Wednesday, March 14, 2012

The Goldman Sachs resignation letter

Much excitement today around the blogosphere about Greg Smith's Goldman Sachs resignation letter - which took the form of a New York Times op-ed - in which he denounces the firm's "toxic" environment and commitment to ripping off its clients.

My favorite paragraph was the following:

"What are three quick ways to become a leader [at Goldman]? a) Execute on the firm’s 'axes,' which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) 'Hunt Elephants.' In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."

Having taken the time to read a number of reactions, it strikes me that absolutely no one except for Goldman Sachs itself appears to have any doubt about the basic accuracy of his account.

Instead, criticisms of Smith's column appear in almost all cases to make one or more of the following points:

1) If he's so shocked, shocked, then what was he doing there for 12 years? But this in no way undermines the accuracy of his critique.

2) He says Goldman's culture has gotten worse, but it was always like that. Or, always since it ceased to be a private partnership. Same.

3) He blames Goldman's leadership, but the problem goes far beyond them, reflecting a broader Goldman culture or still broader financial sector culture and incentives. Same.

4) The clients need to be smarter, or they'll inevitably be ripped off. Same.

5) Clients may rationally use Goldman even though they know it rips them off and can't be trusted. Thus, Smith's suggestion that the firm is endangering its future by destroying client trust is overstated. Same.

For myself, long before reading this column, I knew for certain that, even if I were rich enough to use Goldman, I most certainly wouldn't, for the reasons stated by Smith. (Maybe if I were rich enough that they were afraid of me ... ) So there are really no surprises here for me.

I do think, however, that all this - with particular reference to point 5 above - is an important part of the story when we seek to explain financial institutions' recent hyper-profitability. Grist, I would say, for enacting something like the financial activities tax (FAT) that I discuss here.

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