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Ripping Your Face Off: Goldman Sachs vs. The World

This week marks a turning point for Goldman Sachs and the rest of the investment banking industry. Somehow the king of kingmakers, Goldman Sachs, couldn't buy one if its very own star's silence.
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This week marks a turning point for Goldman Sachs and the rest of the investment banking industry. Somehow the king of kingmakers, Goldman Sachs, couldn't buy one if its very own star's silence. The truth is that the astonishingly brave op-ed piece by the former head of Goldman Sachs Equity Derivatives, Greg Smith, proves that sometimes a hero falls through the cracks and you just can't stop him. No matter how much you bonus him up, he just won't trade character for compensation.

How much can we pay you to rip the face off clients and still put your head down on the pillow at night? The industry asks its stars....

In a book entitled, Conversations with Wall Street, co-authored by me and my former partner at a high end Wall Street search firm, we ask the same questions of the mortgage-securities industry key players: How much are you being paid to put your head down and rip the face off clients and the American public?

The answers, from senior executives at Goldman Sachs and every top investment bank and securities firm in the industry, are as astonishing as Greg Smith's expose -- albeit anonymous. In their candid, confidential moments, they relay how they feel trapped by a system that rewards only bad behavior and punishes good. In conversation after conversation, senior managers and producers recount the Faustian choice they face: sacrifice your hard-earned career and jump ship like Greg or sell your soul for a bonus and keep your moral conflicts to yourself.

Most, sadly, choose the latter. Truthfully, in a culture that values money over mammon, who could blame them? What would anyone of us do in their shoes? I would like to think more of us would choose honor over hustle, but in the dozens of conversations we had with Wall Street mortgage traders, sales people, analysts, and senior managers, only half a dozen refused to sacrifice personal integrity for cash.

One of them was John Servin, who sold credit (bonds & loans) at Merrill Lynch for a decade. Before that he was a leveraged loan trader at a large commercial bank. John sat next to some of the biggest players in the mortgage markets at Merrill. He himself moved billions of dollars of loan products across his screen into the market. Like Greg, he was deeply mortified by the choice he was expected to make and by the truly deviant behavior of industry colleagues who deliberately profited at the expense of long-term clients.

At the time of the collapse in an unusual turn of events, he asked his wife if she would support his leaving Wall Street. She consented and the couple took their three children and relocated to Vermont. John now manages retirement and deferred compensation plans at Fleischer Jacobs Group in Burlington, earning substantially less than his Merrill Lynch big bonus days, but secure in the knowledge that he is helping clients not harming them. Like Greg Smith, for John Servin the personal cost to his conscience could not justify the material cost in his income.

I venture to guess more Greg Smiths and John Servins will be coming out to the public. In this year of 2012, the Wall Street business model is in a deep transition of purpose. What is the purpose of Wall Street to an increasingly resentful American society? What place does the financial industry hold in a global economy that has been devastated by it? Is there anything "good" about an industry that tacitly accepts "ripping the face off clients" as standard operating procedure?

The truth about Goldman Sachs is exactly what Greg Smith said. They used to be a great firm based on integrity, fair dealing and teamwork. That was before they went public in 1999. In those days, they were a client of my search firm and a pleasure to work with. Gradually, however, from 2000 on the firm changed its stripes. By 2004, it was a completely different place with completely different management. As one former partner put it, "The good guys got pushed out and the bad guys got pushed up." Those that operated with integrity in the fixed income division began leaving the firm in droves. "Rip your face off" became the Goldman motto. Clients complained about their double dealing yet because of their market distribution returned again.

Yet this model is not specific to Goldman. In order the stay competitive, every top firm in the industry operates this way.

Goldman just does it better. My partner suggested to the CEO of a small investment bank that he create a market niche by treating his clients well: "You make money and they make money. It's a win-win." The client howled with laughter. It was the funniest thing he had ever heard: "Oh sure, that would be great. There is only one problem: If we don't rip their face off, they will try to rip ours off first."

That is just how the game is played with the Big Boys. These guys think the rest of us are Pollyanna and don't get the joke. But in the wake of the greatest financial crisis of our history, the American public is saying to an arrogant and vulnerable Wall Street: You don't get the joke. You don't call the shots anymore. The "Little People" are replacing the Big Boys by sheer numbers and finally making their voices heard.

So kudos to Greg Smith for breaking ranks and standing up for integrity in finance. It took an amazing amount of courage for Smith to take this step and will take an extraordinary amount of fortitude to weather the attacks that will come from an angry industry. Yet I happen to know, there are many silent Greg Smiths behind the scenes who feel similarly and only need a way to incorporate integrity back into the model.

Greg Smith is an anomaly on Wall Street... a man among the ranks who couldn't be bought. To those clamoring to have Greg's seat, he is viewed as "crazy." To senior management, he is viewed as a "traitor." To colleagues, he is alternately viewed as a "hypocrite" or sarcastically "naïve" -- Wall Street parlance for "sucker."

But in the every increasing moral divide between Wall Street and Main Street, the American Public views him as a hero: one of the few in the seductive world of high finance that couldn't be corrupted.

Monika Mitchell is an expert on Wall Street ethics and the co-author with Peter Ressler of the recently released, "Conversations with Wall Street." She was recently named one of the "Top 100 Thought Leaders in Trustworthy Business in America.