Don't Bank on It

Article excerpt

Byline: Rob Cox

In a sententious harrumph, a midlevel Goldman Sachs banker stormed out of Wall Street's leading investment bank last week by publishing a critique in The New York Times of his now former employer. Greg Smith accused Goldman chief executive Lloyd Blankfein and president Gary Cohn of fomenting a corporate culture where the pursuit of making money "sidelined" the interests of clients, who Smith said were referred to as "muppets" by superiors. "Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence," he wrote.

Smith has been called brave for speaking out against the apparent wickedness of the bank that lavished him with a decade of bonuses. But there's also a glaring naivete to his appraisal that is as short-sighted as the supposed decisions of Goldman's masters to chase profits today

over the interests of clients tomorrow. Money is and forever will be the lifeblood of global finance. The only changing dynamic is the degree to which other goals compete with this pursuit.

Goldman did not suddenly become greedy when Smith trotted in with his Stanford education and table-tennis trophy 12 years ago. For 143 years Goldman has tried to strike a balance between serving its customers' needs and creating lucre for its partners. It has often failed. Goldman executives wincing at being the butt of late-night talk-show jokes this week may be as historically myopic as Smith. In 1932, after the stunning collapse of Goldman Sachs Trading Corp., an investment fund that crippled the firm and singed its clients, vaudevillian comic Eddie Cantor made Goldman his regular whipping boy.

It took decades for Goldman to repair its reputation as a trustworthy broker under the leadership of consummate relationship-banker Sidney Weinberg. But it wasn't long before the desire to mint money returned with a vengeance under Goldman partner Gus Levy in the 1950s and '60s. Rather than simply dispensing advice to clients like Ford Motor, Levy pioneered the deployment of Goldman's capital to generate returns in ways that set the firm, and indeed all of the financial industry, on its current trajectory.

Levy championed two businesses--block trading and risk arbitrage--both of which essentially boiled down to Goldman taking risks in the stock market with its own money in the same way hedge funds do today. …