By now, Greg Smith’s resignation letter from Goldman Sachs, delivered via the New York Times op-ed page, ranks high in the pantheon of dramatic stage exits. His message about Goldman culture was straightforward and distressing: “It makes me ill how callously people talk about ripping their clients off.”
I spent 20 years in big Wall Street firms. So did I see what Smith saw?
Let’s start with the obvious: a public company with a 10:1 debt ratio (down from 30:1) is under intense, continuous pressure to produce profits for its shareholders and repay debt.
This ownership structure and financing model describes most Wall Street firms. I don’t think it’s a model that favors clients – neither individuals nor institutions. Client interests are simply not the same as the firm’s interests, and often they are directly opposed.
It’s a simple chain reaction: Investors buy GS stock to earn a return. If profits fall, the stock price falls. If the stock price falls, shareholders sell. If shareholders sell, the price falls further and executives are held accountable. So leaders of the firm have full motivation to keep profits and the stock price as high as possible, even if it comes at a cost to clients. Whether this happens callously, as Smith asserts, or with a gentle touch, the impact on clients is the same.
Yes, it sounds familiar
While working on Wall Street, starting from the bottom up to managing director, I can honestly say that, in my experience, what Greg Smith says is completely familiar and has been going on for some time, or at least since 1986, the year Morgan Stanley went public.
When a manufacturer and distributor of financial products also acts as intermediary between suppliers and users of capital, it’s easy to see how more money for the firm means less money for the client. In my experience it was a huge, continuing challenge to unite the interests of clients and the firm. There was always was, and still is, a conflict of interest.
Conflicts can be profitable. As a trader friend put it, “If there’s no conflict, I’m not interested.”
Follow the money
Are conflicts of interest a threat to you? There is a simple test of how well your interests are aligned with those of your money manager: just follow the money. It sounds simple, and it is.
How does the firm make money? How much? Who gets it? Does the firm make more when you make less? Why is this arrangement in your best interest? Could you get similar products or performance with less expense, more transparency, and less conflict of interest? Is the firm’s first allegiance to you?
As I described in a recent post, I structured Osbon Capital as I did because I believe that a private firm for private people, operating in one business only, unencumbered with voting shareholders and debt, is the best way to deliver money management service.
Have a laugh, but not at your own expense
Now back to the Smith letter. Credit the New York Times with pointing out its humor value, with a sampling of reactions from satirists: “Andy Borowitz offered a mock memo from Lloyd C. Blankfein, the Goldman chief. ‘Mr. Smith comes across as a man of conscience, ideals and high moral standards,’ Mr. Borowitz wrote. And as you read his words, you no doubt asked yourself this troubling question: how could Goldman have hired such a person?”
Among the most popular spoofs was a resignation letter from Darth Vader on The Daily Mash. “After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines,” the mock article said. “And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.”
For our most popular posts, click here.
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.
Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.