Too Big To Fail? How About Too Pernicious And Corrosive To Exist?

The NY Times just ran an astounding OpEd by Greg Smith, an executive director of Goldman Sachs, explaining why he resigned today. Aside from being the head of Goldman's equity derivatives business in Europe, the Middle East and Africa, he was part of the recruiting and mentoring team for new employees. "I knew it was time to leave," he wrote, "when I realized I could no longer look students in the eye and tell them what a great place this was to work... I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival." He worked there for twelve years and says "the environment now is as toxic and destructive as I have ever seen it." He seems horrified that Goldman is no longer about putting their client's interests first but has become a firm about putting itself first. I know the feeling.

I was at Warner Bros Records when AOL bought it and changed the culture-- virtually overnight-- to do the exact same thing. Our company was no longer about what was best for the artists, the employees, our customers or our shareholders. It was now about the avaricious plundering management team. I felt his pain when he wrote "I attend derivatives sales meetings where 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. It makes me ill how callously people talk about ripping their clients off."

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. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

...How did we get here? The firm changed the way it thought about leadership. Leadership used to 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 ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? 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.

These people-- and their unrestrained, even celebrated greed-- are perverting more than just Wall Street. Their impact on politics-- having turned virtually the entire government into a whore house (and not just the Republicans), is toxic for the whole society. David Korten's book, Agenda For A New Economy analyses the problem and suggests how society can mobilize to turn things around before it's too late. Of course, Goldman doesn't agree with Smith's assessment. Yesterday we looked at the Bill Moyers video interview with Reagan's former Budget Director, David Stockman, who is so pessimistic about the pernicious and corrosive impact of firms like Goldman that it makes you wonder if you have to look for an alternative country to live in-- at least until everything gets sorted out here.

I have 3 unrelated financial advisors, all of whom have left big Wall Street banks. Paula made the move over a decade ago and started her own firm. I love working with her. She told me this morning that "considering what happened with the last financial crisis, it does seem like the bankers were looking out for their profits and not their clients. They are too smart not to have known that the risk was as great as their profits but they were happy to pass the risk on to their clients and the government... The reason I decided to start my own advisory firm instead of going to a big player was due to something that is still being argued about today. I always wanted to do what was best for each of my individual clients. This is actually not the standard brokers are held to. Rather they only have a suitability standard. Thus they can be clear with recommending (and profiting on something) that is OK but not necessarilly the best thing. The firm profit can come first in this model. I did not want to live with this conflict of interest each day. Today, the Fiduciary versus Suitability debate rages on and guess whose interests block regulating the fiduciary standard into law for anyone who holds themselves out as a financial advisor. Surveys show that investors have no idea that this difference exists and the big brokers would like to keep it that way."

"I'm not moving from one pile of shit to another."

The above quote is from the guy I've known for more than 2 decades who's leaving his giant Wall Street bank, where he's a senior VP, tomorrow. He's also starting up his own boutique firm. And that quote was part of the explanation of why he was moving on.

I have no business relationship with Roger McNamee, just a friendly one. His 30 year career in the investment business has included the management of mutual funds, venture capital and private equity and he's currently co-founder of Elevation Partners in Menlo Park, CA. I value his opinion on matters like this (plus on music, but that's another story). This afternoon he also gave me on comment on the Times OpEd. I don't know if he had Romney in mind or not, but when people mention "carcasses of companies," how can Romney not come to mind?

"Once an essential engine of capital formation, Wall Street is now a centrifuge that sucks cash out of our economy, leaving behind the carcasses of companies, communities and people... A cozy relationship with regulators has enabled banks like Goldman to become giant hedge funds which treat their so-called clients like marks to be exploited for short term gains."

Funny the Times ran the story on the same day Mitt Romney hosted a million dollar fundraiser for himself at the Waldorf-Astoria in New York City with dozens of the worst and greediest bankster and hedge fund criminals like Jamie Dimon, John Paulson and all kinds of dangerous sociopaths plotting for further disenfranchisement and plundering of the 99%. By the way, Goldman Sachs has contributed $670,000 so far to Romney's slimy SuperPAC, Restore Our Future, and another $521,180 directly to the Romney campaign, making them his #1 contributor. Here are the top 6 campaign contributor's to Romney (not counting the millions and millions of dollars pouring into the SuperPACs he set up):