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Goldman Sachs Muppetgate: The Fall-out Continues

Posted on the 16 March 2012 by Periscope

Goldman Sachs Muppetgate: The fall-out continues

The Goldman Sachs tower. Culture of corruption? Photocredit: Paul Lowry

Since Greg Smith’s open letter in the New York Times offerring his resignation to Goldman Sachs, and massively criticising the firm’s “toxic” culture under CEO Lloyd Blankfein, in which clients were referred to by senior staff as “muppets”, commentators have sprung up to look deeper into the question. It’s not just a simple matter of a disgruntled employee leaving. There are wider matters to be looked at, to do with corporate culture and regulation. And how come it took Greg Smith so long to realize that he was working for a bank that made money? The bank has had a hard time shaking off its “vampire squid” image.

Commentators are split between those who say that Smith – a middle ranking executive – ought to have known he worked for a bank with a predatory culture, and those who say that such a culture should be actively discouraged. Smith’s exit certainly had an effect – Goldman Sachs lost $2 billion in its market share after the letter. And some are now questioning his motives, suggesting that he only left because he didn’t get the promotion he wanted. Whatever’s going on, the murky world of finance is now having some light shone on it again. But will Goldman continue in their practices? Is it fair to say that a bank is a bank? Should we have more regulation? Only time will tell whether the vampire squid will stop being, well, quite so vampirey.

Has Greg Smith started a ball rolling? Even Darth Vader’s resigning from the Empire!

Redefining what client means. The brouhaha around the story is typical, said Frank Partnoy on The Financial Times. But we should stop a little, and think about what it means to be a client of Goldman Sachs. Smith’s letter mentions the word “client” 20 times. “But there are clients, and there are clients.” True clients involve a “fiduciary duty”; but there are also “psuedo client relationships”, or a counterparty, in which Goldman trades “at arm’s length.” The clients which Smith refers to as “muppets”, are “pseudo clients at most.” The bank isn’t obliged to act in that company’s interest. It’s like people sitting round a poker table. We shouldn’t expect “derivatives salespeople to be honourable”, any more than we should be “sympathetic” to those pension fund managers who take risks when they shouldn’t. But should these latter be offered more protection? Are they in fact “true clients?” We need to think about the rules that are in place.  “There is an opportunity for regulators, and perhaps even Wall Street, to act human and tell us that the word “client” has real meaning.”

Remember when banks were good? And don’t forget, said Tony Tassell on the FT, that investment banks were once seen as the “vanguard of globalisation.” They’re also “genuine meritocracies.” Wherever you came from, you could “rise through the ranks” if you were good enough. But this “positive narrative” has been “overshadowed” by the financial crisis.  Of course, society doesn’t accept the “lack of restraints” on banks. Risks should be “reined in.” Goldman epitomised the investment bank that had changed from “adviser on deals … to trading house” in which all clients were “reduced to counterparty.” But this model isn’t compatible with building trust within a broader society – if banks treat some clients like “rubes”, then society is going to think they treat everyone like that. Goldman needs a shake up.

There’s more trouble at the bank than one employee. Tom Braithwaite and Tracy Alloway on the FT said that Goldman’s “traditional code of silence” had been broken. More bankers are willing to speak out now, as they worry about the future and the threats of new regulations. Goldman has had a series of bad PR episodes. Maybe it’s time for management change, and for Lloyd Blankfein to retire. The bank will be hit by newer rules more than most. And senior people are leaving. That, perhaps, is, “more of a threat … than the noisier exit of Mr Smith.”

And what did Smith expect, anyway? Was he really that naive? said an editorial on The Winnipeg Free Press. It’s not as if executives at the bank were existing “only to bring light and peace and happiness to the world.” Smith must have had a “terrible shock” when he realised that Goldman was about making money. And it took him ten years to realize this! Here’s some advice. If you want to serve humanity, “don’t work at Goldman Sachs.” “Goldman and other investment banks do perform an important role in our economy, and Goldman bankers – most of them, at least – can hold their heads up high. But it is not charity work. Goldman’s clients are mostly very well-off. Smith’s lament that the bank no longer serves their needs above and beyond its own does not tug at our heartstrings.”

That’s exactly what we should be worried about. Smith’s revelations are nothing new, said Richard Eskow on The Huffington Post.  That sort of rip off culture has been pervasive on Wall Street for ages. “The surprise isn’t that Goldman Sachs encourages its employees to mislead clients and put its own interests above theirs – the surprise is that anybody is surprised.” We need to reinforce regulation, and to bring back the stigmatisation of corrupt business behavior. But this will be hard – predatory behavior is everywhere. The “bond” between customer and business has long been broken: “we need a movement to clean up our entire corporate culture.”


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