But the biggest question would have to be: What happened to Goldman Sachs? Smith wrote that the culture at Goldman had shifted during his 12 years there from valuing teamwork and "always doing right by clients" to one where people "callously ... talk about ripping customers off." That sounds bad. So what are we to make of it?
The answer that seems easiest to dispense with is that it's just not true, and Goldman always does right by its clients. I saw mentions of Goldman's charitable activities Wednesday, but not a single defense of it (other than from Goldman's PR department) as a company that puts clients first. (Update: Politico's Ben White did have a brief testimonial from hedge fund manager and Goldman client Whitney Tilson this morning.) And Goldman's behavior before and during the financial crisis just wasn't what any neutral observer could call client-centric.
A more popular line of reasoning is that Goldman (and other Wall Street firms) were always about ripping customers off. It's no mistake that one of the classic books about Wall Street is called Where Are the Customers' Yachts? Didn't Smith get that when he joined? Was he that naive?
But something did change on Wall Street and at Goldman in particular over the past few decades. Goldman did have a reputation for looking out for its clients — and inspiring great loyalty in them. This was largely a product of the firm's near-death experience after the 1929 crash. It had spawned a closed-end fund, the Goldman Sachs Trading Corp., run by a charismatic would-be visionary named Waddill Catchings. As Charley Ellis tells it in his history of Goldman Sachs:
It was Catchings' No. 2 at Goldman Sachs Trading, Sidney Weinberg, who wound the thing down and succeeded in at least paying off all its debts (its share price dropped from $326 to $1.75) — at huge cost to the parent firm. Before long the Sachs family had put one-time office boy Weinberg in charge of bringing their enterprise back to health. Over the course of the next two decades, he did. The Weinberg trademarks, which became the Goldman trademarks, were (1) hard-nosed prudence, (2) an extreme emphasis on the partnership, with partners generally able to make serious money only after decades at the firm, and (3) the long-term cultivation of relationships with business executives and politicians. Weinberg was one of the only Wall Street chieftains who supported Franklin Delano Roosevelt, which resulted in all sorts of status-enhancing opportunities during the 1930s, and the opportunity during the war years, as assistant to the chairman of the War Production Board, to get to know just about every promising young business executive in the country. Weinberg was self-interested, sure. But he was long-term self-interested. And so was Goldman Sachs, well into the 1990s at least.
So back to the question: What changed? The most obvious answer is simply that Goldman stopped being a partnership. It was the last of the major Wall Street firms to switch over, in 1999 (right around when Greg Smith arrived), to being a publicly traded corporation. Upstart Donaldson, Lufkin & Jenrette had been the first, in 1970, followed by biggie Merrill Lynch the next year. Andrew Haldane, the Bank of England official whose speeches I recently praised to the heavens, has an excellent explanation of why highly leveraged financial institutions probably shouldn't be controlled by shareholders with limited liability:
But Goldman succeeded in managing its risks before and during the financial crisis better than almost any other financial firm. That may just be because some of the partnership ethos lived on nine years after the IPO, meaning that the firm is unlikely to do so well in the next financial crisis. It's also certainly true that Goldman hasn't been great about managing its reputational risk. But it feels like the end of the partnership can't be the whole answer.
Noah Millman, a former equity derivatives trader, offers up another explanation: that there's just too much money for the taking in the over-the-counter derivatives business not to drive short-term greedy, customer insensitive behavior:
At Goldman, where investment banking for corporate clients had driven the resurgence of the firm in the 1950s and 1960s, this shift in where money is made is quite apparent in the financial statement. In 2011 — a bad year for trading — investment banking generated just $4.6 billion of Goldman's $28.81 billion in net revenue. The firm's long-standing balance of power between bankers and traders is broken, which has big implications for the firm's overall culture. For one thing, it means Goldman's most important customers are no longer nonfinancial corporations out to build real-world businesses, but hedge funds, banks, and other financial players who are often out to put one over on Goldman. I can see having far fewer qualms about taking advantage of the latter than the former. Also, as Mihir Desai argues in this month's HBR, it means Goldman is playing in a talent market where the terms are set by hedge funds — making it impossible to maintain the wait-till-you-retire-to-get-rich pay structure that long defined Goldman.
Finally, there's the wonderful explanation for Wall Street's woes that Calvin Trillin offered up in a New York Times op-ed three years ago: Smart people started working there. Wall Street had long attracted the bottom third of the class; decent enough folks with modest ambitions. Then the combination of bigger paychecks and higher college and grad school tuition began driving the best students into finance. Quoting a possibly imaginary (but possibly not) grizzled veteran of his generation, Trillin wrote:
It's a joke. But not entirely. Goldman was the world's gold-standard employer, able to recruit from the very top of the top of the class. And the culture of an organization composed entirely of people who are really, really smart and know they are really, really smart may be bound to turn toxic eventually. (Watch out, Google!) That's probably especially true in a pay environment where the rewards to long-term loyalty to the organization are low.
This blog first appeared on Harvard Business Review on 3/15/2012.
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