The financial turmoil of recent years has produced an outpouring of op-eds, news stories, books and essays seeking to document and analyze the unfolding disaster. Some of the material has been written by insiders, some by those from the outside. Some by experts, some by astonished laypeople. It's a mass of material which can, remarkably, be summarized in just two teenage acronyms: OMG and WTF.
Those two acronyms apply -- with as many exclamation points as you care to add -- to a piece published yesterday in the New York Times. The op-ed by Greg Smith, a former Executive Director of Goldman Sachs, accused the firm of having abandoned its principles in pursuit of profit. Specifically, he says, 'The environment [at Goldman] now is as toxic and destructive as I have ever seen it. 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.'
That may not immediately strike you as remarkable -- or at least, you might find it remarkable merely that it took Greg Smith a dozen years to notice the nature of the beast he worked for. It would be like a Santorum aide quitting because he found his boss too Catholic. Or like a Romney aide quitting because he didn't want to work for a rich guy.
Yet Smith's testimony is important in two ways. First, Smith is a genuinely senior figure. The Goldman spin machine is already out in force to blat away his comments, but Smith ran the US Equity Derivatives business for Europe, the Middle East and Africa. That doesn't place him at the top of the firm, or even in the next rank down, but his job is -- sorry, was -- of real heft and substance. It's people like Smith who are most closely in touch with how the firm treats its clients day to day.
Secondly, his article summarizes the entire problem of the last few years in a remarkably succinct way. The financial industry -- exemplified and led by Goldman Sachs -- lost touch with its clients. It forgot its ethics. It forgot that its first duty was to serve others.
I believe Smith is right. When I first joined the financial services industry thirty years back, Goldman had an almost unblemished reputation. It cared more about its integrity than its rivals. For a long time it wouldn't handle a hostile M&A bid, because it wasn't sure it would be able to preserve its ethics in the trench warfare of a proxy fight. The firm did well financially, because it did right ethically. The two things fed each other.
But as other firms improved their act, as competition intensified, Goldman sought other ways to maintain its edge. Since everyone fought over the same Ivy League and business school graduates, since everyone paid top dollar, since everyone compelled their employees to work all the hours of the clock, Goldman figured that it could make money from an ethical arbitrage. In plainer language, the firm's senior executives thought, 'We're Goldman, we can shaft our clients.'
And they did. I think the firm has been going sour for longer than Smith suggests, but he works there. Maybe he knows more. They key point, however, lies in his remark that, '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 ... It makes me ill how callously people talk about ripping their clients off.'
And of course, competition breeds a response. Goldman has been so good at doing what it does that others follow. There has been, during my time on the Street and in the City of London, a long slide downhill in ethics. We used to serve clients. Now we serve ourselves. I myself became a hedge fund owner so I could choose my own investors, select my own investment strategy, and cleave to my own ethical path. I'm shocked to reflect that there is almost no leading Wall Street firm I would now be willing to work for. I think they're cowboys.
There is a still more somber side to this story, however, and it's that the people we pay to protect us from these rogues have become the rogues' own henchmen, nodding dolls that wave through every new outrage. David Stockman, a former White House budget director, said in an interview with the Associated Press,
Here's the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything [it does] is designed to keep this rickety structure from unwinding. If you had a [former Fed Chairman] Paul Volcker running the Fed today -- utterly fearless and independent and willing to scare the hell out of the market any day of the week -- you wouldn't have half, you wouldn't have 95 percent, of the speculative positions today.
He's right. Smith is right and Stockman is right. Read those two pieces (here and here) and you have everything in a nutshell. The moral corruption at the heart of the Wall Street. The regulatory failure that means the Fed, the SEC, Congress and every other regulatory agency we have are failing in their duty to protect ordinary citizens. That Goldman is a vampire squid has long been recognized. The conflicted and non-transparent nature of the aquarium is, as yet, far too little understood.
Asked how he sees the immediate financial future, Stockman says, 'The carnage will be unimaginable.' He's right again and I'll bet Greg Smith agrees. But you know what? Nothing will change. There are times when you have to be teenage to know what to say. OMG and WTF.