Why Goldman Sachs Turned on Us

The extraordinary op-ed in the New York Times today by Greg Smith, a Goldman executive director, explaining that he was resigning because he could no longer stomach a corporate culture that did not look out for clients, brought back vividly to me that moment in 2010 when Sen. Carl Levin called top Goldman execs on the carpet. I was sitting there in the hearing room when the following happened:


Daniel Sparks, the former head of Goldman's mortgage department, repeatedly declined to utter the simple statement that he had acted in the clients' best interests, as did two other Goldman witnesses including Tourre (who took the opportunity to deny all the SEC charges against him). "You knew it was a s--tty deal," Levin told Sparks, repeating again and again a word seldom heard on the record from high public officials. "How much of that s--tty deal did you sell to your clients?"

Sparks refused to say. When Sen. Susan Collins asked him whether he felt an obligation to "act in the best interest of your clients," Sparks couldn't answer that directly either. "I had a duty to act in a very straightforward way and very open way with my clients," he responded, prompting gasps of incredulity in the room.



Reporting this event for Newsweek inspired me to go more deeply into the changed corporate culture of Wall Street. As I wrote in Capital Offense:

Back in the nineteenth-century world of J. P. Morgan, capital had been scarce and Wall Street had been controlled by a stodgy few. Morgan himself held major stakes in the railroads, which together comprised some 60 percent of the New York Stock Exchange, and stock issuance was a closely held right granted to only the most blue-blooded of corporations. But now the IBMs and the General Motors didn’t need Wall Street as much as before; their corporate ratings were often better than those of the investment banks and they sometimes had their own financing units. They could easily tap the commercial-paper market on their own. So whereas in the old days prestige came to those firms that worked their way up the credit scale to the blue chips, now firms like Morgan Stanley had to look for less credit-worthy new clients. .

That was Michael Milken’s great insight at Drexel Burnham in the 1980s as he began finding ways to issue “junk” bonds for buccaneering entrepreneurs, people who in previous periods would not have warranted a second look from the Street. The ever-escalating race to finance less-credit-worthy borrowers proceeded through the biotech bubble and the high-tech bubble of the 1990s, but at least Wall Street ended up financing some great companies of enduring value. Google. Yahoo! Genentech.

The derivatives selling and "structured finance" craze that characterized the subprime bubble took on a wholly different quality. At some indefinable point, in its desperation for new sources of profit, Wall Street crossed the line from innovative if sometimes reckless financing of new ventures, and the hedging of them, into practices that were purely about speculation and scamming. ... while in the old days firms like J.P. Morgan’s had possessed a sense of noblesse oblige about the American economy, Goldman had never matured into that role. In the post-Milken era the elite of the Street had become vastly more diffuse. Though there was still a pecking order and Goldman sat atop it, no banker commanded ultimate prestige. Wall Street had been gradually giving up control to Washington regulators and to the Fed, created in 1912 in response to the repeated panics. And Goldman’s corporate ethos was to be more a predator than a protector. 


Goldman became known as the savviest and most prestigious firm on the street in part because it had no scruples about simultaneously betting against products it was selling. Goldman justified this by saying that it had more sophisticated customers, like big institutional and professional investors, who didn’t mind if Goldman placed hedges against the very investments it was touting to other clients. It was more of a hedge-fund mentality than anything else.

Rather than feeling themselves obligated to preserve the stability of the system, top firms like Goldman were instead consumed with making money off of it. And in this era that meant coming up with the best ways of lobbying Washington to back off. It was no accident that Goldman came to dominate the Wall Street-Washington nexus. ...