Smith wrote an article in The New York Times
that is actually relatively restrained and uses types of expression very different to the typical foul-mouthed trash talk language of the Street. It’s a very interesting commentary:
I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
… 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.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
This translates into “Everything you’ve always suspected about Wall Street, the bank and the finance companies is either worse than you thought or exactly what you thought.” Smith has already been proven right in terms of the steady erosion of standards of professional honesty and ethics. That’s been obvious for years, as the sector has become more engrossed in its fable about being a superior species, “Masters of the Universe”, etc. and barely even seemed to notice the fact that the whole world economy went down the tube as a result of its truly inexcusable, unforgivable actions.
The culture of crooks and cretins, or Wall Street As We Know It
Smith should get some sort of acknowledgement for one particular line in his article, which sums up the entire financial sector culture as it is perceived by those of us who know it and analyze it-
Goldman Sachs today has become too much about shortcuts and not enough about achievement.
OK, it’s too short for a Pulitzer, but it’s definitely long enough to get some sort of mental activity happening. Shortcuts and virtual investment scams are the guts of the worst financial practices in American financial history.
Mortgage securities, which triggered the monster crash and the huge hit on the US economy were based on a single business operational shortcut- “Sell to anyone, based on loans given to anyone.” The entire financial sector was involved. Banks, securities traders, find a name for what people in finance do, and they did it- To the entire US and global economy. Nobody would have any difficulty believing it was common practice with other financial products.
Smith outlines a range of practices regarding product sales which can be defined as “Sell product”, and have absolutely nothing to do with best financial practices. Selling a 70 year old retiree a skateboard and then saying “It’s a nice day, try it out on the freeway” would be the rough equivalent.
America’s not alone in this regard. In the UK, Lloyds was recently hit by regulators for selling dud insurance syndicates. Other financial practices, quite literally too numerous to include in an encyclopaedia, have also been popping up regularly. God alone knows what could be happening in China and India.
This really is a culture of crooks and cretins in many ways. Sharp practice in normal business may be brutal, but there’s usually a 50-50 chance that it’s legal. Finance is different- “sharp practice” usually equates to fraud in some form.
Fraud is a particularly dumb type of white collar crime with a very high arrest rate and even fully documented evidence supplied by the fraudsters. It’s surprising that Smith refers to selling “inappropriate” or non-performing products to clients by Goldman Sachs, because the inference is that clients bought on the basis of incorrect information, which is a core element of fraud and could also involve misrepresentation. If so, the risk of a gigantic class action would be horrific. It could destroy the company, and the legals alone would be murderously expensive.
Is Goldman Sachs a sort of corporate Bernie Madoff? Probably not, despite Smith’s clear worries about the way business is conducted. Madoff’s business practices didn’t make any sense to any professional analyst who looked at them. Goldman Sachs, as a business, isn’t that grotesquely oblique or that obviously idiotic.
Is Goldman Sachs at risk of being seen as a corporate Bernie Madoff? Very likely. This mud will stick, whether Smith’s comments are 100% pure or not. Smith has expressed an opinion, not an indictment, but public sentiment is hardly on the side of the financiers. It will be read as an indictment.
The legal side of this is just plain ugly, in terms of perspectives. All this publicity may be an excuse for lawyers and their clients to rip out a few eyes themselves. "Doubtful" transactions always look bad. Patterns of deception or misleading practices, which are the basics of Smith's comments, are also the basic ingredients for major legal actions.
Goldman Sachs didn’t like what Smith had to say, understandably enough, and has rejected his claims. The fact is that whether they like it or not, what if he’s right, now or in the future? What if, at some point, one of those young interns goes gaga and tries a stunt which lands the company in corporate hell along with Enron and World Com?
There’s another risk here- The type of practices Smith’s talking about also often include a lot of parlaying of company money, taking on debt and trying to juggle cash flows and even business viability. The result would be massive losses for investors, a crash that would make 2008 look positively benevolent, and shockwaves throughout the sector. There's no option- Smith's allegations should be checked out by Goldman Sachs in full.
Either there’s a problem or there isn’t. Which is it?