March 20, 2012
When Goldman Sachs (GS) banker Greg Smith claimed last week that some of his colleagues referred to clients as “muppets,” he was resurrecting the nightmare the bank thought it had put behind it in 2010, when it agreed to settle SEC charges of failing to disclose critical information about how a derivatives transaction was structured to a client.
Just to be clear, the phrase “muppet,” used in Greg Smith’s now-infamous resignation letter to the head honchos at Goldman Sachs last week, isn’t a cute reference to a group of amiable puppets like Kermit the frog. It’s a very disparaging term in “British English,” used to refer to people who are more than a little dense, slow on the uptake and generally not worth taking seriously.
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In other words, the SEC claimed that the Goldman team had treated its clients like muppets – or in U.S. parlance, “dumb money.” What made Smith’s letter so horrifying wasn’t that this happened at all, but that the attitude still appeared to be common within Goldman Sachs. After all, as part of its SEC settlement agreement more than 18 months ago, Goldman had pledged to forge ahead with a complete review of its business practices. Completed later that year, the published conclusions sounded warm and fuzzy. “Our experience shows that if we serve our clients well, our own success will follow,” the review declared. Presumably, the firm’s senior officials didn’t envisage that their employees would continue referring to those clients as “muppets.”
Admittedly, it’s hard for any financial institution to navigate the shark-infested waters of Wall Street and remain pure. That’s simply utopianism run amok. But there are a few steps that Goldman and its peers – because let’s face it, even now, whatever Goldman is doing and saying, its rivals are at least trying to do and say in order to keep up – could take to reassure its clients and critics that it’s not looking at them as sheep waiting to be fleeced.
1. Make it clear that once more, there are some kinds of business or strategies that, while they might generate short-term profits, that the bank simply won’t allocate resources to any more. Former Goldmanites talk about a day in the past where “long-term” greed reigned, and where doing profitable trades with one client that disadvantages another client (the heart of the infamous Abacus transaction that was at the heart of the SEC lawsuit) won’t be seen as a good idea.
2. Offer big bonus checks to employees who devise smart ways to minimize losses and curb risk, not just to those who push the envelope in order to generate heftier profits.
3. Stop trying to claim that market-making isn’t a variant on proprietary trading. If it’s there as a service to clients, it should be provided as a service, not as a profit-generating enterprise. If it’s a division that is expected to maximize profits, like other parts of the business, be upfront about it.
4. Require departing employees to avoid taking new positions where they would be in a position to regulate their former company or otherwise shape policies that would affect their former firms for a period of time. Often a former banker may be the most knowledgeable person in line for a job at the Federal Reserve or the SEC or some other entity. Ideally, someone should not only wait a respectable period of time before taking such a job, but have been trained to think critically not just about their suitability for the position and their own personal goals, but about the optics of taking the job. If a Treasury Secretary is less effective or less credible as a result of his or her ties to the banking industry, that can outweigh the benefits of the expertise and experience that person brings to the job.
5. Don’t argue untenable positions, such as the idea that regulation of the financial markets is a bad thing.
6. Underwrite the cost of a mandatory high-school level course on personal finance and the financial markets, nationwide, so that the odds that there is a future generation of muppets to exploit go down.
7. Stop treating their own firms as their best customers, and treat each customer equally, regardless of the size of that customer’s account or their contribution to the firm’s bottom line.
Of course, many of these are as utopian as Greg Smith’s conviction that he was joining a business that had ideals and principles. But above all, Goldman and its peers should recall that actions speak louder than fancy words. A disdainful comment about clients made by one managing director – which in turn speaks volumes about the kind of corporate culture that individual works in – counts for far more in the court of public opinion than does a glossy and impeccably written statement of principles published in the wake of a high-profile review of business practices, as Goldman Sachs is now discovering. The more Goldman claims to take the high road, and cloaks itself in such lofty prose, the tougher it is for its employees to measure up and the more dramatic the reaction when they fall short.
Goldman may never succeed in transforming its culture completely. Nor does it want to – it needs the sharp-elbowed, keen-eyed, aggressive bankers and traders to keep it ahead of its rivals and churning out returns for investors. But it also needs to instill in those individuals a new sense of when they have gone too far and crossed the line. It’s not a matter or rebuking and punishing a few who get caught; it’s about ensuring that people catch themselves before they speak or act in a way that reflects poorly on their institution and the business.
We need financial services firms like Goldman Sachs, and the savvy, tough bankers who inhabit them, in order to keep our global capital markets humming. What we don’t need is to suspect that they’re sneering at us behind our backs.