The worst damage to the Goldman Sachs franchise from the extraordinary attack on its corporate culture by a mid-level former employee comes from its clinical execution.
With exquisite timing, Greg Smith’s opinion piece for the New York Times coincided with the early release by the Federal Reserve of stress test reports into the American banking sector. They appeared to show a sustained if patchy recovery.
In the immediate wake of the announcement, Goldman Sachs shares surged by 6%. JP Morgan, another strong performer, increased by 7%, its performance buoyed by a planned dividend increase and a ramping up a share buy-back program.
Greg Smith’s very public resignation from Goldman Sachs through the opinion pages of the New York Times punctured a rally of questionable value.
Reducing capital requirements at this stage remains hotly contested. It also reopened debate on whether ostensibly stricter regulatory oversight has effected lasting change on Wall Street.
Smith certainly didn’t think so. “I can honestly say the environment is now as toxic and destructive as I’ve ever seen it,” he wrote. “To put the problem in its simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Goldman Sachs, understandably, downplayed the standing of the complainant. It disputed that a systematic ethical malaise existed within the bank. In a memo to staff, the firm noted “it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper that speaks louder than the regular, detailed and intensive feedback you have provided the firm”.
This misses the point.
The power of the attack has little to do with its veracity. Its strength derives from its initial placement in such a prestigious outlet, its timing and subsequent viral social media dissemination. Not since the infamous depiction of Goldman Sachs as a giant “vampire squid\” by Rolling Stone has a banking and financial regulation story attracted such public interest. As such, it has the capacity to reframe debate on what constitutes corporate and regulatory purpose.
The controversy highlights the constellation of interests at play in the dynamics of financial regulation. It also reflects the critical intermediating role played by the media. Regulatory strategies focus on competing (if partially understood) narratives, one of which gains media and, therefore, political, traction. It is essential to “own” the media agenda, a fact reluctantly acknowledged by Goldman Sachs.
The firm has received backing from within citadels of business journalism. That an investment bank ever was or should have been seen as a “Make-A Wish Foundation” reflects, according to the Bloomberg editors, stunning naïveté on the part of Mr Smith.
“If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs. That’s not its function, and it never will be,” wrote the Bloomberg editors. “Go to work for Goldman Sachs if you wish to work hard and get paid more than you deserve even so. (Or if you want to make your living selling derivatives but don’t know what a derivative is, as Smith concedes in passing that he didn’t at first.)”
In shooting the messenger, Bloomberg forces as much consideration of its editorial priorities as on the problems of ascertaining the extent to which Goldman Sachs has effective mechanisms to ensure cultural values are embedded in practice. The fact that the article is signed by the editors makes the intervention even more extraordinary. It raises even more questions about the purpose of business journalism than a now notorious on-air 2009 rant by Rick Santelli.
The excited CNBC correspondent, cheered on by traders at the Chicago Mercantile Exchange, had maintained that those caught up in the sub-prime crisis were “losers” and that government intervention served only to sully the American dream of free markets. Santelli later claimed to be the progenitor of the Tea Party Movement. It is implausible that the Bloomberg editors have such crass ambition. The article does, however, suggest that spoiling an undoubted coup by the New York Times may have unintended consequences. These include critical reflection on whether the broader financial community, including the business media, recognise that prior acceptable practice is no longer acceptable.
The conventional legal, regulatory and policy wisdom is that conflicts of interest within financial services are permissible if managed. This approach had been falsified long before Mr Smith’s intervention; so too has confidence in reliance on internally evaluated compliance systems. It has become a critical imperative for both regulator and regulated to create systems of oversight that embed integrity into an organisational design framework that can rebuild trust.
The legal frameworks that underpin compliance and risk management systems need to be buttressed by warranted commitment to ethical aspiration. Absent such an integrated approach, we risk repeating past failures of both corporate governance and regulatory design. The policy problem is how to render this operational in a systematic, dynamic and responsive way.
At corporate, professional and regulatory levels the oversight framework needs to be mutually reinforcing. It needs to be capable of evaluating the calculative, social and normative reasons for behaving in a more (or less) ethically responsible manner. What is also apparent, however, is that those rules and procedures cannot be vouchsafed by allowing the communities of practice themselves to set what constitutes best-practice and monitor effectiveness. Instead, the oversight regime necessitates reciprocal obligation from each institutional actor to maintainence of the integrity of the governance arrangements of the frameowrk as a whole.
Disputes over interpretation can and should be resolved in a manner that is proportionate, targeted and ultimately conducive to the building of warranted trust in the operation of the financial sector. It is against these more demanding criteria that policy reform proposals must be judged.
It is against these criteria that the Goldman approach and its jusitifcation by Bloomberg is so dispiriting. Yet it is only against these criteria, however, that warranted trust can be assured. The goal for regulator and regulated alike is for substantive compliance, demonstrable ethical commitment, effective deterrence, enhanced accountability and reduced risk. It is something that Bloomberg editors as well as banking executives should concentrate on.