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Greg Smith, Goldman Sachs, and the Predatory Culture of the Financial Giants

By Dennis Loo (3/15/12)

Yesterday Greg Smith, a 33-year-old middle-level executive at Goldman Sachs, resigned and fifteen minutes later his Op Ed in The New York Times was published to explain why.

This sent a shudder through Goldman Sachs and the financial community more broadly, with Goldman Sachs’ shares dropping 3.4% and one anonymous Goldman Sachs insider describing the very public resignation as going off “like a bomb” in the financial giant. Smith had been with Goldman Sachs since graduating from Stanford. His complaint that led to his giving up his very cushy – though by Goldman Sachs’ standards, relatively modest - $500k salary, possibly the retaliatory withdrawal of his stock options by the Goldman Sach’s management, thus likely burning his bridges in the financial world, was that he could no longer tolerate the culture of predatory greed that he found himself surrounded by at Goldman Sachs where clients are routinely referred to as “muppets." He reports in his OpEd piece that discussions in the firm were all about how much money the company made off of these muppets, including by getting them to invest in securities that Goldman Sachs itself was betting would fail, and therefore making money twice over from their client muppets - from commissions on the initial sales and from the failures of those very same investments:

"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. The story, of course, is broader than just the culture at Goldman Sachs. It includes the entire financial banking industry."

As I wrote in Globalization and the Demolition of Society:

Professor of Economics at University of Missouri, Kansas City, provides a broader analysis of the underlying structural problems at work:

“[F]inancialization” of the economies concurrently meant both “globalization” as well as rising inequality. The weight of finance moved away from institutions—that were guided by a culture of developing relations with customers—toward “markets” (the “originate to distribute” model of securitizing pools of mortgages is a good example). This virtually eliminated underwriting (assessing credit worthiness of customers) and also favored the “short view” (immediate profits) of traders (you are only as good as your last trade) over the long view of financial institutions that hold loans. In addition, the philosophy of “maximization of total shareholder returns” as well as the transition away from partnerships in investment banking toward public holdings promoted pump and dump schemes to increase the value of stock options that rewarded CEOs and traders. A “trader mentality” triumphed, that encouraged practices based on the “zero sum” approach: in every trade there is a winner and a loser. As practiced, the bank would be the winner and the customer would be duped.

This transformation helps to explain why fraud became rampant as normal business practice. Competition among traders and top management to beat average returns led to ever lower underwriting standards to increase the volume of trades—with fees booked on each one—and with strong incentives to “cook the books” (record false accounting profits). Once accounting fraud is underway, there is a strong incentive to engage in ever more audacious fraud to cover the previous crimes. In the end, the US financial system (and perhaps many others) became nothing but a massive criminal conspiracy to defraud borrowers. . . . [Emphasis added.]

Chilling words. Professor Wray does not explain why the weight of finance capital moved towards “markets.”

To answer that question very succinctly, finance capital’s dominance reflects the natural flow of capital into the areas where the quickest and biggest profits can be made. For a system premised on the pursuit of profit, this shift to financialization and what Wray describes as a “massive criminal conspiracy” are to be expected. Short-term logic trumps any long-term logic; profits made today override any serious considerations of longer time horizons. Arguing as some do that finance capital’s focus on short-term gains is jeopardizing the system’s long-term stability and viability misses the point. The system can only be governed, so long as it continues to be the system in place and is not replaced by a different system, by profit. Doing what is best for it in the long-run is not how the system operates.

Some people have reacted to Smith’s resignation by saying that it must have been sour grapes that he resigned because he wasn’t making as much money as others in Goldman Sachs or that Mr. Smith is “naïve” and that traders and financial wizards do this all of the time and it’s no big deal. In The New York Times article of 3/14/12: "One Goldman client who spoke on the condition of anonymity called the letter 'naïve,' saying that the firm had been trading against its clients for years. 'Come on, that is what they do and they are good traders, so I do business with them.'”

These reactions reveal that these people see nothing wrong with either being a mercenary themselves or doing their business with mercenaries like financial giant Goldman Sachs.

A sorry commentary on them.

When insiders start to blow the whistle, as we have seen with those who have been disclosing state secrets to Wikileaks and people like Mr. Greg Smith, this is not unconnected with movements such as Occupy Wall Street and other insurgent movements of the people. Those movements create the atmosphere for revelations such as Smith's and the video Collateral Murder to occur and provide an alternative narrative for people to be influenced by or identify with. When these kind of breaks in the edifice occur, they are a sign of the strife and struggle within the monolith but they don't occur absent movements on the outside that produce the reverberations that are felt inside the belly of the beast.

As Wray above concludes, the financial system (and perhaps many others) are now nothing but a massive criminal conspiracy. That is now the norm for corporate giants, not the exception. It is the routine business practice.

This is something that people are in a beginning way recognizing. Occupy Wall Street has played and is still playing a key role in highlighting this, as with their actions, for instance, today in some ten major cities targetting Bank of America. 

The very worst crimes, in other words, are being committed by those in authority. The police should be deployed against those criminals in their high-rise and marbled offices, instead of harassing Occupy and issuing absurd tickets for truly horrible behavior like wearing roller skates and writing with children's washable color chalk on the sidewalks.

But then, for that to happen, for the police to go after the real criminals, there would first have to be a revolution.

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