Goldman Sachs, Culture Change, and the Resignation of Greg Smith

I'm off-work on Wednesdays.  I spent the entire morning with my folks today enjoying my mother's Filipino brunch.  A brunch at my parents' household always ends with coffee and my father's argumentative discussion of what he reads from the day's news.  He passed The New  York Times to me after my second gulp.  He wanted me to read what he highlighted with a pencil, "Why I'm Leaving Goldman Sachs."

The article restored  my father's belief in humanity, and he wanted me to tag along.  I don't  know if he has investments he has kept secret from us.  His sudden interest in the financial woes and toxic values of Wall Street alarmed me.  I'm not the right person to talk to about hedge funds, equity derivatives, and other finance and banking terminologies only Wall Street people use and understand.  "What do you want me to say?" I asked.

As I expected, he wanted me to throw some praises for Greg Smith, the article's writer.  He wanted me to condemn Goldman Sachs, Wall Street, and Capitalism.  My father's early adventures with Philippine Marxism and, later, Socialism were obvious.  He wanted to talk about exploitation and alienation for gains and profits.  I could not dance to his music as my reading of the article was different.  I found Greg Smith to be close-minded and insensitive to change.

My father listened.  I reminded him how the Chinese traders in our town spent a little for a sustainable small  profit and how they invest now globally after reaching their goal of becoming millionaires.  Now that they have bigger capitals, they now want quick, big bucks.  They don't care if middle men make huge profits off them as long as they make money by not doing anything.  Greg Smith represents the middle men in my narrative.

I could not condemn the toxic culture and eroding values in American financial institutions even though I wanted to appease my father.  The culture and values of investors are eroding and becoming toxic too.  It is just imperative that the Greg Smiths and the Goldman Sachs of Wall Street have to go with the flow.  Investors don't care about the people who are running their money.  Why would they care, in return, about the investors but their money?

My sister overheard us and pitched in.  "Patients nowadays don't trust doctors with small practice, those who do home visits and volunteer in community clinics. To have a clinic with modern medical facility with effective marketing in a right address means a doctor has to work and spend a lot. If my patients will see me with just my stethoscope and medical bag, I won't be in the system that thinks of profits more than patients. I have to change because my clients change."

My father got it.           

 

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Comment by Keith Hart on March 16, 2012 at 8:34am

From an FT article by the author of FIASCO, now practising as an honest professor of law:

Goldman’s “muppets” are pseudo clients at most – fellow gamblers around a poker table. Goldman will ensure is that the rules of the game are accurately described – the financial equivalent of checking to be sure there are 52 cards in the deck. But it is not obliged to act in a disadvantaged counterparty’s best interests, any more than a savvy poker player is obliged to show a poor player his good cards.

When Goldman disparages unsophisticated “clients”, they are like gamblers mocking the sucker. Their sharp words are offensive, but not new. Wall Street has used such language to describe relationships with less sophisticated institutions for decades. There was the “human piranha” at Salomon Brothers in the 1980s and salesmen “ripping faces off” at Morgan Stanley in 1990s.

Comment by Keith Hart on March 15, 2012 at 6:05pm

Here is a pitch from ethnographer of finance, Daniel Buenza, who seems to think that "culture" is fine to describe what isn't no-holds-barred economics. There is no question, the Smith letter is a total social fact.

Comment by Keith Hart on March 15, 2012 at 2:11pm

Maybe it's a generation thing, M. But the mid 20th century sponsored a hybrid of impersonal rational institutions and personal, even moral responsibility. Max Weber recognized that markets and bureaucracy were impersonal and he feared for the future of western civilization as a result. All previous versions of society had been led by persons who were morally accountable, but not ours. The iron cage would close in on us and the only escape would be though charismatic leaders like Hitler.

Talcott Parsons airbrushed this gloomy scenario for consumption by American sociologists (in The Structure of Social Action, 1937) by suggesting that moral authority could be part of the modern division of labour. Thus people trust their professors, doctors and bankers to be of service to them as individuals, to have their interests in mind, if not at heart. I am old enough to know that this is how it was in Britain and the US until a few decades ago. Believe it or not, professors felt a sort of moral obligation to their students and to each other. But remember that the modern university is itself a hybrid of the medieval guild system and bureaucracy and therefore transitional. The nation-state too sustained a community of citizens whose constructed cultural identity had moral properties, including the idea of public sacrifice. This all peaked in the three decades after WW2 which saw the fastest economic growth and a broadly egalitarian income distribution in the leading industrial countries.

This has all been unravelling since the 80s, not because of some natural process, but because the financial elites sought and won the right to generate and retain grossly unequal returns while disempowering workers and cutting public services (which were always less in the US than Europe). You have presumably never know any other time. Now it is true that some services have been modernised and the idea of the personal doctor or banker or of a teacher who cared for their students looks increasingly old hat.

Greg Smith's sob story doesn't hold up. Bankers have been cheating their clients for decades. Frank Partnoy's FIASCO blew the lid off Morgan Stanley in the 90s. Traders would get together on a Monday morning and their boss would urge them to go out and kill! kill! kill! Who were they killing? Their competitors? No, their clients. They supervised the largest local government bankruptcy ever, Orange County's, by selling them Latin American derivatives that they knew were rotten. Every year the office party took the form of a clay pigeon shoot. Work out the symbolism. So where was Greg Smith when he went into Goldman with all those high ideals of service?

Maybe it is ridiculous to suppose that morality has any place in business, never mind finance. But money systems depend on the trust of their users and the last few years have seen massive erosion of belief in the money we have to operate with. I notice that your posts are usually about culture and science (plus cooking of course), neither of which have the scope to examine the sources of social glue I am talking about. But whether your father was a Marxist or not, his generation and even more the one that fought fascism before, laid the ground for postwar propsperity and they did rely on shared values and rules. I certainly don't want to live in a world that is ruled by anything goes for big bucks. That route leads to gangsters from Capone to Putin.

The morality question isn't even the issue. It is whether people making money are subject to social rules or they can flaunt their own blatant criminality because they have bought all the politicians, judges and journalists. Most of the money flowing round the world does so in channels that by-pass lawful governments. When Goldman Sachs accepts a fee to supply financial services to a client, should the contract include an expectation that they will not knowingly ruin their clients, while slicing off the top on both sides of a monetary instrument they devise? Should corporations pay reasonable taxes on their worldwide earning in order to finance? The Glass-Steagall Act protected retail banking customers from the risks of investment banking until it was repealed not long ago. This act was put in place to persuade people to put their money back in the banks after they pulled it out in the 30s. We could be heading back to that situation now.

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