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Morality in Business: Worms of Conscience Blunted



March 20, 2012 – Comments (0) | RELATED TICKERS: GS

Board: IV Value Central

Author: TMFRoZany

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An op-ed by Greg Smith, with a parting rebuke of Goldman Sachs, doesn't necessarily make Goldman any different from the rest of Wall Street. He quit after 12 years because “the environment now is as toxic and destructive as I have ever seen it.” He says he's heard Goldman Managing Directors refer to their clients as "muppets". He has sat through many planning sessions that did not discuss how best to serve clients.

As Greg Smith’s resignation letter put it, “If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are. … Without clients you will not make money. In fact, you will not exist.”

The worms of conscience gnawed at his mind as it did in the play by William Shakespeare, Richard 111.

Could it be that a book will be forthcoming from Greg Smith? Really - is predators in banking a novel idea? Does it surprise you that Goldman Sachs might encourage employees to mislead clients by putting its own interest above theirs? After all, the culture is making money, not client satisfaction.

Blow up a client or rip his face off
Remember how traders at Salomon Brothers referred to their clients in Michael Lewis' 1989 book Liar's Poker and blowing up a customer (bankrupting). Then at Morgan Stanley the spin in 1999 by former employee Frank Partnoy in F.I.A.S.C.O.: Blood in the Water on Wall Street, about the sale of PERLS (fixed-income investments) that permitted investors and issuers to hedge and speculate on foreign currency movements were sold to clients. The sale was supposedly referred to “as ripping a client’s face off.” In Morgan Stanley terms, to “rip a client’s face off” meant to sell them a booby-trapped derivative trade.

Both of these books depict the relationship between investment banks and their clients. They would be of interest to those concerned with norms, in particular reputational norms that operate in business environments.

Moral compass engulfed by judgment full of holes
If we are honest with ourselves, we may be able to identify the “worms” that gnaw at our conscience and gnaw at those in management positions of corporations – or not as the case may be, nudging remorse. Discernment or acuteness of judgment results from the direction of a moral compass. Occasionally that compass is engulfed in wormwood causing judgment to be full of holes.

Everyone is doing it, go ahead, it is OK. You can be like gods, be your own masters, a familiar corporate story. Author William Cohan has written in "Money and Power: How Goldman Sachs Came to Rule the World," how new norms evolve to invade a culture. Goldman Sachs is the ultimate financial wheeler dealer in our time.

SEC Fines. Business Ethics decided to look at just one aspect of Goldman’s record: SEC charges levied against Goldman and its employees over the past decade and found 13 unflattering headlines involving the SEC. Goldman had a rough year, paying a $550 million fine to settle federal claims of civil securities fraud, alleging that Goldman Sachs misled investors about a complex mortgage product—telling investors to buy what had been conceived by some as a losing proposition and then being vilified at a Senate hearing. Even the $15.38 billion the firm has set aside for compensation in 2010 wasn’t enough to salve the pain.

Of course, this is just the cost of doing business. No worm of conscience gnawing for remorse here midst a moral compass. Mr. Smith’s assertions beg deeper inquiry of Goldman Sach’s actions as well as the broader investment banking industry. It is the lack of a SEC fiduciary standard that is at the heart of Mr. Smith’s assertions says Todd Ganos, at Forbes.

No SEC Fiduciary Standard. In January 2011, a new document at Goldman Sachs, “Report of the Business Standards Committee”, reiterated its principles and announced the formation of many new committees. It’s language “reads straight out of a Tony Robbins retreat manual, not your usual business document,” said Christine B. Whelan, a University of Pittsburgh sociologist who has studied the self-help industry.

Viewed by some as a public relations stunt, this document would seem to support taking a deeper look at SEC standards as Goldman may have been anticipating a fiduciary standard. The industry’s powerful lobby ensured that requirement didn’t make it out of Congressional committee.

Broker-dealers currently are held to a suitability standard that calls for advice that meets their clients’ needs when a product is sold, instead of the fiduciary duty followed by registered investment advisers to put their clients’ best interests first.

Most investors “start with the presumption that the professional who is working with them and to whom they entrust their capital are looking out for their best interests,” Harvey Pitt said. The common standard is needed because many retail investors are confused by the roles played by investment advisers and broker-dealers, the SEC’s January study said. (

Managerial ethics. Greg Smith leaves saying in an op-ed profits were ahead of clients, yet many clients disagree. Consciously or unconsciously, employees judge their workplace as ethical - or not - based on what they think their boss does, according to Jim Clifton, chairman and CEO of Gallup. A critical factor is the type of people companies hire as managers.

Gallup’s research indicates that engagement in the workplace is all about the manager. “The leader can make breathless remarks about integrity, values, mission and purpose,” Clifton says. “I can hear the leader saying that at the state of the company speech; but (as an employee) I am going to judge him or her based on the actions of my manager.”

Last month's release of the Ethics Resource Center’s 2011 National Business Ethics Survey “indicates a decrease in confidence in managers’ and leaders’ ethical behavior and warns of a “looming ethics downturn” in corporate America.”

Smith's revelations aren't really news at all, and the moral decline he describes at Goldman has been replicated throughout many corporate cultures. Behavior at Wall Street firms like Goldman may have been more overtly criminal, but the shift from respect for the customer to the desire to rip customers off is pervasive and insidious says Richard Escow. (“Culture of Predation”)

Not so at Starbucks! On Wednesday, CEO Howard Schultz will take the podium at his company’s annual meeting and talk about the importance of morality in business. He will make the case that companies that earn the country’s trust will ultimately be rewarded with a higher stock price. “The value of your company is driven by your company’s values,” he plans to say.

Whitney Tilson writes that Smith’s op-ed is not relevant to their investment thesis and that Goldman does what is right for clients the majority of time. It will remain the premier investment banking franchise in the world.

Abuse of power
It is not just greed, but abuse of power and trust says Robert Reich. Finance has become so complex that investors don't even know when they're being taken for a ride Even sophisticated investors can be duped.

Regulations have been watered down as Wall Street applauds. Shenanigans at Wall Street have convinced a large portion of America that the economic game is rigged. Yet capitalism depends on trust.

Abuse of power and trust are a result of worms in conscience, wormwood captures the moral compass blunting discernment or judgment in those vested with power. Sadly, Congress has become an enabler for banking’s corrupt abuse - members there also suffer from worms of conscience blunted in wormwood.

Inside Value Home Fool

Selected References:
If You Took the Greed Out of Wall Street, All You’d Have Left Is Pavement: Why Greg Smith’s Critique is Way Too Narrow.

Partnoy’s complaint about Morgan Stanley.
Wall Street Versus Main Street: How Ignorance, Hyperbole, and Fear Lead to Regulation.
How Goldman Sachs Ripped Its Clients' Faces Off.
How Goldman Sachs Ripped Its Clients' Faces Off. Fool Morgan Housel 2010.
Culture of Predation: That Goldman Sachs Exposé Barely Scratches the Surface
“Capitalism has always been based in part on predatory behavior.”

13 reasons Goldman’s quitting exec may have a point.
Goldman’s self help: eat, pay, trade
Managers and ethics: the importance of ‘tone in the middle’.
Deeper inquiry of Greg Smith's assertions: might Goldman Sachs have intentionally precipitated the financial crisis?

The Good, Bad and Ugly of Capitalism

Broker’s Fiduciary Standards Should Match Reality of Market, Pitt Says

Our Take On 'Why I Am Leaving Goldman' Greed At Goldman Is As Surprising As Hookers In Vegas. Whitney Tilson

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