Goldman Sach's and Pandora's Box - What (or should I say who?) next?

There has been a lot of debate about Greg Smiths's very open letter of resignation from Goldman Sachs. Some shocked that he should say such things, others shocked that it took him so long to realise. I share sympathy with both views.

My career in financial services has now spanned three decades and is into its fourth. I have been lucky to work for some great organisations and one or two not so great, or at least not the parts I was in. The world has undoubtedly become more joined up, faster and altogether more complicated. We know so much more about what is going on and have layer upon layer of rules applied in order make it "safer"(?). While I recognise the risk of having a rose-tinted rear view mirror, I do think that in terms of integrity and safety things were better when I started. All the effort that has been applied by regulators and governments and business schools has made it different, but not better.

The signs have been there for a while, maybe not endemic or should it be pandemic, but there and worrying all the same. Greg's comments about his colleagues only thinking of themselves and how much money they could make out of clients was portrayed vividly by Frank Partnoy in his book "F.I.A.S.C.O." (published in 1999) where Morgan Stanley derivatives teams were the living example of what Greg is now complaining about. I am sure Morgan Stanley were not alone. I would certainly question the ethics of a few derivatives guys I have worked with.

Now I am not saying that derivatives are bad as some are. Last night a radio host was deriding all derivatives and likening them to a garage taking your car for repair, selling it to another person without you knowing and letting them use it when you weren't. This went out over London! It is not only unfair it is wrong. Many, if not most, derivatives (I was in at the beginning of financial futures in London, worked with currency options and all sorts) have a real and genuine purpose to help business. The trouble comes with the "wetware" ie the people. If people want or need to speculate then they can use derivatives badly. If someone is unscrupulous they can create toxic derivatives (and some have). But it is the people creating and selling them that are bad, not derivatives as a collective product. And it is ill-equipped management that allows it!

Enough on that and back to Greg Smith vs Goldman Sachs (GSvsGS). It may be that the culture at Goldman Sachs held out longer than others? That it held clients in high esteem? I do agree with Greg that satisfying clients is a better strategy, but as the rewards for individuals grow, so does the temptation to relax certain behaviours.  I saw changes in the DNA at Flemings while I was there, but nothing catastrophic and it sold to Chase before things went too far. The family had held a pretty strong hold on ethics and taking their name with them into a Family Office protected that.

For all the regulators attempts to strengthen boards and executive teams by bringing diversity in, I would question if things have improved. The price of diversity has been a lack of deep relevant experience that has been shown wanting in many of the recent crisis'. As industry is going back towards apprenticeships then so should financial services think of deepening it training and not just go for smart suits, patent shoes and a taste for fast cars and fancy liquor.

My take is that something has just broken the proverbial camel's back for Greg to come out with this. Goldman Sachs and Greg' awareness has not just happened overnight; indeed Greg's words suggest he has been seeing this for some time. Of course business exists to make money, but not at any price. I wonder how many others will break ranks and talk about their organisation? I suspect many are nodding in agreement, but will sit tight and say nothing, until the next thing breaks and then it will be "I told you so!"

We know we still have institutions failing spectaularly, indeed we have countries doing so. We have "Bernie Madoff"s and "Alan Stansfords" out there hoping that their fraud will not collapse. All in all I suspect we are no safer or better off than we were, we just think we are. Every now and then it gets too much for someone, in this instance Greg Smith, and we get a juicy exposee. This one cost Goldmans a big chunk of their value (down US$2.2bn)!

I wonder if they will recover and indeed what the next one will be?