Last week, as he exited noisily from Goldman Sachs with an op-ed in The New York Times, Greg Smith painted the picture of a firm that has lost its moral compass. Goldman, the derivatives executive told us, was once a place that cared about its clients, but has become a place that only cares about itself.
To the now-jaded public, this was not news.
Most people I know in the business saw Goldman's very public stepped-up commitment to ethics -- launched after the taint of the Abacus collateralized debt obligation deal, its $550 million civil penalty, chief executive Lloyd Blankfein's testimony before Congress, and chatter about the revolving door between Goldman and Washington -- as little more than damage control.
But with a little recall of the research scandals of the early 2000s, the insider-trading scandals from Ivan Boesky in 1987 onward, the gargantuan Ponzi scheme of Bernard Madoff, and predatory lending by some of our largest banks, we can easily see that to fixate on Goldman is inapt. The Street's ethical dysfunction is pervasive.
This dysfunction is due to its self-understanding. That is, for Wall Street, large profits and compensation packages are its telos, the endgame. Full stop. People do not become investment bankers or traders to innovate, to design more useful and better products and services for clients, or for larger social reasons. They do so, almost solely, for the money. This is the very heart of Wall Street's ethics problems.
Why an industry thinks it exists matters a great deal. Everyone wants to make money. The people who become nurses, horticulturalists and airline pilots want to make money, too. But there tends to be an understanding among these professionals that money is not the endgame. They want to make a decent living, but they are about the work at hand -- healing the sick, improving crop yields, transporting passengers safely and so on.
Not so with Wall Street, which continues its reputation as a bastion of sophisticated, self-dealing kleptomaniacs. It is extremely good at separating clients from their money and convincing them that it is for their own good. An industry with such a mindset cannot be reformed through regulation alone. Regulation is coercion. Real reform for Wall Street means core cultural reform, and that will have to come from within. The Dodd-Frank Wall Street reform law of 2010 and similar regulations work to a degree, but also invite brilliant and cynical minds to find ways to keep the kleptomania going.
The capital markets, though imperfect, are not inherently evil. They have improved the quality of life for billions of people. When their functions are properly respected, it is easy to see them as valuable generators of social welfare. When they are not, their core functions get occluded, and scandals, bubbles, meltdowns and "uncreative destruction" happen -- and billions of people may get harmed.
What's the route to reform? The bar of entry into the industry needs to be raised: New educational standards need to be implemented, including regular and required proficiency and business ethics training that teaches more than dos and don'ts; common fixtures, such as the commission system, must be scrapped; the sales mentality must be replaced by an ethic of service and care; research needs to be isolated -- utterly -- from sales; long-term investing must be rewarded, and short-term speculation dissuaded; and corporate managers' kowtowing to the expectations of traders and speculators must be punished rather than rewarded by shareholders.
Wall Street needs to enter the painful process of reinvention. Unfortunately, it's hard to see how this will happen without enlightened leadership from within, and new firms with new models of service that are willing to earn less in exchange for client trust, loyalty and stability. We have a "green revolution" under way in energy and sustainability. It's time for a similar cultural revolution on Wall Street.