Goldman Sachs and Moral Values

A few days ago, Greg Smith resigned from Goldman Sachs, that venerable scion of Wall Street because of what he saw was its pervasive immoral and irresponsible practices .  I have written recently about James Q. Wilson and his thoughts on the importance of a strong moral sense and character in public life, whether it be in the inner city or on Wall Street, and his themes are very relevant here.

“Until early Wednesday morning, Greg Smith was a largely anonymous 33-year-old midlevel executive at Goldman Sachs in London. Now everyone at the firm — and on Wall Street — knows his name. Mr. Smith resigned in an e-mail message to his bosses at 6:40 a.m. London time, laying out concerns that Goldman’s culture had gone haywire, putting its own interests ahead of its clients.” (From NYT 3.15.12)

Smith wrote an Op-Ed piece in the New York Times which appeared yesterday (3.14.12) describing the reprehensible behavior he saw within the organization.  http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?ref=business

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

What did Goldman Sachs do that earned the ire and criticism of Smith?

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.

It gets worse.  Not only did Goldman have this policy of taking advantage of its clients for corporate profits, it bred an ethos of sarcastic, demeaning, and dismissive attitudes:

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact….

You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

There is little more to add here, except to see how easy it is for a company and its employees to stray from principles which were moral and which created exactly the environment of trust and confidence necessary to keep and attract clients. Here is what Goldman was:

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.. 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.

One has to wonder how this happened.  How did a company go from one based on character and moral values to one which disregarded them?.  Something must have happened in the 80s when deregulation was the flavor of the day, Wall Street was flush, and university graduates began to turn away from the social conscience of the 60s and 70s to Wall Street.  ‘I-Banking’ was the way to go – hard work rewarded with untold wealth, respect, New York living.  What could be more seductive?. 

Morning in America became the revolutionary slogan of individualism, enterprise, wealth, and pride.  Young people should leave the dingy alleys of liberal do-goodism and increase their sphere of influence.  Working with one community would be nothing compared to the social and economic impact resulting from wise macro--investments.  Wealth creates wealth.  Smith’s clients had a total asset value of more than a trillion dollars!  It was a heady business.  It was easy to see how young I-Bankers could become arrogant and self-centered when the lives of tens of thousands were at their fingertips.  “Power corrupts and absolute power corrupts absolutely” said Lord Acton; and while he was referring to dictatorial political power, it is also applies to financial power.  I-Bankers were supreme leaders, supremely intelligent, able to create and destroy.  And they were only in their 30s.

The advent of derivatives and hedge funds complicated both financial and moral issues.  Making bad loans then quickly selling them to a mortgage company, bank, or insurance company gave more moral latitude than ever should have been permitted.  ‘Not my problem anymore’, said young I-Bankers, ‘buyer beware’ and all that; and besides, once the bad loan gets bundled, repackaged, resold ten times, it is totally lost as the connection between an individual loan and a young I-Banker is lost for good.  Why worry?

Perhaps in an era of individualism, in a buyer-beware marketplace, and ‘A fool and his money are soon parted’ and ‘A sucker is born every day’ mentality, it is easy to justify and tolerate a few wobbly morals.

Perhaps as Wilson, Alan Bloom, William Bennett, and others have written, moral erosion begins early.  Parents do not take the time, the effort to insist on honesty, responsibility, respect for others.  Little offenses are ignored, like buying  a pair of shoes, wearing them for a day, then returning them.  “No one is hurt”, complains your son to your rebuke.  “Their policy is easy returns”; and you are too tired to explain the difference.

Perhaps moral values are ignored in schools because they smack of absolutism, standards, and principles, all inappropriate in a multi-cultural setting where relativism is necessary because of diversity.

Goldman Sachs of course responded critically to Smith’s expose.  They have never done what he said.  The same ethos of integrity, honesty, and responsibility exist.  I doubt it.  This well-educated, promising, and ambitious young man had the wealth of Croesus within his grasp, and he turned it down.  Goldman Sachs, has been outed.  Are we surprised?  I don’t think so.

I don’t see too many signs of a return to principle and values.  Articles and books are being written both about Wall Street and about the failure of communities and families to insist on character, morals, and ethical behavior.  We are looking to traditional Asian families in America which consistently do better on every educational indicator than whites or other minorities – despite modest incomes, second language, and cultural displacement – in part because of their rigorous and inflexible insistence on values and excellence.  As we disaggregate the excesses and failures of Wall Street, we try to go back to first causes, as I have in this article.  The pieces of the social puzzle are being slowly put together – maybe there is a systemic problem in America; that just as we are suffering from the excesses of the Sixties, so are we suffering from the Eighties.  History affords us perspective and opportunity; and if we put on the lenses of morality and character and look at every social enterprise through them, we might well craft a better and more harmonious whole.