Four days ago the New York Times published an Op-Ed piece by a Goldman Sachs executive announcing his decision to leave the bank because its business culture had become “as toxic and destructive as have ever known it.” The following day shares in Goldman Sachs fell by more 3 percent—incurring a loss of more than US$2 billion.
As the Op Ed began to circulate further afield, critics raised questions about its author, an employee in Goldman’s London offices named Gregory Smith. Many pointed out that despite his impressive-sounding title, Smith was one of 12,000 “vice presidents” and his lack of progress within the firm (after 12 years) explained his departure far better than any ethical dilemma. Others noted that Smith’s conscience had remained suspiciously untroubled while the company enjoyed the fruits of the massive taxpayer bailout in 2008. (The following year Goldman generated US$45 billion in revenues, thanks in part to US$10 billion from the Treasury Department’s Troubled Asset Relief Program, and the firm’s success in selling nearly US$30 billion worth of low-cost bonds with the safety net of the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.) Many found Smith’s tone smug and sanctimonious and pointed out that Goldman’s condescending culture, its alleged contempt for the “muppets” who pay its fees, is no different to prevailing attitudes elsewhere on Wall Street.
Goldman countered Smith’s charges with an internal memo issued by its CEO and Chairman Lloyd Blankfein and President and COO Gary Cohn. The memo regretted “that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.” Blankfein and Cohn then cited internal statistics about the employees’ high opinion of the firm and its abiding commitment to clients. The response was typical – faced with outside criticism, Wall Street executives always claim that none of their peers have encountered the problems that other people notice.
When Goldman’s shares recover their value – as they quickly will– and Gregory Smith uses up his 15 minutes of fame, the financial culture at the root of this affair will not have changed at all. That is because a much larger cultural failure on the part of the media and the government has been tolerated for years. To date no senior executive has been successfully prosecuted for the activities that triggered the multiple financial crises in 2008. Admittedly these are complex matters to investigate and prosecute, but it seems an astonishing lapse on the part of the regulators that not a single person has been held accountable. Despite loud condemnation at the time, equally little has been done to alter the cozy relationship between Wall Street and the financial media that should be keeping it honest. Most importantly, almost nothing been done to close the regulatory loopholes that tempted so many firms to overreach in the first place.
Speaking at a conference earlier this week, the legendary former Federal Reserve chairman Paul Volcker noted that Wall Street had reaped spectacular profits for more than a decade thanks to unregulated speculation, even though the American economy had faltered during the same period. When their luck changed, the so-called ‘masters of the universe’ lost no time in seeking public funds for a bailout that was eventually granted on far more generous terms than they expected. This relationship will not change without deep reforms – like the eponymous Volcker rule in the Dodd-Frank proposals. (This would prevent firms from proprietary trading that is not directly requested by its clients). Without similar constraints Goldman and its ilk have faced neither the threats nor the incentives needed for them to change their ways.
What is remarkable about this week’s events is how the public mood has altered since 2008. Sobered by the trauma of a ‘jobless’ recovery that has fattened Wall Street executives but hardly anyone else, there is now little patience for the usual special pleading. Had public opinion been half as strict four years ago, Wall Street’s culture of contempt for Main Street would have already have experienced a self-induced and long overdue correction.
