“When did it seem to shift from ‘making money without doing anything wrong’ as opposed to ‘do what’s right and the money will follow?’…Every financial services firm should ask themselves whether this question applies to them. This is about culture, about behaviors, about what is rewarded. Goldman was a place where doing the ‘right thing’ was in general rewarded by promotions and by compensation. There was accountability.”

These are the questions for the industry to ponder. My hope is that your poignant words are a call to action for moral rectitude and a return of honor to a once honorable trade: finance.
It has been a heartbreak for anyone who knew Goldman “when,” to see the embattled post-crisis reputation of its former industry star. That the firm was the “best” for many reasons including ethics and integrity rings true for all who knew the firm under the leadership of people like Mike Mortara and Tom Lasersohn. I wonder if you got the chance to read, “Conversations with Wall Street.” My former partner and co-author Peter Ressler writes a lot about Mike and the former honor days of GS. So thank you for your deep insights and passionate pleas to return the firm and the industry to what made it great. Accountability & Customer Service.
Also many thanks for the work you are doing with WMM for women and girls around the globe. It does make a difference, an important difference, to show the world that on and off Wall Street, there are those who combine character with purpose to change the world for the better.

All the best
Monika
http://www.good-b.com

Bad Money

Gresham’s Law…a general law or principle concerning the circulation of money…[named] after Sir Thomas Gresham, who clearly perceived its truths three centuries ago. This law, briefly expressed, it that bad money drives out good money, but that good money cannot drive out bad money

W.S. Jevons, nineteenth century economist

In a global free market, there is a variation on Gresham’s Law: bad capitalism tends to drive out good.

Professor John Gray, False Dawn, 1998

I would speculate that it might take a deep depression to drive out the bad money

I would appreciate your thoughts on this: has investment banking culture become too internally specialized?

One thing that I know has shifted since the days I started working on the Street is the demise of rotational training programs. They were sort of on their last legs in the late 1990s, and I don’t think they’re standard now.

When people rail against the banks both creating (underwriting) mortgage securities and then shorting them as an asset class, I kind of understand their bad gut reaction, but it seems more clear to me that a bank with an inventory of securities needs to hedge it to offset risks, so the practice per se doesn’t bother me all that much. (I mean, at the time of the impending mortgage crisis, no bank going short the securities knew that trade would turn out so massively in their favor.)

But, those traders thus having a fairly confined worldview of who the “customer” is, and a sense of a duty only to make money for their desk (maybe oblivious to what it could do to the larger client relationship with the firm) seems to me an issue of overspecialization. I have had a bit of experience of dealing with clients as a lender (commercial banking dept. of a bank), as an equity underwriter, and as a principal in their stock. The commercial banking experience, especially, where in a bank you are closer to being an insider with the client (access to financial data and mgt plans that are not public, for the sake of credit modeling in what is contractually an ongoing, multi-year relationship and/or credit commitment) opened my eyes a bit to the different hats an institution can wear. As a result, I tend to think a lot when I’m involved with various transactions about where the customer’s interests are going to shake out vis a vis my firm’s actions.

It’s not like my own actions really change as a result of this sort of ongoing awareness (my role and responsibility relative to my firm and the client is pretty clear), but it definitely informs how I communicate with other departments regarding the client. (For example, I go a bit further to make sure certain departments are in the loop, and/or that everyone who should be “over the wall” compliance-wise should be.)

In contrast, I don’t have the assumption that, “well, I’ve done the letter of my job, and my part in this transaction is off my plate now, so all is good.”

So, I’m wondering if people are recruited and trained so specifically into the silo of their function nowadays that they’re clueless about the potential dominoes that they could be setting in motion, regarding the larger firm. And the tunnel-vision mindset, it seems to me, would get increasingly self-reinforced and insular, year after year, especially among those who are newer to than industry than the last crisis in the particular sector or product they cover.

As I think about this, I also feel that there’s much less admiration for the generalist (of any stripe) in banks today. It seems like it’s more like, “choose a function, be a star, move up that hierarchy” and darn the rest of the organization. I mean, I get it that a culture of specialization is more efficient nearly all the time (and a cheaper way to add new people for a bank’s growth), but it seems to me to carry some hazards as well, perhaps particularly at market and/or macro inflection points like we saw in 2008-2009.

So, has the demise of the culture of training and rotation made some of our current problems inevitable?

Cindy Olson
Former Executive Vice President of Global Human Resources Enron

GS and its people may well be doing god’s work, but they are human after all. And humans are not very good at being objective in situations where their own profits are at stake. And this applies to all bankers, not just GS; just that GS has been more shameless than most…

There are inherent conflicts of interest in today’s investment banking model – obvious enough for any high school kid to see. The banks want to be allowed to trade and underwrite and advise and finance – ostensibly because it allows them to serve their clients better. In actual fact, all it allows them to do is to front-run, to insider trade, and to play against their clients. Chinese walls, right. Traffic passes underneath the real one in China…

However, there is an aspect of this issue that I have been privately speculating about ever since Mr. Smith’s article first came out, but have not seen discussed in detail in any of the articles I’ve read. How much of the culture shift at Goldman that you and Mr. Smith have both felt is driven by inevitable changes in institutional incentives caused by Goldman going public in 1999?

I would be interested to hear your thoughts, but basically my thesis boils down to the naysayers at the (by all accounts extremely emotional) 1999 partnership meeting were right. Below is the argument, sorry about the length.

In all institutions subject to major structural change culture changes very slowly, as culture carriers like yourself gradually retire and new blood gets promoted into positions of influence. The process is often difficult to see on a day-to-day basis, but becomes clearer when observed over a long time span. So it seems to me that, given the timing of your two careers, the changes you noticed are not accidental. Mr Smith joined Goldman in 2000, when presumably the firm was still almost entirely populated by senior people who had spent their careers in a partnership. You spent most of your time at Goldman in the final partnership years, and left shortly after the firm went public.

In the partnership, the main goal would have been to make partner (in the real economic ownership sense, not the current titular award Goldman still uses to reward its top performers). And once a partner, the vast bulk of your personal net worth was hard-tied to the long term performance of the firm, very importantly including your retirement income and assets when you became a limited partner. This must have encouraged and incentivized the recruitment and training of customer-centered, conservative junior staff who could look after the firm when you left, and in whom you were basically entrusting your fortune (and for a retiring Goldman partner, it really would be a fortune). Similarly, the incentives for a junior staff member would be heavily stacked in favor of proving to the senior partners that they were worthy culture carriers who could be entrusted with the partners’ future — as well as people who were likely to stay at the firm their entire careers. After all, this was the path to personal wealth. You yourself must have succeeded spectacularly in this endeavor, to have made partner so young (and as a woman).

However, in the public company senior management and the board are primarily responsible to the stock price, and so incentivized to get caught up in the whole ROE arms race that the other tier 1 firms were playing (and which Goldman has been very, very good at). Thus they have an incentive to encourage aggressive, risky but profitable behavior in their underlings, even if it might be unethical. As for the employees, the primary route to personal wealth becomes the annual bonus. And cash or stock options, both are very short term when compared to a partnership stake. Once that bonus is cashed in, any sensible person would diversify out of the firm as quickly as possible, not because they believe the firm is at risk, but simply because they are presumably mostly smart investors. As for staying at the firm for your career, with true partnership off the table, there is always a powerful incentive to go elsewhere if a bigger bonus is on offer, hence the incentive to continually ensure that the firm pays the highest bonuses on the Street. And to pay these, you need short-term profits. So short-term profit taking is further encouraged.

The net effect — aggressive, risky behavior wins even when not in the interests of clients, and everyone’s mental time horizon gradually shrinks.

I hope I’m wrong about this, and would love to hear why. Because I fear that if this argument is correct, there may be very little the board or senior management can do, and over time Goldman’s culture will increasingly resemble that of its peer firms, even if it continues to outperform them because it hires smarter people for more money. And the Street will have lost one of its truly great institutions.