal the Drummer or, heaven forbid, the gluttonous Cookie Monster."
The NYT ran a parallel story in the business section that laid out how the new Goldman culture — the one that Smith attacked — displaced the old Goldman culture, and in a larger sense the traditional culture of Wall Street investment banking.
It goes like this. The old investment banks were partnerships. They could be completely dysfunctional partnerships, but the defining feature of this arrangement was that the partners put their own money at risk. This made them, in the words of Goldman Sachs legendary head Gus Levy, "long-term greedy" (as the NYT dutifully notes). Long-term greed is good — it kept the focus on sacrosanct client relationships. The mantra at Lazard Freres, a one-time top-tier i-bank, was to be always available for the client. And this was in the 1970s and early 1980s, when always available meant something different than it now does in the smartphone era. You had to work at it. You had the landlines and your feet and your wits.
In the past two decades, investment banks moved away from the partnership structure and became public companies. This gave them access to a lot more money, a lot more risk — and encouraged the development of an outsize compensation culture (The bonus is king! You eat what you kill!) that shifted the focus away from advising clients on how to acquire companies or launch IPOs to trading on the firm's own accounts.
This shift is why you often hear people complain that investment banks don't really do anything productive in the economy anymore. Instead, they make a very small number of amoral traders rich and and they introduce enormous amounts of risk to the economy, by trafficking in complex financial products that are barely regulated. You remember Lehman Brothers, right?
This is a familiar story to anyone who's read William Cohan's books about Lazard or Goldman. Cohan has actually advanced the argument of late, saying that Wall Street used the financial crisis to create a cartel — ironically in the very client-centric businesses that Smith maintains Goldman has abandoned!
As Smith notes in his op-ed, Goldman and other big investment banks have an important role to play in the fortunes of the nation. And who knows why he has such a gigantic ax to grind. Goldman Sachs is a lot like Fight Club: the first rule is never to talk about Goldman Sachs. Former employees can be counted on to remain loyal and quiet until they slip off this mortal coil. Even if they become Governor of New Jersey or Treasury Secretary.
But is something wrong with the way that Wall Street does business now, and did business before the financial crisis? Um....yeah! So in the end it's a good thing that a repentant banker from the most controversial bank of them all has reminded us that while Goldman Sachs may be great, it often isn't very good.
UPDATE: Goldman is taking whacks at Smith's tenure at the firm.