A master of the universe resigns

By Martin Vogel

Goldman Tower
Goldman Tower, Jersey City

Greg Smith had been working for Goldman Sachs for twelve years before he published the resignation letter yesterday which has caused a furore.

It presents a devastating portrait of a corporate culture that is entirely self-serving and betraying the interests of its clients:

“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

“It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.”

Smith describes three ways in which people routinely make money in the firm and thereby get elevated to leadership positions:

“a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.”

One response to this is to question Smith’s sense of timing, as Robert Peston has done:

“Has so much changed over the past 12 years? I’m not so sure. I’ve been watching Goldman for more than 20 years, and I’m not persuaded it was ever the co-op Mr Smith seems to think he joined. Which is not to say that Mr Smith – a Goldman “executive director”, who has more than 2000 managing directors and partners above him in the pecking order – doesn’t have a point. But it is to question why the humungous penny has dropped for him only now.”

Nathan Vardi at Forbes puts it all down to a mid-life crisis. He means this dismissively but there may be a more constructive meaning to the observation. The mid-life transition is a time when individuals connect with aspects of themselves and values that they have been neglecting in earlier years. Rather than the Goldman culture having changed around Smith, perhaps he is seeing it with the lucidity of an outsider that has eluded him until now.

Whatever his motivations, what of the truth in his critique? While Goldman has previous, as detectives would say, there is a real sense in which the culture of investment banks has changed over the years. In the UK, people speak of a culture of honour that was lost after the Big Bang of deregulation in 1986. Many couldn’t stomach the change and got out. The historian, Niall Ferguson, has highlighted the high moral standards pursued by Sigmund Warburg who embodied “relationship banking” in the era before Big Bang:

“Though no paragon – he was prone to theatrical rages – Warburg was a saint by the standards of today’s financial markets. “Success from the financial and from the prestige point of view, important and self-understood as it is, is not enough,” he wrote in 1959. “What matters even more is constructive achievement and adherence to high moral and aesthetic standards in the way in which we do our work.” It is hard to imagine any modern bank chief executive coming out with a line like that.”

Modern bankers are more likely to come out with lines like this – from The Guardian’s banking blog:

“I remember in my first few weeks I sat down with one of the structured products guys. He was selling so-called PFI deals, where local authorities buy a complicated financial instrument to pay for, say, a hospital. I asked him: where’s the benefit for the local authorities in this? He was aghast. ‘What are you, a socialist?’”

What’s interesting about all this is not so much that banks behave in this way. Didn’t we already know that? Rather, the fact that the disclosures come from within is a sign that staff are experiencing discomfort with the gap that has opened up between banking culture and society at large. Greg Smith is saddened by how far Goldman people are from model citizens. His account resonates because it is so forthright about where this leads:

“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.”

The speed with which his article has electrified the commentariat is a sign that it is on society’s side that the gap has opened and the banks haven’t cottoned on. As Robert Peston puts it:

“The spirit of the age is indeed that banks should revert to their role of servants of capitalism rather than masters of the universe. If Goldman fails to learn that lesson, it may well lose the clients that are the source of all those enormous bonuses. The bank’s rather lacklustre share-price performance over the past year may imply that perhaps in this vital regard it is something of a slow learner.”

What’s true of banking is more broadly true of business as a whole. In today’s consumer capitalism, businesses that thrive are those that concentrate more on the value they create for customers and society than on how they can maximise their own gain in the short term.

Image courtesy Saebaryo.