Views on improving the integrity of global capital markets
15 March 2012

From the Belly of the Beast: Goldman Exec’s Parting Words an Indictment of Investment Industry

Today the investment profession received the latest shot across the bow in the ongoing battle to reestablish investor confidence in the integrity of the investment profession — one that dramatically demonstrates the inherent difficulty in changing the culture of some of the leading firms in the industry. 

In an op-ed piece in the New York Times, Greg Smith, former executive director and head of Goldman’s United States equity derivatives business in Europe, the Middle East, and Africa, penned a scathing indictment of what he claimed was an eroding culture of integrity at Goldman. He colorfully claims that Goldman, a pillar of the financial services industry that has lately been under attack for how it has treated investors, has moved away from a culture of integrity where client interests come first, to a business where clients are “muppets” to be fleeced for maximum profit.

While such accusations are disturbing enough when coming from “outsiders” such as the press, regulators, and former clients, the fact that a high-level insider has acknowledged what many have long believed is a devastating indictment of not just Goldman but, arguably, of the investment profession as a whole. As with the ongoing drumbeat of stories of Ponzi schemes, insider trading convictions, and taxpayer-funded executive bonuses splashed across the news, the damage in the eyes of the investing public won’t be limited to those firms immediately affected. Such revelations only work to smear the entire investment profession.

The vitality of global capital markets depends on the confidence of investors willing to commit their financial assets to entities they can trust. Smith points out what common sense dictates: People who view their clients as profit centers, sacrifice their clients for personal gain, and care only about making money will not sustain the trust of clients for very long. His call to action for Goldman could just as easily be a call to action for all individuals and firms who seek to restore the investing public’s faith in the integrity of capital markets, and those who work in them: Make the client the focal point of your business again.

But how do those who work diligently for clients and recognize that protecting client interest is the best long-term path to success distinguish themselves from the callous and “elephant hunters” described by Smith?

It starts with a commitment to the fundamental ethical principles embodied in the CFA Institute Code of Ethics and Standards of Professional Conduct and the Asset Manager Code of Professional Conduct. Adherence to a rigorous code of conduct that includes provisions on such topics as handling conflicts of interest, transparency, independence, and fair-dealing sends a clear signal to clients and potential clients that a firm has the clients’ best interests at the forefront of the investment decision-making process.

Firms should educate, train, and constantly reinforce this commitment with employees to build a culture of integrity within the firm. Establishing incentive structures to reward ethical, client-oriented conduct — not just performance — will also move the focus away from a solely profit-based mindset. Finally, firms that implement these measures will have the tools they need to proactively discuss ethics, integrity, professionalism, and client-centered practice with investors, thereby changing their view from the vision vividly painted by Mr. Smith.

About the Author(s)
Jon Stokes

Jon Stokes was the Director of Ethics and Standards Education at CFA Institute. His responsibilities included design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

6 thoughts on “From the Belly of the Beast: Goldman Exec’s Parting Words an Indictment of Investment Industry”

  1. Jeff Tryka says:

    This is a very insightful commentary and a reminder to all of us to take a renewed look at our commitment to financial market integrity and our duty to uphold the highest standards of ethics in our industry. In thinking of this, I also wonder how much the fundamental change in the industry away from asset management and investment banking and toward trading has contributed to this current environment. It seems to me that asset management and investment banking typically have longer timeframes to develop relationships with clients and ultimately revenues, compared with trading, which typically has extremely short time horizons and even more so in terms of the high-frequency variety. Has the shift in leadership, where more firms are being led by the trading side of the business contributed to such a short-sighted environment?

    1. Marc L. Ross, CFA, CFP(R), CLU(R) says:

      In part, yes. Also, the fact that Wall Street has become in many respects a place that has ceased to create anything and strayed from the primary mission of finance. Goldman has long been a trading house, but may have gotten its hands into more than it bargained for. Smith’s comments about managing directors’ derision of clients as muppets would seem to evoke Frank Partnoy’s recounting in F.I.A.S.C.O. of how derivatives traders would boast of ripping clients’ faces off with respect to a particular strategy. Plus ca change…

  2. Marc L. Ross, CFA, CFP(R), CLU(R) says:

    Thank you for this post, Jon. I am the president of the CFA Society of Orlando and have served on our board for six years. After attending an advocacy workshop last month in Atlanta, I think that Greg Smith’s letter presents an opportunity to promote further the value of the charter, particularly its ethical component. Bank analyst Mike Mayo exemplifies the right way to do things in Exile on Wall Street. Himself a charterholder, he is the standard bearer of what a charterholder should exemplify. Sadly, he appears more the exception than the rule as Mr. Smith’s letter would seem to attest. A return to the basics would be welcome. Sidney Weinberg must be turning in his grave.

  3. Jon Stokes says:

    Thank you for your comments. Yes, it is incumbent on CFA Institute and its members and societies to use opportunities, such as Mr. Smith’s op-ed piece, to distinguish the organization and its members as striving to meet the highest standards of ethics and professionalism and, most of all, emphasize charterholders’ commitment to holding client interests paramount. Changing the perceptions of investors in the face of such stark assessments and events as the insider trading cases will require concerted, long-term, and vocal engagement by all of us to regain the public trust.

  4. I agree that there there is an opportunity for Charterholder’s to distinguish themselves while addressing the issues raised by Greg Smith.

    It has also been interesting to read the distinction between fidicuary duty and agency duty in some of the general financial press coverage as it pertains to this story. Hopefully that will be a question that the press, public, and investors ask ahead of time rather than after the fact.

    Finally, with respect to Marc Ross’ reference to Sidney Weinberg: I would love to see the look on Mr. Weinberg’s face if he returned from the grave and was told that Goldman Sachs was no longer a partnership!

  5. Jon Stokes says:

    Thanks for your comments.

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