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Goldman Sachs Exec Rips Firm for Short-Sighted Greed

Greg Smith, an executive at Goldman Sachs, picked a heck of a way to spend his last day there. His resignation letter, published in the New York Times, reflects the wisdom of someone who has been with the firm for a while and seen it, and Wall Street, degenerate into a morass of greed, where the customer is viewed as an asset to be stripped.

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. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for […]

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? 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.

Smith talks of the culture of Goldman Sachs, and actually points at Lloyd Blankfein and the President of the firm, Gary Cohn, as having “lost hold of the culture” during their tenure. He says that the firm has become unmoored from the anchor of a strong and trusting client relationship, where the traders are partners with the clients, and now where the traders view them as marks. I especially enjoyed his story of Goldman managing directors referring to clients as “Muppets.” He asks the rhetorical question, “will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.”

The resignation letter was so powerful, that the NYT followed up with a news analysis of it. The article tries to put the letter in a broader context, reflective of the new Wall Street, and the attitude toward clients. Honestly, I don’t know why people do business with these firms anymore. Smith writes, “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.” But that reputational risk has not yet come to pass. Wall Street may have been slightly chastened in 2011 with lower profits, but they still make up an inordinate share of overall compensation and GDP. It’s important for public relations purposes to keep up these appearances of working for the client, which is why Goldman responded to the letter thusly:

A Goldman Sachs spokesman responded to the piece early Wednesday: “We disagree with the views expressed, which we don’t think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”

But I’m not sure that Goldman and the other firms like it have really taken the hit, relative to the damage they caused. From this vantage point it looks like that adversarial relationship to their own customers hasn’t hurt them much at all.

Anyway, just because Smith’s leaving, don’t despair for Goldman. I’m sure they’ll find some former senior Administration official to take his place.

(I know Jake Siewert is only a press aide, but let me my joke.)

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David Dayen

David Dayen