Friday, March 16, 2012

Mr. Smith Is Going To Washington

Greg Smith, formerly of Goldman Sachs, is surely going to Washington. In an Op Ed piece published in the March 14, 2012 edition of the New York Times (, Mr. Smith lambasted his erstwhile employer for having a "toxic and destructive" environment in which making money for the firm mattered more than serving clients, who were sometimes reportedly called "muppets" by high-ranking Goldman executives.

Money managers who deal with GS may well find themselves having to assure clients that they're sophisticated folks who well understood that Goldman is out for itself. And to be sure, the heart of Mr. Smith's revelations isn't exactly news. The SEC's 2003 settlement with major underwriters about the way they deployed analysts to help promote stock offerings is an earlier example of how investment banks thought of themselves before they thought of clients. (See Going back to the 1930s, the Pecora Investigation trawled the slimey side of Wall Street and revealed that a lot of bankers are scum. And a couple thousand years ago, Jesus had a run in with some money changers.

But the problem for Goldman and other big banks is that the average Joe and Joan on Main Street (perhaps a/k/a "muppets") aren't cynically avaricious and don't care for those who are. The same Joe and Joan may have money invested in mutual funds, 401(k) accounts and pension funds that one way or another deal with Goldman. And they'd want some comfort that they aren't one way or another being ripped off by GS.

Goldman announced today that it was reviewing its conflicts of interest rules. One doesn't need a vivid imagination to suspect that Mr. Smith's essay had something to do with this announcement (although a Delaware judge's glance of askance at Goldman's conduct in a corporate acquisition played a large role in instigating the review). Perhaps this announcement will do something to ameliorate Goldman's image as the world's most notorious vampire squid, but GS shouldn't hold its breath.

The financial press is having a rollicking good time with this story, while members of Congress have donned Kabuki costumes and enthusiastically proclaimed their shock at discovering that venal things may have occurred at Goldman. No doubt Congressional hearings are in the works. Mr. Smith will surely receive an offer to testify on the Hill, where he can expect to be asked to confirm under oath that diverse and sundry senior personnel at Goldman are depraved, hypocritical, rapacious, swinish, ravenous, and wolfish, even as they continue to beat their significant others early and often.

In the Internet Age, in which instant celebrity is the life's greatest achievement and mud-slinging controversy paves the way to its attainment, Greg Smith may have limited future prospects on Wall Street, but a damn good chance for a lucrative book contract with gratifyingly valuable movie rights. But let's remember why Mr. Smith is now the best known young financier in the world. It's because people are hurting. Millions are unemployed. Millions are underwater on their mortgages. Mucho millions still feel the sting of losses in their 401(k) accounts from the 2007-09 stock market collapse. And all because of a financial crisis spawned on Wall Street. Mr. Smith's missive resonates. People want someone to blame, and Goldman's very high level of, shall we say, self-regard and self-confidence makes it an easy target.

It's de rigueur public relations 101 that when you screw up, you program the teleprompter for a profuse, sincere and unqualified apology. Many public figures have survived and even prospered by following this script. Others--most recently Rush Limbaugh--have learned that half-measures aren't enough. The one description that is most typically associated with Goldman is smart. But smarts consist not only of knowing a lot about calculus, differential equations, linear and nonlinear regressions, and other mathematical knowledge that can be applied to securities trading and financial engineering. It also involves having the good judgment to understand that you exist in a larger world and need to accommodate the concerns of that larger world. Mr. Smith won't be the only witness invited to testify before Congress, and we will probably soon see how good Goldman's judgment really is.

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