Why Bloomberg Is Wrong About Goldman Sachs: Clients Vs. Customers

Take this job and shove it has been a war cry for the working class and lottery winners since Johnny Paycheck first sang it in 1977. Now it seems that it’s not just folks who work on farms and factories who identify with the song, it’s also folks on Wall Street.

After 12 years poor Greg Smith decided that he didn’t like his job with Goldman Sachs. In a blistering op-ed piece written in the New York Times, Smith explained that “the firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.”

Smith’s complaint and the place where it appeared instantly set off headlines and commentary nationwide. Those who didn’t like Goldman Sachs believe all their criticisms have been validated while those who support the company and what it does see Smith as an ungrateful and misguided employee.

Perhaps more interesting was an unsigned Bloomberg opinion piece which said that Smith didn’t get it, that he was criticizing Goldman for nothing more than maximizing profits and maximizing profits was the reason for Goldman’s existence.

“It must have been a terrible shock when Smith concluded that Goldman actually was primarily about making money,” said the Bloomberg editorial. “He spares us the sordid details, but apparently it took more than a decade for the scales to finally fall from his eyes.”

The Bloomberg criticism is interesting but entirely misses the point. Smith’s central complaint is not that Goldman Sachs makes money — or that it makes a lot of money — instead it’s the allegation that Goldman’s drive for money sometimes conflicts with the best interests of clients.

Clients Versus Customers

“I attend derivatives sales meetings,” alleged Smith, “where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”

Later he adds:

“I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.”

In other words, Smith is not offended by by the willingness of Goldman to make profits, rather he feels that client interests are allegedly not being put first.

The Bloomberg opinion piece seems vastly out of place for an organization which leads the country in financial reporting. Bloomberg surely understands that “clients” are not “customers” and that Smith was writing about broker/client relationships.

The client is someone who is owed a fiduciary obligation. A broker must put client interests first, follow lawful client orders, retain client confidences and account for client records. This means client interests come first even if the broker will not maximize profits and in some cases not make a profit at all. This is the standard that guides real estate brokers.

A customer, in contrast, is a free-range financial target with no more rights than the auto buyer who steps into a new car showroom. Despite the fancy settings and glib talk the bottom-line reality is that the interests of the car buyer and the interests of the auto dealer conflict, that they have an adversarial relationship. The auto buyer has no expectation that the auto dealer will do anything other than try to maximize profits from the sale.

The car dealer’s behavior is not regarded as unfair or immoral, it’s expected. That’s because a dealer is a dealer. A broker with a fiduciary obligation to clients is supposed to act differently — that’s the central argument being made by Smith.

From Smith’s op-ed piece it’s apparent that he has no objection to Goldman profiting as long as the client also benefits. Instead, Smith alleges that in too many cases Goldman had information and advantages that allowed it to maximize profits while leaving clients with greater risk, less profit and maybe no profit.

Smith is not just a disgruntled employee he now wears the mantle of whistleblower. It will be very interesting to see where he next finds employment and whether his op-ed piece produces claims against him by Goldman Sachs.

Technorati Tags: , , , , , , , , , , ,

Posted in: News

Post a Comment