The most surprising facts about Greg Smith's denunciation of Goldman Sachs' ethos and its disdain of its clients is that he had the audacity to write what is common knowledge, and the New York Times printed it. Media, academic and elected officials have jumped on the article to reinforce their previously held views on everything from the state of capitalism to the collapse of morality.
The article shows nothing more than the failure of Goldman's Board and management. And that eventually bad business practices will tarnish a great reputation.
In full disclosure, for 50 years I have competed against Goldman Sachs. During these decades, Goldman and most of its peers transitioned from private partnerships to limited liability public companies with access to virtually unlimited capital. Capital was the catalyst for ventures more lucrative than advising clients, such as proprietary investing in private equity, real estate, commodities and securities.
Finance may be complex, but life is simple. If you are a principal dealing with another principal on the other side of a trade and you are involved in any way with a counter party, you have a conflict. At the least, you are obligated to disclose fully your conflict. The preferred position is to avoid the conflict or even the appearance.
Lloyd Blankfein defined Goldman's position clearly. In his most recent edition of The Partnership: The Making of Goldman Sachs, Charles Ellis lets Lloyd Blankfein define Goldman's view of conflicts.
The crucial differentiating advantage of Goldman Sachs would be one that outsiders might find surprising: Its complex variety of many businesses was sure to have lots of conflicts. Goldman Sachs, Blankfein said, should embrace the challenge of those conflicts. Like market risk, the risk of conflicts would keep most competitors away -- but by engaging actively with clients, Goldman Sachs would understand these conflicts better and could manage them better. Blankfein (who spends a significant part of his time managing real or perceived conflicts) said, "If major clients -- governments, institutional investors, corporations, and wealthy families -- believe they can trust our judgment, we can invite them to partner with us and share in their success."
Blankfein's concept of the relationship between an advisor and its clients is dangerous and alien to the tenets of trust and fiduciary obligations. It is difficult to envision a situation where competing with your client is good for the client. It has never occurred in my experience.
Imagine a lawyer managing conflicts with clients or a doctor managing a conflict with a patient. The Courts and government regulators have continually found such conduct wanting. As recently as February in the Kinder Morgan merger with El Paso Corp., Delaware Chancery Court chastised Goldman for a series of undisclosed conflicts.
Irony is a word without definition -- unlike conflict. But like pornography, in the words of Justice Potter Stewart, "I know it when I see it."
How ironic it is that Goldman, the firm that advises governments, boards of directors, senior managements and the world's wealthiest cannot advise itself on appropriate behavior. Where is the Board oversight?
How ironic that Goldman's corporate clients operating their own Boards under scrutiny of Institutional Shareholder Services and Sarbanes-Oxley legislation would tolerate a conflicted relationship with its advisor that it would not tolerate for a moment within its own organization.
How is it that the nation's pre-eminent business schools provide their finest graduates who may intellectually understand the term fiduciary responsibility but seem incapable to apply it in practice?
It is ironic that mainstream media -- so critical of every aspect of corporate behavior -- ignored the Goldman situation until it was poked in its averted eye, first by Rolling Stone and now by Greg Smith.
Finally, how ironic is it that I, a competitor, should feel that the health and reputation of the financial system requires Goldman to confront these practices and re-set its culture.
The financial system is fragile. It is just beginning to rebuild its capital base at a huge cost to the nation. As a result of the financial crisis, we now have an oligopolistic financial system with "banks too big to fail." Goldman Sachs is in that select group. Ironically, Goldman and other such banks are semi-government entities -- some form of "ward" of the State. Politically, however, from Occupy Wall Street to Main Street, banks are the object of derision. The banking community needs distinguished leaders and practices beyond reproach because, like a sprawling utility, Wall Street supplies the credit and liquidity propelling America's economic growth. Wall Street is a jobs issue and not only in the financial centers.
It is late in the process but it "ain't over!" Businesses succeed because they put the customer first. Gus Levy -- the famed Goldman partner -- admonished his partners 60 years ago to be "long-term" greedy. I never liked the term but understood the concept. Simply stated... we will get rich by being sure we hold back a bit and be sure to serve our clients first. There is no irony in that.References:
- Charles D. Ellis, The Partnership: The Making of Goldman Sachs (London: The Penguin Press, Edition 2009) 669-670
- Jacobellis v. Ohio 378 U.S. 184 (1964)
Peter J. Solomon is Founder and Chairman of Peter J. Solomon Company, L.P., an investment banking firm. He was Counselor to the Secretary of the Treasury under President Jimmy Carter, Deputy Mayor for Economic Policy and Development under Mayor Edward I. Koch and Vice Chairman of Lehman Brothers in the 1980s.