Goldman's mangled muppet show

Mud will likely be flying at former Goldman Sachs executive Greg Smith after he penned his very critical views of the investment bank's culture, but ignoring the issues he raises will do real harm to the firm.

The letter to the New York Times by former Goldman Sachs executive director Greg Smith, who was head of the United States equity derivatives business of Goldman in Europe, the Middle East and Africa, will do incalculable damage to the global firm. (Goldman officials called clients 'muppets', March 15).

That news item incudes the full letter and I commend it to Business Spectator readers because it shows what can happen – or can be perceived to happen – in a company that becomes totally profit driven. I will not try and summarise the damning allegations. The ramifications will be wide.

Every chief financial officer who bought a Goldman Sachs financial product in the last few years will have to justify that purchase to their board and explain that their company was not a "muppet”. Every Goldman Sachs client will read the Smith letter and ask themselves whether their experience duplicated the cavalier way Greg Smith says Goldman treated many of its clients.

A great many, probably a clear majority, of Goldman Sachs clients will say they were not "muppets” and were very satisfied with their experience. But the doubt will linger and every time a Goldman product is recommended to a board the CFO will have to justify the use of the firm. In most cases that will be no problem but winning business becomes harder.

Moreover we saw just how Goldman Sachs works in the sub prime and European mess so anyone who deals with Goldman Sachs could have any illusions that this was a benign firm. Indeed one US commentator suggests there is nothing new in the Greg Smith letter – it's just Goldman Sachs being Goldman Sachs.

But the Greg Smith letter goes much deeper.

Although there were many higher-up people in Goldman Sachs than Greg Smith and no doubt he had an axe or two to grind, his clients had a total asset base of more than a trillion dollars and he was a key figure in the recruitment of US MBA graduates where Goldman Sachs is the fourth favoured MBA destination for US MBA’s (Google, McKinsey and Apple are the top three).

MBA’s are the lifeblood of firms like Goldman Sachs and if the firm moves down the recruitment ladder its long-term future will be damaged.

In many ways the deepest blows to Goldman were these remarks:

"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 fibre represents the single most serious threat to its long-run survival.”

I suspect we will see a vigorous attack on the credibility of Smith, and some of the mud may be justified, but sweeping the issue under the carpet will not solve it. Careful internal examination is required.

Some US commentators say the only way to restore faith in Goldman after such a letter is for Lloyd Blankfein to step down and a new person to set about restoring the firm's image. Alternatively Goldman may say that it will continue being Goldman, because although it makes money, so does its clients.

In today’s world where accountability is so high on the agenda that second course would be a dangerous path for the giant US investment banks, but I suspect it is the one it will take.

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