The major US investment banks are again under attack after a departing Goldman Sachs executive wrote a scathing opinion piece in The New York Times attacking the "toxic and destructive” culture of his former employer.
While investment banks like to boast that they put their clients’ interests first, particularly since the financial crisis which shook client confidence, the former middle-ranking Goldman executive, Gregory Smith, claimed that he attended meetings at Goldman during which "not one single minute is spent asking questions about how we can help clients.”
Instead, he said, "it’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”
Goldman Sachs was quick to respond to the piece, saying that it disagreed "with the views expressed, which we don’t think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”
But the article will fuel concerns about the extent to which the big investment banks have changed their behaviour since the financial crisis.
The big Wall Street firms have come under fire for their role in packaging and selling complex mortgage-backed securities that backfired spectacularly when the US housing market turned down. In April 2010, the Securities and Exchange Commission charged Goldman with fraud in relation to its marketing of complicated mortgage-backed securities that later soured, causing investors to lose $1 billion.
The SEC complaint included emails from a Goldman employee, Fabrice Tourre – the self-described "Fabulous Fab” – who boasted that he alone could understand the "monstrosities” that he had created. Goldman eventually settled the SEC complaint for $550 million, and acknowledged that it had made a "mistake” when it came to disclosure. Around the same time, an article in Rolling Stone magazine described Goldman as "a giant vampire squid”.
In October 2009, Goldman boss Lloyd Blankfein said in an interview that the firm was "doing God’s work”. Although Goldman said that Blankfein was only joking, many believed the remark betrayed the firm’s deep-seated arrogance.
Despite these public setbacks, Smith claimed in his letter that Goldman employees continued to treat clients with disdain. "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.” He continued: "I don’t know of any illegal behaviour, 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.”
Some claim that the culture of the big Wall Street investment banks has changed since they evolved from being partnerships – where the firm’s senior management had their own fortunes on the line – to becoming public companies. At the same time, proprietary trading – where investment banks used their own capital to make huge bets – became a massive source of profits. As a result, the importance of traditional client relationships crumbled.
Although the US is planning regulations aimed at limiting the extent to which investment banks can trade on their own behalf, critics doubt that these will change the prevailing Wall Street culture. They argue that one of the major problems of the US government’s rescue of country’s financial system in 2008 was that it preserved some of the troublesome features of the system – such as excessive leverage and risk-taking, the ‘heads I win, tails you lose’ ethos, and the huge influence the investment banks have on US politicians.
Indeed, Smith seems to believe that change will only come from within the firm itself. He appeals to Goldman’s board to change the culture, and weed out the morally bankrupt people, no matter how much money they make for the firm. "People who care only about making money will not sustain this firm – or the trust of its clients – for very much longer.”