Americans love it when the large and powerful get their comeuppance. So it should be no surprise, perhaps, when twelve-year Goldman Sachs veteran Greg Smith’s resigns from the firm in a flurry of allegations in the pages of the New York Times a Mardi Gras-style celebration erupts.
Smith makes his case that at Goldman, “The interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” The responses have been immediate and sharp. Washington Post financial columnist Steven Pearlstein seems to speak for many, when he says Smith accused “the image-battered investment bank of shamelessly putting its interests ahead of its customer.”
The problem is much of such commentary is more about “piling on” and obscuring important truths than about elucidating them. Smith charges, essentially, that Goldman rewards any legal conduct that generates profits. This includes persuading clients to invest in vehicles that Goldman wants to dump; getting clients to trade whatever is most profitable to Goldman, and trading “any illiquid, opaque product with a three-letter acronym.” He also is offended by Goldman managers who, he believes, view their own customers as dupes. (He says the British term ‘Muppets’ was the expression of choice.)
Goldman’s immediate response seems calibrated to not take the Smith letter seriously. It rejects the allegation and speaks about an internal survey of Goldman managers. Pretty thin gruel. A Bloomberg opinion piece which has been reported to be popular at Goldman focused on Smith’s naivete. “It must have been a terrible shock when Smith concluded that Goldman was actually primarily about making money.” Even thinner gruel.
What’s been almost entirely missing is a discussion of why Goldman, according to Smith, was not violating federal regulations. The answer lies in the huge difference between the minimum requirements of the sales or broker standard that brokers must meet as opposed to the far higher fiduciary standard that most all customers or clients expect and that SEC registered investment advisers must meet.
A version of this blog first appeared on the website of the Institute for the Fiduciary Standard, where Mr. Rostad is president.
One notable exception: WSJ columnist Holman Jenkins does reference this difference in a March 16 posting and offers one alternative. Jenkins notes, “When Goldman is making markets or taking the contrary side of a complex transaction requested by a customer, Goldman is clearly looking out for itself.”