In an outpouring of rage, shame and frustration, Greg Smith wrote in The New York Times yesterday, the day of his resignation from Goldman Sachs, that the investment bank had become "as toxic and destructive as I have ever seen it". During Mr Smith's 12 years with the firm, something did indeed change in the way banking is conducted and not just at Goldman Sachs, but everywhere else.
Investment banking went from being "relational" to being "transactional". Clients ceased dealing with a single investment bank, using it as a trusted adviser and facilitator, almost as a family friend, and began to shop around for the best provider of the service it was looking for at a given moment. If I want to do this sort of transaction, I shall go to Bank A; if another sort of transaction, I shall go to Bank B. In response, banks started to think in terms of offering products rather than a broad-based service.
This change had begun some time before Mr Smith started his career. Many banks had originally been partnerships, with the partners doing their work in a single big room, each one sitting at a rather grand desk. These business relationships, which each partner would handle on his own, using only the administrative services of the firm, would often last for decades. Goldman Sachs continued to operate with a partnership spirit until 1999, when it became a public company. Now these firms are more like high-class shops with products to shift. Even loans become products.
Alongside this change from counselling to selling came a new emphasis on avoidance, that is avoidance of regulation and avoidance of tax. Avoidance has become a feature in what investment banks do. The technique is the same in both cases, exploiting loopholes in the regulations. The first one serves the bank's own purposes; the second, the clients'. Which is not to say that the activity is illegal. Mr Smith comments: "I don't know of any illegal behaviour."
In his article, he recalled the culture he encountered when he first joined Goldman Sachs: "It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients." And he bitterly contrasted it with what he had more recently encountered. He would attend meetings with fellow executives at which "not one single minute is spent asking questions about how we can help clients. It's purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client's success or progress was not part of the thought process at all... people talk about ripping their clients off." The clients are called "muppets" in internal emails.
Having long sensed and seen evidence that this way of doing business is rife, almost natural I sometimes think, given the ease with which people do it, I have developed a rule. If you have money, there will always be somebody trying to take it off you. I apply it in business settings and in managing my own resources. When I receive an unsolicited letter asking me to some tax planning seminar, or containing an "offer" from my bank, I think only that these people are trying to take my money away through charging excessive fees.
However, if I were running Goldman Sachs, I would have a simple answer to Mr Smith's diatribe: "Goldman Sachs does not deal with the public. All our clients are themselves professional firms or businesses and it is caveat emptor or let-the-buyer-beware out there. If our clients allow themselves to be ripped off, as you claim, they have only themselves to blame." This is an arguable defence, even though products are often made unnecessarily complicated to thwart rational analysis. But, again, there is a simple answer: if you don't understand it, don't buy it.
What Mr Smith is pointing out, however, is the sheer unpleasantness of operating in the way he describes, its moral worthlessness. Indeed, he calls some of his colleagues "morally bankrupt". He has longed for a Goldman Sachs leadership that would 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 axe murderer), you will be promoted into a position of influence."
My guess is that if Goldman Sachs operates as Mr Smith describes, then it is a relatively rare example of the heartlessness with which financial firms can behave, driven by greed. I can think of a different example. A large endowment fund, of which I am a trustee, employs a successful, long-established investment manager in the US to undertake a specialised task. On more than one occasion in the past 10 years, when markets have become unfavourable, the firm has advised us to withdraw some of the funds it manages on our behalf and bring them back when the outlook improves. The firm loses investment fees as a result but earns enormous goodwill and trust from us. I must send Mr Smith the name.