Breaking News: Goldman Sachs’ Corporate Culture Encourages Money-Making
If your local baker confessed to you that he secretly topped his cakes with cheap, crummy-tasting icing, would you think that he was an evil exploiter of the masses, and that his scheme was an indictment of capitalism? Or would you think, “This guy is destined for bankruptcy”?
Most of us would agree that, in the words of one commentator, it’s “a basic truth: If clients don’t trust you they will eventually stop doing business with you.” Not when it comes to Wall Street, though.
Last week Greg Smith, one of Goldman Sachs’s 12,000 vice presidents, very publicly resigned from the firm, declaring in a New York Times op-ed that “I can honestly say that the environment [at Goldman] now is as toxic and destructive as I have ever seen it.” The company, he continues, puts making money above the interests of its clients.
Now, it’s certainly possible for a company to operate this way (I know nothing about the actual culture at Goldman). But the “basic truth”—I was quoting Smith’s own op-ed—would imply one of two things: either Goldman is going to be punished by the market as it loses the business of once burnt, twice shy customers, or it is somehow being insulated from market forces by the government (or some combination of the two).
What it wouldn’t imply is that the company is “too focused” on profits. To the extent a market is free, the only way you profit in the long run is by creating value. The baker only profits if he makes good cakes, and the banker only profits if he helps his clients profit. A market punishes anyone who isn’t focused on value creation: he may get away with cutting corners for a while, but ultimately he’ll go broke. It’s as simple as that.
But Smith wants us to see Goldman’s focus on money-making as corrupt, leading it to take short-sighted actions at the expense of customers. He speaks of employees wanting to “make the most possible money off” (why not from?) clients, and of employees “ripping their clients off” (he offers exactly zero examples). He wants us to see Goldman engaging in bad business as a result of the profit motive. But if Goldman is acting badly—and that’s far from obvious—it’s because it is failing to abide by the profit motive.
Smith’s op-ed—and the reaction to it—illustrates the way in which a certain moral view underlies the push for bigger government. Viewing money-making as amoral (and even immoral) and money-makers as greedy and selfish, many Americans are led to conclude that the profit system itself has to be restrained in the name of “the public interest.”
Robert Reich, for instance, says that Smith’s critique of Goldman is “way too narrow,” that it applies to Wall Street as a whole, and that the best policy is not for Goldman to reform its culture but for the government to ramp up financial regulations.
As Wall Street hedge fund manager Barry Colvin has put it, “What Mr. Smith alleges is not just an accusation against Goldman Sachs, but a back door attack on capitalism as well. ‘Goldman Sachs is bad. Goldman Sachs represents capitalism. Ergo capitalism is bad.’”
There is an important debate that needs to take place about government cronyism on Wall Street. I am the first to condemn special favors doled out to firms such as Goldman Sachs. But whatever their sins against capitalism, there is no sin in earning money and being proud of the money one has earned.
UPDATE: Yaron shares his thoughts on PJTV.
26 Comments to “Breaking News: Goldman Sachs’ Corporate Culture Encourages Money-Making”
Dan, this is good article. I would suggest for you to ask your audience to research further how many ex-Goldman employees work for the Treasury Department. The number alone does not prove crony capitalism is alive at Goldman’s but invites further research.
Another interesting research project on crony capitalism is the series of conversations between George Bush while President and Hank Paulson while Treasury Secretary outlined in Bush’s recent book. If you follow the money from the amount of Goldman’s stock Paulson owned as a recent ex-executive, how much Goldman stood to lose if AIG went down, how little Bush new about the interworking of Wall Street and finally how hard Paulson pushed Bush to bail out AIG; if you researched and documented all of this I think you would find the most blatant case of crony capitalism in the past decade.
Before anyone feels sorry for Goldman they should have a full disclosure of the above.
Crony capital ranks up there at the top of why you are having some difficulty defending capitalism morally.
I think it is imperative to distinguish between moral capitalists and crony capitalists. Your audience may not look deep enough if you don’t.
Just my thoughts.
Sorry Don, I know your name is not Dan. My keyboard moved - LOL.
Don, I thin your evaluation of what Smith said in his letterr is mistaken. Whehn youy quote He never said (nor implied) that ‘The company puts making money above the interests of its clients.”, like you interpret.
In his resignation letter he shows being disappointed at a culture at GS of making money at the customer’s expense and by misleading the customer.
The context is that GS is being hired by customers to provide the best possible investment advice to its customers and instead they will now give lesser or even bad advice if that makes them more money.
Smith wrote amongst others: “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. ” and “I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. ”
Those two quotes illustrate my interpretation above, that he was saying something totally different than your mistaken suggestion, which is that Smith was reproaching GS of wanting to make money.
“or it is somehow being insulated from market forces by the government”
I would agree that this must be the case and the ramifications obvious. I would love to hears some examples in evidence of this. It’s always useful to back up a good argument with a concrete example or two. Thanks.
“He speaks of employees wanting to “make the most possible money off” (why not from?) clients, and of employees “ripping their clients off” (he offers exactly zero examples).”
To be fair, it is entirely possible that to offer examples would violate confidentiality in some way. A place like Goldman would undoubtedly be very strict about such things.
No, taking nrtcool of the root index isn’t the real purpose; it is a means to an end.The real purpose is to give the United Nations a legitimate means of INCOME. The UN will charge a domain name fee, and will attempt to charge the sites registering those domains ‘user fees’ based on bandwidth as well.Once the UN can legitmately charge a TAX, then it can finish the job installing itself as a legitmate world government.Then the fun really starts. A bit of friendly advice: Buy guns and ammo.
The problem is that in many people’s eyes organizations like GS do represent capitalism. If this is the type of organization that we are looking to as shining examples of capitalism at work then it is not surprising that there is an ever increasing anti-capitalism movement. If we are to have any chance of convincing the world that capitalism is not root of all that is evil then we should be standing in front of the GS headquarters holding up giant banners saying “This is not capitalism!”.
John, I’m afraid we would be too thinly spread then, since ‘dishonesty’ in business is mainstream now. Too many businesses to cover. Maybe we should instead cover the real capitalists? There are less of them, so easier to cover.
Goldman Sachs shouldn’t exist today. It should have gone the way of Lehman and Bear Stearns in 2008. Brokerages go down all the time. Others pick up the pieces and move forward. The only reason they didn’t is because they are a fascist organization at this point and are so in bed with government they can do anything they want. . .and they know it.
There is a big difference between working hard and EARNING money, and having a mafioso-like relationship with regulators that puts your competition out of business and protects you no matter what you do. This guy has some steel in his spine and he is just saying what should have been said a long time ago.
I am what is called an “Independent Trader.” Its one of the things a person with integrity can become when they have devoted their life to the financial markets, but discover the industry is rotten to the core precisely because of what this guy is describing. The whole charade needs to end, and it will. The longer it goes on, the worse the fallout will be.
I am posting this anonymously because, frankly, I am scared of GS execs. They seem to be turning up everywhere today.
Well said.
Thanks for the comments, everyone. Yaron is going to address some of the issues you raised in a new video. Should be up by Monday if not sooner.
Terrible analogy here, by the way, Mr. Watkins. Comparing cake frosting to Mortgage Backed Securities which I know for a fact were being sold as a real estate investment?
Rat poison would be much more appropriate.
Of course, the argument would be “But we were recommending them as a part of a well diversified portfolio.”
In other words, it was just a little bit of rat poison.
And, Brianna is probably right. He probably can’t give any specifics without getting the bejesus sued put of him. But if you have any doubt that is the root of the problem he is discussing, suggest you give it a little thought. GS got away with selling absolutely worthless paper. Nobody else did. Not Lehman. Not Bear. Not even Merrill Lynch who has been at the center of every Wall Street debacle in living memory.
What does that do to an organization when it’s top people know they are bullet proof and Teflon-coated?
It’s all frosting to them.
Also, Dr. Brook, with all due respect—and that is a lot—yes, there are always two sides to each transaction. There is always a buyer and a seller, but when the seller is a trusted adviser and he is urging you to buy so he can unload something he knows for a fact is toxic (which is why GS was aggressively buying offsets on its MBS portfolio in 2007) it’s a little different than a long buying from a short seller in the futures markets. There is all sorts of reasons that a short seller might be selling but there was only one reason Goldman was unloading in 2007.
It’s also another thing when a brokerage is unloading shares of a company it took public to its clients. It might be a lame stock, bi
but presumably they have actual assets backing them and aren’t leveraged 40:1. I talked to a lot of people that were buying these things because they were told they had real estate backing them. It was pointless for me to explain they were nothing of the sort. They were never anything but debt. And there is no way in hell the people selling hem didn’t know that.
Goldman was at the center of this and somehow the TARP program never got started until the insurance company selling them the offsets, AIG, went insolvent. Before you defend these people will all the mastery of reason you have proven yourself to have, consider this. They made really bad choices. I dont care if they have been around for 175 years or a thousand, they should have paid for it on the same way Lehman and Bear did. The fact that they didn’t. . .well, you ever seen those Final Destimation movies? Me neither, but the concept should give you pause before you throw ultour weight behind GS.
Don’t let yourself get sucked into this, Sir. As long as we are using analogies: This wave is double overhead and its outside your lineup. You gotta dive deep. You gotta grab the reef. Grab something solid. You know what I’m talking about: Au.
Briana, you wrote “To be fair, it is entirely possible that to offer examples would violate confidentiality in some way. A place like Goldman would undoubtedly be very strict about such things.”
That’s true, but that’s precisely why it was wrong for him to write this piece and wrong for the New York Times to publish it. From the reader’s perspective, there is no rational way to evaluate his claims. They are totally baseless.
Imagine that you got a letter in the mail from some guy you never heard of saying, “Hey, you know Joe at the office? He’s a pretty corrupt person. He does a bunch of really bad things, he mistreats his wife, and hates puppies and kittens.” If that letter clashed with what you know about Joe, then you’d crumple it up and throw it in the trash. If it was consistent with what you know about Joe, the letter itself would add nothing to that knowledge.
This is why the op-ed has changed exactly zero minds: it says nothing new and nothing specific, so people who have a bad view of GS agree with the piece, and those who don’t, disagree with the piece.
Don, then why not address that issue instead of using the letter as a vehicle for a subject it does not really ‘carry? I do not understand your choice.
I think we disagree about the implication of the op-ed. In your previous comment you quote the op-ed as follows: “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. ” and “I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm.”
Now I take that to be saying that a focus on money-making has led them to sacrifice the interests of their clients. In other words, that they need to put a concern for clients *above* the profit motive. And that amounts to an attack on the profit motive and capitalism—which is exactly how the piece has been interpreted *by many of the people who agree with it.*
Now I admit this is a judgment call, and you could read this as simply saying: we’re engaged in short-sighted and destructive business practices. But I think if that was the real point of the piece you wouldn’t put it as “we’re focused on making money rather than what’s doing best for the client.” (You also probably wouldn’t go the NYT with your complaints, which is inherently suspect.)
Maybe you could clarify where you think I’m going wrong.
dear Don,
I still do not understand the motive for your ‘judgment call’, certainly not from your criticism of Smith’s wording.
YOU may not have put it that way, but others, from a different context, may. It may not be said as best as you could have, but within the context of the other words elsewhere it is clear what he meant, being ‘they are cheating the clients’.
As to your conclusion of the ‘motive’ of Mr Smith to go to the NYT with his story, I do not see anything in the piece to support that.
It is more likely that the man saw the fraud being committed and reported the fraud in public.
Note that he took a big risk for his own career and private life. It is highly unlikely that he would take that risk for accusing GS to be capitalist, something that still carries a big risk of ridicule in this country.
The man is also a money maker himself and has proven that! Why wuld he object to what he does himself? NO, he clearly objects to the ‘culture, not ‘the moneymaking’. GS was already doing ‘money making’ when he interviewed there and he must have known that when he started. He applied for a ‘money making job’, not a ‘redistribution of wealth job’.
Also, if he had shown other repeat behavior that validates the assertion that he is against capitalism, I would have no problem speaking out against that, but where is that substantial proof of that?
I’ll eat my words if I see it, but the onus of an accusation is with the accuser, so I leave it to you.
For me you have not made you case to accuse this man and you ought to retract this piece to do the man justice.
Your point for capitalism is important and should be made, but not at the expense of someone who does not deserve it.
PS In case of a ‘judgment call’, which implies ‘the facts are not clear to me’, so ‘doubt’, wouldn’t it be at least ‘just’ to mention that in the public piece, so mention caveats in your accusation?
Not that I’m in favor of any accusation being made with caveats that basically say ‘I could be totally wrong to accuse this man’. That would make one look foolish, but that begs the question ‘why start it at all if that doubt is on your mind?.’
PS 2 - I usually love to learn from your articles and interviews, but in this one I feel that justice needs to be done, especially by those who champion ‘the benefit of the doubt’ with strangers, like I believe we both do.
Just heard Morning Joe say that Obama took mnlliois and mnlliois and mnlliois from Wall Street during his campaign but with nary a word that ALL of McCain’s TOP FIVE contributors were Wall Street institutions, a $1.5 MILLION compared to the $945K AIG employees donated to Obama. No wonder Republican leaders went up to NYC a few weeks ago for a closed door meeting with fat cat benefactors. So I see where the trolls are getting their nourishment, not from FACTS but from the likes of Joe Dead Intern Scarborough. Joe also likes to call the Stimulus package a steaming pile but had to back down when Mika said that many more teachers would have lost their jobs without it.Headlines from the L.A. Times this morning tout a turnaround in California’s housing market. It’s already happened here in Texas. How can we hear the good news when the haters are screaming their LIES about all of the doom and gloom, especially the BIG LIE that Obama is steering our nation towards socialism?
Don’t drop context, Mr. Watkins. Look at the headlines. What is GS being sued for? They are being sued for the advice they gave on Mortgage Backed Securities. You want to talk about self interest and the morality therein, consider Mister Smith’s self interest. He got out because he knows the hedge funds suing GS have a very solid case. You can call it the rats leaving the ship if you want to call a 34 year old who has become disillusioned over the last 1/3 of his career a rat.
Y’all need to think twice or three times before defending a company that got bailed out through the back door. Particularly because you have a board co-chair that likes to forward confidential e mails while acting as your lead council. You ought to recuse yourself from this one and let the courts and the markets sort it ought. And I don’t mean maybe.
And, they don’t need to put concerns of the clients *above* the profit motive. The need to understand the two are inexricably linked. Suggest you review Ayn Rand’s recorded discussion of “The Money Making Personality.” It is on ARI’s website. She describes situations wherein there is no conflicts between the clients’ interests and that of the companies serving them.
She also makes the point that the Money Making Personality thinks about the long bend of time; not the range of the moment. That is what money appropriators do.
I spent the first half of the 2000s telling my few friends who think like I do about the markets that our time would come and they should hang on. Now, they are telling me they can’t any more as they start changing their recommendations because they have families, mortgages and employees. What about us, Don? Who’s going to defend us??? And if you don’t defend us, we are not going to defend you.
Γαιήοχος Gaiēochos
After the markets ilnugpng under Bush and the Republicans, I imagine Wall Street workers wanted CHANGE and therefore voted for Obama over McCain. New York City is liberal and votes Democratic most of the time anyway.