Questionable Values Produce Resignation at Goldman Sachs
Allegations of serious impropriety and perhaps illegality surrounding Goldman Sachs’s contribution to the 2008 financial crisis have been well publicized. Allegations included trading for their own benefit directly against the interests of its clients (e.g., the ABACUS deal involved deliberately stuffing collateralized debt obligations with inferior mortgage assets, selling them to clients, and then short selling them for their own account) and abusive practices generally.1 These allegations and a description of the ABACUS deal are the subject of the ethics case “Goldman Sachs’s Conflicts: Guilty or Not?” which begins on page 685.
The underlying values associated with this kind of activity were obviously troubling. This was further illustrated in 2012 when Greg Smith, head of Goldman’s U.S. equity derivatives business in Europe, Africa, and the Middle East, wrote an op-ed piece in the New York Times about his resignation2 in response to the appalling deterioration of the firm’s culture. Goldman’s old culture had previously been recognized for its ethicality that he describes as revolving around “teamwork, integrity, a spirit of humility, and always doing right by your clients.” The modern culture he describes as “toxic” and “destructive.” The following are some quotes from his article: To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Leadership (in Goldman) used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm … you will be promoted into a position of influence. 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.” He comments on what he believes to be the three quick ways to become a leader at Goldman:
a) Persuade your clients to invest in stocks or other products that Goldman was trying to get rid of because they were not seen as being sufficiently profitable (described as the firm’s “axes”).
b) “Hunt elephants,” that is, persuade your clients to buy the products that are the most profitable for Goldman rather than what is best for the client.
c) Trade “any illiquid, opaque product with a three-letter acronym.” Of course, Goldman disputes this view of its practice, but Smith’s interpretation intuitively explains how it—and other firms with similar cultures—got so far off the rails during the subprime lending crisis.
Questions According to Greg Smith, the culture he describes existed in 2012, long after the 2008 financial crisis and subsequent fallout, suggesting that the lessons have not been learned and that the problems are at least as bad as they were before the crisis.
1. How could the culture described be changed?
2. Who will need to cause this culture to change?
3. What will have to happen to cause this change?
4. Is it likely that Goldman Sachs will be able to hire the best and brightest recruits unless they change the culture described? Why and why not?
5. Corporate psychopaths would likely be attracted to a firm with Goldman’s modern culture. How would Goldman ensure that they are not hired?