Omertá and Wall Street

By David Brooks

From the Mexican newspaper La Jornada

It wasn’t exactly unknown, but apparently what’s unacceptable is that someone “from the inside” revealed it.

This week, judging from the reactions, there was high treason on Wall Street and the consequences are serious enough to create a movement of solidarity in the nation’s highest financial circles and deal with the serious problem provoked when an executive dares to reveal that things are as “toxic” as everyone knows.

What was the big secret revealed by a young executive at Goldman Sachs, perhaps the world’s most powerful investment bank? It turns out that greed is the engine of financial capitalism, according to Greg Smith, a vice president of that company (there are 12,000 vice presidents in that company with 30,000 employees, in other words, it’s not at one of the highest levels) who wrote a kind of public resignation letter in The New York Times.

Smith denounced that, inside the monster, the expectation is – wait, wait for the punch line – to make more and more money, no matter how. The most devastating part is that the common practice inside that prestigious and historical firm to achieve its huge profits is to swindle and deceive its clients and anyone else who lets it.

Ah, another surprise: inside, there is a “culture” that has deteriorated to the point that “the environment now is as toxic and destructive as I have ever seen it,” and “I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.”

The impact of these words was such that the firm’s market shares plunged in the New York exchange. Goldman Sachs’ top executives immediately rejected the accusations and insisted that they are decent people; executives in other investment houses were forced to defend their “culture”; the main media and cyberspace reported an intense exchange of analyses, reactions and comments, and even the multimillion-dollar Mayor of New York City, Michael Bloomberg, who made his fortune on Wall Street, visited the bank’s offices to express his solidarity.

The top chiefs at Goldman Sachs responded, in a memo to all employees, that Smith’s assertions did not reflect the “values” or “culture” of the firm. “We disagree,” said a spokesperson to the press, because “we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”

Now there are open and explicit debates about what kind of greed is better, and if the problem is the difference between short-term and long-term greed. As Ezra Klein argued in The Washington Post, “long-term greed meant treating your clients right,” while most of Goldman Sachs’ profits now come from the side that emphasizes “short-term greed”, where the priority is the volume of sales and trading of shares and other financial instruments, not the relationship with clients.

Defenders of Wall Street argued that that’s only the opinion of an isolated man, not representative of the sector, and tried to downplay Smith’s criticism. An editorial in Bloomberg View said: “It must have been a terrible shock when Smith concluded that Goldman actually was primarily about making money.” The Wall Street Journal started to discredit Smith, claiming that, according to sources, he was a low-level employee.

Some critics of Wall Street pointed out that the curious thing is that this young man discovered what millions of people already knew: that the Wall Street banks had pushed the nation into its worst economic crisis since The Great Depression precisely through the practices that Smith had denounced.

“What’s absent from this article [Smith’s] is any sense of mea culpa, any sense that he was in any way part of the problem,” commented Felix Salmon, a well-known commentator on financial affairs for the Reuters news agency.

Others, including commentators for Forbes and the BBC, said that the simple fact that an executive dared to resign with such a public message could only damage the company, especially its credibility with its clients and, what’s worse, could encourage an exodus of talent from Goldman Sachs.

Liberals and progressives celebrated that “an insider” finally denounced what the outsiders had already criticized. Matt Taibbi, a columnist for Rolling Stone, author of a famous description of Goldman Sachs as “a great vampire squid wrapped around the face of humanity” in his ferocious criticisms, considered that Smith’s resignation was “historic” because it involved an insider denouncing that the firm’s practice was to swindle and screw its own clients.

Taibbi pointed out that “that’s how the end game had to be to reform Wall Street,” something that couldn’t come from government pressure or Occupy Wall Street. “The real change always had to come from inside Wall Street itself,” he wrote. The effect of all this, he said, is that the clients of that firm will no longer believe that it is the best place to manage their funds.

Founded in 1869, Goldman Sachs was the alma mater of several of the “masters of the universe,” among them former Treasure Secretaries Henry Paulson and Robert Rubin, several CEOs of other Wall Street firm and heads of the World Bank, the Federal Reserve and national banks in countries like Italy and Canada.

A couple of years ago, Taibbi wrote that Goldman Sachs, with its unprecedented influence and reach inside world cupolas, “is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.”

In other words, it seems that it is treason to reveal what that sacred business really is. Could that be like the Cosa Nostra’s omertá?