It wasn’t very Goldman Sachs-like for Greg Smith to use the Op-Ed page of the New York Times last week to tender his resignation as an executive director, accusing the image-battered investment bank of having shamelessly put its interests ahead of its customers. But then again, Smith’s point is that even Goldman Sachs is no longer like Goldman Sachs now that it has given up the “long term greed” in favor of the short-term variety necessary to produce industry-beating profits and bonuses.
The predictable response from Wall Street was to dismiss Smith as hopelessly hypocritical and naïve — hypocritical because he didn’t resign from Goldman until after he had been passed over for promotion and after he received his 2011 bonus check, naïve for thinking that trading financial instruments with customers has ever been anything but a zero-sum game.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
(Richard Drew/AP) - Greg Smith, an executive director at Goldman Sachs, resigned with a blistering public essay that accused the bank of losing its “moral fiber,” putting profits ahead of customers' interests and dismissing customers as “muppets.”
Such a dismissal would be more convincing, however, if it wasn’t merely the latest piece of evidence of the ethical deterioration at Goldman in particular, and on Wall Street more generally.
In fact, Smith was not a trader of derivatives, but someone who helped to design and sell the complex instruments to corporate treasurers and hedge-fund managers. The boiler-room atmosphere and “rip-out-their-eyeballs” culture that Smith describes jibes perfectly with what we learned just a year ago about Fabrice Tourre, the self-described “Fabulous Fab.” It was Tourre and his colleagues, you may recall, who deliberately set out to create credit-default swaps that they knew would blow up so they could peddle one side of the bet to a client who was in on the joke and another set of unsuspecting clients who foolishly assumed Goldman had their best interests at heart. It cost Goldman $550 million to settle that one with the Securities and Exchange Commission and its former clients.
There’s also recent evidence that this “toxic” culture that Smith describes has infected the investment banking floors at Goldman, where longtime corporate clients get supposedly impartial advice on mergers and acquisitions.
In a scathing opinion issued last month by Delaware’s Chancery Court, Chancellor Leo Strine concluded that Goldman had seriously breeched its duty to the board and shareholders of El Paso Corp. in advising them to accept a takeover bid from Kinder Morgan, in which Goldman itself held a 19 percent stake and two seats on the board of directors. Goldman argued that it took care to deal with this “potential” conflict-of-interest by having its two Kinder Morgan directors recuse themselves from merger discussions and by bringing in another investment bank, Morgan Stanley, to advise El Paso on the terms of the proposed takeover. But Strine ruled that Morgan Stanley’s independence was badly compromised by the fact that its $35 million fee was entirely contingent on the merger going through. In the end, the judge concluded, Goldman benefited in two ways from its unresolved conflict of interest: from the $20 million investment banking fee from El Paso for a transaction in which it claimed to have no active role, and from the lowball (“suboptimal”) price that El Paso shareholders were persuaded to accept from Kinder Morgan, in which Goldman continues to hold a 19 percent interest.