Goldman Sachs and the Rise of the Trader

Traders work on the floor of the New York Stock Exchange minutes after the Federal Reserve announced it would leave interest rates unchanged on March 13, 2012

Photograph by Mario Tama/Getty Images.

Everyone is talking about Greg Smith’s scathing exit attack on Goldman Sachs, accusing the firm of moral decline and a lack of interest in serving its clients well. What strikes me is that Smith avoids a clear statement of the basic issue. Once upon a time Goldman was a firm that was pretty overwhelmingly in the business of advising clients. It’s hard to succeed in the client-advising business unless clients feel that you’re giving good advice. But over the time span Smith is describing, this whole portion of the business has shrunk relative to trading. This means that whether or not the advice is good or clients are happy or there’s a perception of ethical behavior is all just less and less relevant to the operation of the enterprise. Companies shift their focus all the time and it would be the most natural thing in the world for executives affiliated with the declining side of the business to resent the change. Some Googlers are quitting in displeasure over the company’s shift to a Google+ focus, there must be Mac people who aren’t thrilled that Apple is defining itself as a “post-PC” company, and as Goldman Sachs becomes more of a trading firm and less of a client-advising firm its key client advisors are going to be unhappy.

Whether that shift per se constitutes moral decline is I think difficult to say, but that’s the backdrop for his key complaints. Smith writes that he has “always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm” but simultaneously warns that the new attitude he dislikes will spell the death of the firm. That’s contradictory. It’s not that the Old Goldman put doing the right thing ahead of making money, it’s that the Old Goldman made money by making clients feel that they were getting good advice. In the New Goldman, Smith tells us:

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients—some of whom are sophisticated, and some of whom aren’t—to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Translating out of indignationese, point c) is that trading is now the focus of the business. Points a) and b) are indicating that the client-advising side of the business is now compromised for the sake of the trading side. If that’s true, then Smith is probably correct that clients will gravitate away from Goldman in the long term. But his claim that that spells death for the bank is wrong, that would just mean a further transformation of the focus of the business away from advising clients and toward trading.