“We Stopped Putting Our Clients First”
Greg Smith, a 12-year veteran executive of Goldman Sachs, set Wall Street buzzing this morning with his explanation on the opinion pages of The New York Times of why he had just resigned. Smith’s chronicle of how the firm changed during his tenure underscores why Wall Street needs to rethink its business model and raise its standards — or face further erosion of public trust.
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“The firm changed the way it thought about leadership” Smith wrote. “Leadership used to be about ideas, setting an example, and doing the right thing.”
But in later days, leadership came to mean something else. According to Smith, the paths to becoming a leader at Goldman included persuading clients to invest in vehicles that Goldman wants to dump — getting clients to trade whatever is most profitable to Goldman, and trading “any illiquid, opaque product with a three-letter acronym.”
Smith does not allege any criminal wrongdoing. Further he does not suggest any breaches of fiduciary duty; the examples cited appear to be outside fiduciary reach and governed by the lower standard of fair dealing rules.
He speaks, instead, of violations of trust: By his reckoning Smith did not resign because he believed Goldman broke the law; he resigned because he believed Goldman broke its word. Regularly. For instance, Goldman’s promise to clients that their interests “always come first,” and to employees, that “integrity and honesty are at the heart of our business.”
Early on as SEC Chairman, Mary L. Schapiro noted in her remarks to the Investment Company Institute how restoring trust depends on “truthful and complete information.”
“Markets do not work well unless investors believe they do… [which] means, above all, that investors must know that the information upon which they base their investment decisions is the truth, the whole truth, and nothing but the truth…”
The crux of these allegations are not about “legislating morality,” or, as some might have it, “greed.” These allegations are about, as SEC Chairman Schapiro points out, the free market fundamentals that make markets work, and the need to restore Adam Smith’s “invisible hand.”
