On Thanksgiving evening, I started reading Greg Smith’s book, Why I left Goldman Sachs late in the afternoon. I finished it around midnight. It’s a relatively easy read with a relatively straightforward message: That Wall Street, as exemplified by Goldman Sachs’ evolution, has increasingly become a place where we send many of our brightest students to outwit the people who manage our pensions and retirement accounts.
Greg Smith is famous for resigning from Goldman Sachs via an op-ed published in the New York Times, accusing Goldman of evolving from a firm that serves its customers to one that often profits by taking advantage of them. Nothing illegal is documented in the book, but it does show how employees are encouraged to sell ever more complex products to customers in the hope of generating more fees, without consideration of whether these products make their customers’ lives better. Who are these customers? They are the people who manage the money in our retirement accounts, pension funds, and the wealth of philanthropic organizations. Like many Americans, they look to investment bankers like Goldman Sachs for advice on how to help their money grow.
There is little dispute about this, but not everyone believes it is morally wrong. The CEO of Goldman Sachs asserts that they have no obligation to tell customers when they sell them something that they believe will lose money. The Wall St. Journal’s review of the book essentially says that he should have known that Goldman Sachs was not built on selflessness, but rather on “tawdry commerce” and the “sometimes morally ambiguous business of sales”. Bloomberg News seems more interested in tearing him down personally than examining the morality of what he says in the book, asking “Hasn’t it always been about making money and isn’t it okay to be a bank that makes money?”
At the heart of this, is the question that recent financial reforms were designed to change. Specifically, should investment professionals have a fiduciary responsibility to their clients? More simply, should they be required to put their clients’ interests over their own, when making recommendations? I can’t say objectively whether it is morally wrong to take advantage of clients lack of knowledge, but I can examine our data from YourMorals.org to see which individuals believe that it is ok to conduct a “negotiation where not everyone completely understands the process” involved (e.g. opaque fees hidden in the fine print of investment products). The below table shows correlations of Schwartz Values Scale scores and demographics with belief that negotiations with information assymetries are wrong, with positive correlations first.
Correlations of information assymetry "wrongness" with values/demographics
Clearly, people disagree about how wrong it is to conduct a negotiation without complete understanding by all parties. People who hold self-transcendent values such as benevolence and universalism are the most likely to believe that such conduct is wrong. People who hold traditional values are also likely to believe that this is wrong. In contrast, younger, educated, more conservative males who tend to value power, of the type that populate most investment banks, are less likely to feel that such information asymmetry is wrong. As such, it is perhaps not surprising that the reaction of many in the business world to Smith’s book is a collective “so what?”
Those of us who are mere consumers of financial services, via our 401ks, pensions, and college funds, would do well to understand what is behind this collective yawn. What some in the finance world are telling us is that the primary goal of these financial companies is to make themselves money, not serve clients, and given that the average money manager fails to beat the market, we would all probably be better off simply buying broad, transparent index funds, rather than taking their sales calls. We should urge our city officials, counties, and pension managers to stop trying to beat the market with the advice of ostensibly wise finance professionals, who don’t really have their clients interests at heart, lest they suffer the fate of the city of Oakland or Jefferson County, Alabama who both ended up on the wrong side of deals with Goldman Sachs. And if there ends up being less demand for their products, perhaps we can move some of the genius that creates arcane financial products into creating things that people actually need.
– Ravi Iyer
As a young educated female who values power and worked formerly at a bulge bracket bank —
The “customers” in these transactions were sophisticated institutional investors who knew or should have known what they were doing. Buying CDS protection from AIG is not the same as selling a sham annuity to a bunch of clueless senior citizens. In zero-sum derivative transactions that are purely a form of gambling, it would be ludicrous to assume — especially when you’ve signed dozens of documents acknowledging otherwise — that your counterparty is your fiduciary. He is literally betting that you’re wrong about whether the price of the reference asset will rise or fall — and you’re betting that he’s wrong. Your interests are directly adverse.
I haven’t read Smith’s book, but I’m wondering how much of this divide is generational. My parents grew up in an era when banking was a far more retail-oriented, customer-service business. If you hire an investment banker to advise your company on an acquisition, you are absolutely entitled to expect him to perform as a fiduciary. But if you seek out the bank in its capacity as a market-maker for something like a swap contract , that’s a totally different landscape, and it’s a scenario that has become increasingly common over the last decade or so. Technology has played a role and has made transactions less “personal,” etc etc etc.
I also feel like there are many people who would agree with the intuition that investment banking is evil, even without necessarily citing this rationale re: fiduciary duties and clients-vs-counterparties. I don’t know if moral psychology has a term for this, but lots of people are just innately suspicious of those who seem to accrue money or power “easily” (as if working in finance were remotely easy). It’s like: “Those 20somethings make more money than me, and they make money doing things I don’t even understand! They must be evil.” Of course, if all the “arcane” financial products dreamed up by bankers vanished tomorrow, those same people would find themselves without mortgages, credit cards, car loans or 401k returns.
Lilet, thanks for your thoughtful perspective.
I agree that some people are innately suspicious of people who accrue wealth and I might even have to admit some of that bias. Some of my best friends are investment bankers though and I hope that people like me can make the distinction you make, between those who act as fiduciaries and those who don’t. Some bankers do wonderful things for clients and I’ve seen that first hand too.
The problem is that if some banks act as a fiduciary in some cases and not in others, one can reasonably expect clients to confuse the two situations. That may be the fault of the client, and where to put the blame is a subjective question that I don’t pretend to be able to address. What can be addressed objectively is the idea that certain types of people tend to be the kinds of people who would think that blurring the line between fiduciary and non-fiduciary duties in a negotiation is ok, while others would find it immoral. And it might be worth noting, especially among those of us who are clients of such banks, directly or indirectly, that the kinds of people who are attracted to banks tend to be those who feel that this lack of clarity is ok.
So I personally wouldn’t want any institutional investor, managing my money, dealing with these Wall St. Banks with the faulty idea that they can really beat the market. Certainly they _should_ know what they are doing. But clearly they often know less than these banks and can’t rely on these banks to give honest advice about the more complex products. I agree that the customers in his book are certainly at fault too. But that doesn’t make profiting from their lack of knowledge right, in the eyes of many.
It’s interesting that you have banker friends. Have you talked to them about any of this?
Part of the issue here is that the asymmetry we’re referring to is sometimes less of an information asymmetry than an asymmetry in, for lack of a better description, analytic capability and intelligence.
I never worked in structured products, but I had a friend who did — in 2007, I can remember her working on PowerPoint presentations that shouted loud and clear about a declining housing market and advised shorting ABX indices. Her bank delivered these presentations openly at conferences attended by thousands of institutional investors (like the ones managing your savings). But both within the banks and within the audience, there were genuine differences in opinion about how big the effect would be, how hard the landing would be, and where the profit opportunities were. Generally speaking, people were working from the same pool of data and just drawing different conclusions. “
I haven’t gotten any strong reactions from my banker friends, though I don’t push them on such things. Your description of judgment asymmetry makes sense. My main point was just to illustrate that some people would be ok with profiting from such asymmetry with clients, whether they are asymmetry’s of information, judgment, or intelligence, while others would not. I don’t think it’s clear cut, though I do think that people who do business with such banks should know where the bank stands on such matters. Thanks for the thoughtful comments.