The ‘long-term greedy’ canard

JAMES SAFT

Nostalgia for the era when bankers were “long-term greedy” is a red herring, misdirecting our attention to how banks govern themselves when the true issue is how they are governed.

Greg Smith, until Wednesday a Goldman Sachs executive director in its derivatives business, dropped a bomb on his way out the door, publishing an op-ed piece in the New York Times in which he decried, as he describes it, the erosion of integrity at the firm and how the interests of clients take a back seat to short-term profits.

Not only did Smith’s piece bring on a strongly worded rebuttal from top executives at Goldman, much hand-wringing ensued about the good old days in the 1960s and 70s when Goldman supposedly was, in the phrase of its legendary chief executive Gus Levy, “long-term greedy,” never burning clients today so that the partnership might prosper in the future.

That may have been a code of ethics, but it also certainly was a business model, one conditioned by the times. Goldman was, like many of its peers, a partnership, binding tightly its own fortunes with those of its top executives. It also was operating in a very highly regulated business, one which, while highly profitable, did not offer anywhere near the rewards possible today. The products it sold were also far less complex, giving far less scope for bamboozling clients.

Goldman was able to make long-term greedy work because, in the view of those working there at the time, that was the best kind of greedy they could get their hands on. Burning clients wasn’t so much wrong as stupid, in the same way that it would be stupid to dine and dash when you work at the restaurant.

So in this way Smith’s anger at top management is, though understandable and admirable, partly misplaced. People operate not just in milieus, like Goldman, but in systems, like our financial system, which shapes those milieus powerfully. The massive deregulation of banking, which Dodd-Frank only feebly redresses, in combination with a government which backstops the system and ensures the existence of those institutions at the top, has created for bankers the kinds of opportunity which make long-term greedy a foolish, if noble, strategy.

My guess is that many of the people in banking figure they will get around to the noble part in their second careers, and for this we can hardly blame them.

It is interesting that the focus now is on how clients will walk if they are treated poorly by their banks. This is exactly what Alan Greenspan believed, that the market would self-police, and is why he allowed regulation and enforcement to become so weak. The market does not self-police, nor do firms, because it is not in the best interest of those working within firms, either banks or clients.

Careers in banking are wasting assets; someone will only get so many bites at the apple, and is far less likely to be at the same firm than they were in Gus Levy’s time. The industry too, it is important to understand, is also a wasting asset; it is shrinking and may well shrink substantially from here. Ironically, that may well mean it is even more rational for bankers to burn clients, at least on the trading side, because they simply don’t know if their business line will be regulated out of existence in a few short years.

While there may be a long term for Goldman Sachs the company, no such future is promised to its employees. This is as true for the managers as for the troops. In the meantime, there are fortunes to be made.

Really, the only way we can expect long-term greedy to make a real comeback is for regulation to be tightened, or for the non-utility-like functions of banks to be put entirely outside the system of public insurance. Happily, this also happens to be what is best for clients, and by that I mean not the people who work at hedge funds or corporations but their investors, and best for the countries in which banks operate.

Much as we might admire the efforts, self-regulation in the face of life-changing rewards and minimal punishments just won’t work, not now or eventually when those ripped off finally figure it out. 
(James Saft is a columnist for Reuters, which released this abridged column March 15.)