Greg Smith and Goldman Sachs -- justified opinion?

What do you all think of this? Is his opinion justified?

I once worked in the finance industry and found it to be quite stifling. I ended up quitting to go into science.

The reactions I’ve seen have been either praise or some variation of “Well, duh.” I’m not really the latter reaction; I think those people are just trying to impress upon everyone how savvy and jaded they are. What’s important is what Matt Taibbi points to as the “simple, specific problem in the company: the fact that Goldman routinely screws its own clients.”

Is he justified? It’s possible he had no problem looking the other way for years, but is now coming out as the Last Honest Man at Goldman after he’s made his money. But I think it’s still possible to work in investment banking while believing that it’s bad business to bone your clients. If your clients decide they can’t trust you and that you view them with contempt, they’re going to take their business elsewhere.

Stifling? This guy is talking about corruption. Did you get any hint of that?

And as to the main question – I don’t think people on the outside know enough to be sure, though I haven’t read much of the reporting on GS. I would love it for them to be the next target of Anonymous, so we could all pour through a few million internal emails and see if they revel in screwing over their own clients. It wouldn’t surprise me.

Stifling because of the corruption. Yes.

I think these charges are very much real if hyped up a bit.

I find it interesting that this guy is being billed as a very senior GS executive, although this is understandable since it gives him more credibility. He was essentially a VP - one of 12,000 VPs that work for the company.

Yeah, that’s according to a Goldman spokeswoman whom the WSJ gave anonymity to for some reason. I’m sure we’ll eventually find out that he was just a parking lot attendant at one of their offices.

I’m largely in the “duh” camp. Pretty much from the moment a financial adviser/manager position was created in the history of the world, probably for one of the kings of ancient Mesopotamia, the adviser/manager looked for ways to increase their personal wealth using what they managed. When was the first choice between what would be best for the client but not as good for the manager and what would be less good for the client but better for the manager? Probably shortly thereafter.

That having been said, there are two recently developed things which make the current practice of this ancient tradition problematic. Firstly the massive centralization of financial power in the hands of a few investment banks. No matter how rich or powerful an ancient kingdom may have been, none of them girdled the globe as modern financial systems do. Secondly, the opacity of financial deals, especially modern instruments. An ancient king could go down to his counting house an if he saw the minister for finance making payments to a farmer who was not producing, that was relatively easy to diagnose. Who, today, can watch the financial watchmen? Between deals designed to obfuscate, and privacy/intellectual property claims/laws, how is an investor supposed to know if they’re being milked dry? The first is a problem for society in general, the second for an individual investor.

I have another, more market based, objection to the modern practice. The current structure puts bankers in the position of picking winners for investment dollars, and the criteria they’re using is whichever gives them the most return for the quarter, not the soundest business for the long term. Growth in any economy requires a balance of long term and short term investment priorities and if the corporate structure in the past three decades has taught us anything it’s that in publicly traded firms, short term is king.


That’s interesting, because ‘stifling’ is not even close to the term I would use. ‘Corrupting’ or ‘criminal’, or at least ‘unethical’ seem much more suitable.

To be fair I saw those figures in a letter that was written by their CEO and posted on CNN (still biased, but presumably more credible than an unnamed source).

The Op-Ed doesn’t really disagree with this. What he was saying is that the business is now structured so the interests of the client and the company (and thus the adviser) are disjoint, as compared to the old days where they were aligned. One of the people quoted in the Times this morning said that short term gains from selling junk to clients were always greater than the long term gains of having long term clients making money.
When you go to a car dealer you know the salesman is going to try to up-sell you. It didn’t used to be that way in the financial sector. People are realizing it now is, which is why the distrust of bankers is increasing so much.

Wasn’t there a point at which the business of financial advice was split off from the business of investing?

The problem is that the analysis typically used to justify that conclusion is very hazy.

Risk is lower in the short term. When your timelines are closer to t=0, it is easier to realize gains. If I am looking over the long term, things become harder to predict. And so really I think it’s just an aversion to risk; skewing numbers to justify shorter-term gratification over the long haul.

It’s harder to quantify things like client satisfaction/trust/loyalty/synergistic gains/etc. There are obviously statistical ways to do that, but it’s usually a lot easier to just guarantee some short term profit.

All in all I chalk it up to irresponsible business and abusing resources. I didn’t work at GS but a peer firm – and that was my take on things, anyway.

I have a vague recollection that the opposite is true – that certain financial institutions that were barred from investment practices, can now invest too. Something like that.

The Glass-Steagall Act / Gramm–Leach–Bliley Act

I don’t know that there was a golden age, but in general the expectation would be that a good financial adviser will try to maximize his profit within the parameters of acting in the best interests of his client. I don’t know how true that has always been, but Goldman at least certainly always presented itself as a firm that was obsessed with maximizing client value.

Even local financial advisers can screw you because they often have agreements where they make more money by selling specific funds, but I know at least with FAs of that level the good ones don’t just blindly push the funds that give them the most money. Some of them do, but that reputation can spread and if it does it leads to fewer clients.

If Goldman is really just pushing investments that maximize Goldman’s profit with no regard to how their clients end up, then just like the dubious local adviser people should stop using Goldman’s services.

Well, that problem solves itself, doesn’t it? Once Goldman has all their money, they have no further need of financial advice!

I’m not sure I understand this. Clearly no adviser is going to be able to guarantee client gains in the short haul or the long haul, and any client who thinks he can is a fool. Even in the old model clients make mistakes, advisers make mistakes, and the market doesn’t do what is expected.

If you mean short term profit for the company, sure. The crisis didn’t happen because bankers were evil, but because the system now almost required them to make the kinds of decisions they did. Same thing here. A system where a bank creates products to sell with one hand and supposedly give best advice to clients on the other hand is just asking to be abused.

You’d never make it as a conman. The sheep can borrow more.

Yes, that is what I mean.

And I agree, it’s a lopsided incentive system. I don’t think it’s a matter of inherent evil, but there are certainly quite a few bad apples.

It gets kinda evil when the bankers buy politicians to keep their scams going.