WASHINGTON, DC (DPI) — In the fallout of “Muppet-gate” — stemming from the op-ed of an outgoing Goldman Sachs vice president, who decried the culture of greed at his former employ — Wall Street’s most powerful and prestigious firm is still trying to manage a PR calamity.
CEO Lloyd Blankfein announced last week that senior management would review internal emails to determine which employees called Goldman clients “Muppets” — an apparently derogatory term that the outgoing VP, Greg Smith, blew the whistle on in his now-famous NY Times op-ed.
Goldman’s leadership issued its own reply on its web site, a reply that came across as measured, as well as a little ominous — it pledged to “examine carefully” anonymous postings related to Goldman’s reputation and current PR crisis.
http://www.goldmansachs.com/media-relations/comments-and-responses/current/nyt-op-ed-response.html
Of course, as a result of Mr. Smith’s screed more people than ever are ready to storm Goldman’s Broad Street headquarters in Lower Manhattan. But there are many developments in the last decade that have led to less customer-centric, and more trading-oriented, culture at the firm.
1) Goldman Sachs certainly has shifted its focus since it went public in 1999. Prior to that it was a closed partnership, which naturally focused on a longer term results, for both itself and its blue-chip corporate clients. Greg Smith was hardly breaking new ground by pointing out the Goldman culture focuses less on the client. The firm is no longer led by investment bankers.
2) Goldman is losing corporate clients, particularly in its securities underwriting business, and likely by choice. Last month rival Morgan Stanley was tapped to lead underwrite the initial public offering of Facebook — another setback for Goldman. And though strong in global equities (see chart, http://about.bloomberg.com/pdf/gcmkt.pdf) the firm has fled less profitable bond underwritings and trails in US equity underwritings. All of that likely reflects a sensible strategic decision by the firm to avoid losing money. The Goldman Sachs of today bears a greater resemblance to Salomon Brothers of the 1980s – it has chosen to lead Wall Street as a global trading house.
3) The global economy is driving the change. Given the astonishing capital flows globally today — and the still relatively open markets post-2008 — that is probably a good thing that Goldman has chosen to become what it is today. And, given its exceptional performance, it’s a good thing that Goldman Sachs – in a world full of no less avaricious forms of state capitalism – is an American company.
4) Although you wouldn’t know it from the media coverage and political climate, global wealth is at its highest level in human history. The rise in global and cross-border institutional funds hasn’t stopped in far-off places like Dubai and Saudi Arabia and Malaysia and Beijing. It is a shift not often mentioned by pundits and the press, who are focused now on the somewhat arbitrary “1%-99%” construct.
5) It’s a trading firm’s job to be smarter than its counter-parties. Not all global funds have managers as quick and bright as the traders at Goldman Sachs. Wherever there is money, a certain percentage of it has always been dumb money. And the teams of traders and salespeople at a place like Goldman are paid to locate, and exploit, that money. Nothing new here — except that the money today is now in places like Tunis instead of Tulsa.
6) Greg Smith was, most of his career there, quite nearly at ground zero of Goldman’s most egregious financial hucksterism: He was selling US derivatives — the more liquid and credible of the global derivatives markets — to non-US clients, many less sophisticated than Goldman. Nothing new here, either: Recall that AIG’s ill-fated and London-based risk management team was shorn like a lamb by Goldman. And the last buyers of US mortgage debt products running up to the 2008 crisis were small credit unions in Germany that believed to the end that such assets were worthy of their triple-A ratings.
None of this is to say that the rest of Goldman Sachs — its research departments, its M&A people, its bankers — is somehow more moral and upright, perhaps even less greedy. But they probably are, just because of the businesses they are in. And that says something about the nature of many derivatives markets – still unregulated, still unmonitored, still virtually no information available about them.
7) It’s surprising that the Times Op-Ed page ran such a plainly well meaning but slightly naive-sounding and not-terribly-authoritative screed. Smith, as Goldman pointed out, was one of thousands of vice presidents at the firm, and at 33 he was hardly a seasoned executive. According to The Wall Street Journal the day after the op-ed piece appeared, “it is unusual for Goldman vice presidents to keep that title for as long as Mr. Smith did, according to Goldman executives. Such executives usually are promoted to managing director or leave the firm for more lucrative jobs elsewhere.” Yes, that kind of un-sourced remark serves Goldman’s interests by cutting into Smith’s credibility, but it seems unlikely that Smith was on his way to securing a coveted partner’s title at the firm. Even the Times seemed to backtrack by Wednesday night, when it pointed out his age and relatively obscure role.
8 ) Goldman’s leadership knows full well it has an image problem borne of its own success as a wealth creator for its shareholders. Its image advertising, increasingly online, is intended to remind us it’s a constructive, business- and job-creating leader in the new global economy. There is a kernel of truth in that claim, just as there is in Mr. Smith’s op-ed.
9) Goldman still has a frighteningly intelligent and motivated workforce, but it doesn’t have stand-up leadership right now. The firm has been aloof and passive in addressing the impact of its new culture. Its committee-style leadership has all the personality of the Beijing Politburo.
The trader believes his activities are no one’s business but his own – which is fine, so long as you are not running the company.
Look for a new CEO and CFO at Goldman Sachs in the months ahead.