Squid on a skewer

The investment bank Goldman Sachs doesn't have a lot of admirers. At the height of the financial crisis, it was described by Rolling Stone magazine as "a giant vampire squid", sucking blood out of the global economy.  It has paid a fine in excess of half a billion dollars in relation to some of the structured notes it created that were, how to put this, not entirely beneficial to the buyers. It has been castigated for using derivatives to help Greece to conceal the true extent of its debts. It even stands accused of avoiding taxes in the UK, though the amount involved -- £10 million -- is so small in the company's scheme of things that you almost wonder whether it was worth the trouble. Still, take care of the millions and the billions will take care of themselves, right?

Until now, though, Goldman has mostly been able to count on the loyalty and discretion of its staff.  But no longer: this week a mid-ranking employee, Greg Smith, has marked his departure from the firm by publishing a blistering denunciation of its ethics and practices in the pages of the New York Times.  (Contrary to the way he has been characterised in the press, Mr Smith is not a "boss" at Goldman in any real sense. While he was latterly its head of US equity derivatives in London, he has never been elevated to the partnership).  The global media has worked up a fine head of indignant steam over the story, and at least one politician has called for the UK Government to boycott the firm, which recently acted as advisor in the sale of Northern Rock.

The BBC's report on the story, including some perceptive comments by Robert Peston and an attempted rebuttal by the firm, can be found here.  If, however, you want a different take on things,  there's a rather odd attack on Mr Smith, basically accusing him of being naive, here.

Just for the moment,  let's not take sides. Instead, we'll take a look at some of the questions that Mr Smith's tirade brings to mind.

First and foremost, it's hard not to agree with Fred Destin, in the second story linked above, that Mr Smith is pretty naive if it really took him twelve years to suss out what Goldman is like. All investment banks are by their nature aggressive and greedy; there wouldn't be much point in them otherwise. Goldman just happens to be better at those things than most of its competitors.

Moreover, Goldman surely has a right to assume that it's dealing with consenting adults when it makes its trades. It's not selling structured notes to your granny, at least not directly.  It's dealing for the most part with sophisticated investors ("QIBs" -- qualified institutional buyers, in regulator-speak), or supposedly well-informed corporations or institutions, such as, well,  Her Majesty's Government.  If anyone dealing with Goldman (or any other investment bank) chooses to assume that it's not  looking out mainly for its own interests, that's hardly the bank's fault. This is in no way an excuse for illegal behaviour, but even Mr Smith is careful to say that he is not accusing Goldman of that. The principle of caveat emptor must surely apply in what are in effect transactions among equals.

It's interesting to note that while Mr Smith was with Goldman for 12 years in total, his resignation came just a year after he was transferred from New York to the firm's London office. Is it possible that the "toxic" culture he decries was more pronounced in the smaller office than at the company's headquarters? One small piece of evidence pointing that way:  apparently a favoured term of contempt for clients was "muppets". This is a fairly common piece of usage in the UK -- in pubs as much as in City meeting rooms -- but is, unless I'm much mistaken, not used in the same way in New York. It may well be that most of the behaviour that upset Mr Smith so much took place during his year in London rather than during his decade-plus in New York, which might reflect the need for the smaller office to be constantly making its mark with the big bosses back at HQ.

Lastly, it may not be possible to judge exactly what Mr Smith's outburst means until we see what he does next. The media have already pointed out that a dozen years at Goldman probably means he is financially set for life, though he is unlikely to see the deferred portion of his bonuses.  If he announces he has found God, or devotes his life to charity work (and there are precedents for that), all well and good. If, on the other hand, he is setting himself up to be the next Michael Lewis -- not a smart idea,  as the present one is very good at it -- well, not so much.