The departure of Greg Smith, the executive director and head of Goldman Sachs' United States equity derivatives business in Europe, the Middle East and Africa, has made huge ripples in the financial industry. While there have been other Wall Street bankers quitting the industry out of disgust, none have been as high profile as Smith, and none have published the reasons for their departure in the New York Times. Smith tore into his former employer, accusing the company of ripping off its customers and promoting dangerous culture of greed.
He wrote:
What are three quick ways to become a leader?a) Execute on the firm's "axes," which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) "Hunt Elephants." In English: get your clients -- some of whom are sophisticated, and some of whom aren't -- to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Goldman Sachs has been vilified by the media and pounded relentlessly by journalists like Matt Taibbi and Paul Krugman. The Occupy Wall Street movement has also focused much of its attention on the bank, making it about the most despised institution in America. The stock price hasn't budged much since Smith's departure, leading insiders to believe the uncomfortable affair was an annoying but inconsequential glitch. But just as Wall Street only thinks short term, it may not have thought too deeply about the longer lasting effects. Taibbi, the journalist responsible for labeling Goldman a 'Vampire Squid' believes Smith's departure signifies the beginning of something more powerful than the popular movements going on around the country:
Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren't just arrogant sleazebags, they're also not terribly good at managing your money ... The only way to break this cycle, since our government doesn't seem to want to end its habit of financially supporting fraud-committing, repeat-offending, client-fleecing banks, is for these big "muppet" clients to start taking their business elsewhere. Right now, many clients stay because they think that even if Goldman takes a bite out of them here and there, the bank still has the smartest guys in the room. But as Forbes writes this morning, this incident may turn Goldman into such a pariah that the best young bankers won't want to work there anymore.
The impetus for change comes from culture -- and predicting when massive shifts in culture happens is difficult to do. Nobody foresaw the explosion of the Occupy Wall Street movement, just as no one saw the Arab Spring coming. The seismic change in the Middle East started when a young street vendor, Mohamed Bouazizi, set himself on fire in Tunisia in protest of continuous harassment by the police and the confiscation of his wares. While war, political tension, and economic uncertainty across the region provided the fuel for the movement, one single event ignited protests that changed the political dynamics of a region.
The resignation of Greg Smith may or may not be the beginning of something big, but more and more of these events are happening and one of them could provide the tipping point for an irreversible change in culture. Smith's resignation was an important act of defiance, and a signal to other employees that they too can stand up for what is right. Another big name executive leaves, unable to live with the havoc Goldman or any other insidious banking institution is wreaking upon the economy, the shift in culture may become too big to stop. The conditions for serious change are there; the economy is still extremely fragile with high unemployment, massive job insecurity and spiraling inequality. Who knows when or where the ignition will happen, but as Goldman continues to disregard their clients and the well being of the economy, it is becoming clear that they are living on borrowed time.
Change does not necessarily come from within institutions -- it is unlikely that Goldman Sachs will suddenly go back to its more ethical roots. But when no one believes in the institution, it may simply fall apart.
Ben Cohen is the editor of the recently relaunched TheDailyBanter.com