Goldman Sachs has become a magnet for bad publicity. Last week, I wrote a piece entitled, “Why Bad Publicity Never Hurts Goldman Sachs”. On March 14, Greg Smith (a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa) summed-up his disgust with the firm’s devolution by writing “Why I Am Leaving Goldman Sachs” for The New York Times. Among the most-frequently quoted reasons for Smith’s departure was this statement:
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.
In the wake of Greg Smith’s very public resignation from Goldman Sachs, many commentators have begun to speculate that Goldman’s bad behavior may have passed a tipping point. The potential consequences have become a popular subject for speculation. The end of Lloyd Blankfein’s reign as CEO has been the most frequently-expressed prediction. Peter Cohan of Forbes raised the possibility that Goldman’s clients might just decide to take their business elsewhere:
Until a wave of talented people leave Goldman and go work for some other bank, many clients will stick with Goldman and hope for the best. That’s why the biggest threat to Goldman’s survival is that Smith’s departure – and the reasons he publicized so nicely in his Times op-ed – leads to a wider talent exodus.
After all, that loss of talent could erode Goldman’s ability to hold onto clients. And that could give Goldman clients a better alternative. So when Goldman’s board replaces Blankfein, it should appoint a leader who will restore the luster to Goldman’s traditional values.
Goldman’s errant fiduciary behavior became a popular topic in July of 2009, when the Zero Hedge website focused on Goldman’s involvement in high-frequency trading, which raised suspicions that the firm was “front-running” its own customers. It was claimed that when a Goldman customer would send out a limit order, Goldman’s proprietary trading desk would buy the stock first, then resell it to the client at the high limit of the order. (Of course, Goldman denied front-running its clients.) Zero Hedge brought our attention to Goldman’s “GS360” portal. GS360 included a disclaimer which could have been exploited to support an argument that the customer consented to Goldman’s front-running of the customer’s orders. One week later, Matt Taibbi wrote his groundbreaking, tour de force for Rolling Stone about Goldman’s involvement in the events which led to the financial crisis. From that point onward, the “vampire squid” and its predatory business model became popular subjects for advocates of financial reform.
Despite all of the hand-wringing about Goldman’s controversial antics – especially after the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman’s “Fab Four” testified about selling their customers the Abacus CDO and that “shitty” Timberwolf deal, no effective remedial actions for cleaning-up Wall Street were on the horizon. The Dodd-Frank financial “reform” legislation had become a worthless farce.
Exactly two years ago, publication of the report by bankruptcy examiner Anton Valukas, pinpointing causes of the Lehman Brothers collapse, created shockwaves which were limited to the blogosphere. Unfortunately, the mainstream media were not giving that story very much traction. On March 15 of 2010, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal. This shining example of Wall Street malefaction should have been an influential factor toward making the financial reform bill significantly more effective than the worthless sham it became.
Greg Smith’s resignation from Goldman Sachs could become the game-changing event, motivating Wall Street’s investment banks to finally change their ways. Matt Taibbi seems to think so:
This always had to be the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.
Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren’t just arrogant sleazebags, they’re also not terribly good at managing your money.
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These guys have lost the fear of going out of business, because they can’t go out of business. After all, our government won’t let them. Beyond the bailouts, they’re all subsisting daily on massive loads of free cash from the Fed. No one can touch them, and sadly, most of the biggest institutional clients see getting clipped for a few points by Goldman or Chase as the cost of doing business.
The only way to break this cycle, since our government doesn’t seem to want to end its habit of financially supporting fraud-committing, repeat-offending, client-fleecing banks, is for these big “muppet” clients to start taking their business elsewhere.
In the mean time, the rest of us will be keeping our fingers crossed.