A week ago Greg Smith, a Goldman Sachs executive director, wrote a remarkable public resignation letter in a New York Times op ed piece. In it he describes a breakdown in culture at the largest investment bank over the years he worked there. He describes a culture that transformed a customer centric business to one where only the bottom line mattered and executives and sales people openly dismissed customers as “Muppets”—basically carrion to be fed off of until another carcass could be found.
I must admit that I am not surprised by his assessment but I am worried that his startling revelations have seemingly been digested and we have moved on to the next day’s news. Even the stock price, which dipped briefly, has rallied above levels prior to the letter. Is that because people have dismissed Smith as just a disgruntled worker, or more ominously, that what he described has been taken for granted as the status quo due to the steady stream of scandals and bubbles over the past decade and people feel a sense of helplessness and resignation to it?
I believe that, in another time, this revelation would be front page news and elicit serious introspection across business media outlets, government regulatory agencies and congressional hearing rooms.
When Goldman Sachs was charged by the Securities and Exchange Commission (SEC) nearly two years ago over its Abacus CDO (collateralized debt obligation) it elicited a larger response, but here Smith neatly explains the cultural underpinnings that allowed such products to be created and there seems little buzz.
We noted here at the time that Goldman helped to create a product destined to fail for someone looking to profit from that failure and then marketed it to other customers. We pointed out that the complex structure seemed to be created on purpose to mask what was inside. Given what occurred with Abacus, you may wonder what took Smith so long to see that was going on at Goldman.
The discussion at the time of the SEC charges, which were later settled for a cool $550 million, was whether the creation and marketing of such products represented illegal activity. Not being a lawyer, I could not give an opinion on the law but it raised the question, “who would want to do business with this firm?” Here a fairly senior executive of the firm answers the question of whether it is wise to do business with Goldman Sachs. Yet their stock price is up. Why? Is it because those who choose to do business with them share in their success personally and do not look out for the people they represent?
Thomas Peterffy, chairman and CEO of Interactive Brokers, addressed this in a 2010 speech to the World Federation of Exchanges. He pointed out that most OTC derivatives "customers" are not playing with their own money. “The customers are finance or investment staff that work for large corporations, state or municipal governments, pension funds and insurance companies. These end-user employees get to drink the fine wines, but it is the shareholders or taxpayers that pay for the overpriced derivatives,” said Peterffy.
Reading Smith talk about the firm’s former dedication to clients sent a chill up my spine as it reminded me of a comment from Jon Corzine in our December 2010 interview where he laid out his plans for MF Global. Corzine said, “Goldman was a tremendous client-driven firm in the years that I was there and I look forward to creating a franchise that is built around the service and needs of our clients.”
I don’t understand how turning a futures broker into an investment bank and risking the capital of 38,000 plus customers to make a one-way bet on foreign bonds accomplishes that goal but it now appears clear that there were similarities between the way Goldman and MF Global operated. It just wasn’t how Mr. Corzine described it.