The Devil Wears Pinstripes

A CEO sits behind stacks of cash.

The film Broadcast News, which came out in 1987, has one of the greatest insights about humanity and its institutions:

What do you think the Devil is going to look like if he's around? Nobody is going to be taken in if he has a long, red, pointy tail. No. I'm semi-serious here. He will look attractive and he will be nice and helpful and he will get a job where he influences a great God-fearing nation and he will never do an evil thing... he will just bit by little bit lower standards where they are important. Just coax along flash over substance... Just a tiny bit. And he will talk about all of us really being salesmen.

The movie is about journalism, but the observation applies to nearly any established industry that, caught in its own hidebound traditions and self-regard, finds itself on a quickpath to being punished for its hubris.

Today, that industry is Wall Street. For the past few years, the financial industry has been caught in an uneasy slide towards its own destruction and remaking, a little like the glam, besuited salesmen of Mad Men who still enjoyed two-martini lunches as a revolutionary new society was leaving them behind.

One of the loudest death knells came from former Goldman Sachs executive director Greg Smith, who wrote an incredible op-ed in The New York Times today. Smith blasted Goldman's culture as "morally bankrupt," and talked about the firm's traders mocking their own clients as "muppets."

This was a strike at the heart of Goldman's identity; the firm's vaunted business principles start with one rule: "Our clients always come first." Goldman traders openly mocking their clients on email is a little like God coming out and saying, "You know what? The whole murder thing is pretty much okay." It's a violation of the first and most important commandment of the religion.

Smith's points and observations are no doubt true; in fact, most of the reaction from Wall Street and the Wall Street savvy about his claims are along the lines of "well, duh." Venal behavior, name-calling, sociopathic self-interest: we've heard this all before, more entertainingly related in books like Liar's Poker, and it's usually done with a lot more crazy style at hedge funds.

And as for the collapse of Goldman's old culture and its putative slide into moral bankruptcy, you might liken it to Ernest Hemingway's quip about how he went (financially) bankrupt: "Gradually, then all at once." Goldman's move into more "commercialism" - known to the rest of us as "making money at any cost" - was being bemoaned three years ago, when The New York Times wrote a story titled, "As Goldman Thrives, An Ethos Has Faded." Even earlier, insiders criticized Lloyd Blankfein, the firm's chief executive since 2006, for not being what is known at Goldman as a "culture carrier," as a New York Times story from 2007 suggested:

When Mr. Blankfein became Goldman’s chief executive, the internal rap on him from some was that he was, perhaps, not reverential enough about the firm’s culture. (He is known for saying “the graveyard is filled with indispensable people,” blasphemy at a firm whose previous chief executive had to apologize profusely for saying that a small group of executives generated most of the profits.)

That sure sounds like Smith's complaint today:

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

That's why the question of whether or not Goldman Sachs' culture is changing doesn't seem to me to be the real point of Greg Smith's piece and What It Tells Us About Wall Street. A lot of what's happened at Goldman is old news, long ago easily inferred from Carl Levin's war against Goldman's traders mocking a "sh***y deal" they offloaded to clients, and the reputational fallout from Goldman's structuring of the Abacus CDO, for which the bank paid one of the largest fines in Wall Street history. Smith's allegations about Goldman's culture - at least on the debt-trading desks - are all, at this point, not exactly old news but well in keeping with old news.

Instead, I see Smith's self-immolating, public letter of resignation as more about the 99% and the 1% within Wall Street. It's the objection of the underclass of younger bankers and traders stymied by a lack of career mobility, suddenly disillusioned, coming to a realization that despite all their hard work, not everyone actually makes it on Wall Street - and "winning," anyway, may not be a prize worth having if its means making it to the top of a widely-attacked industry and signing on to more of the moral compromises that get others into the corridors of power. As the Wall Street bonus pie shrinks, those internal wars at firms get more and more small and petty - not just between traders and bankers, but trader versus trader and banker versus banker. Smith's opus falls into this camp.

Smith, for instance, traded equity derivatives, and much of his ire seems to be aimed at the guys who trade debt derivatives, like CDOs, CDSs, and CDO squareds. Yes, these are the financial instruments that came under scrutiny during the financial crisis, but Smith's ire seems to arise more from traders who handle those products ruling the roost at Goldman: they make more money, swagger around like they own the place, make classic mistakes of hubris like calling clients "muppets," and in all other ways, get more credit for being profitable than anyone else in the firm. This is not specific to Goldman, by the way: on Wall Street, this kind of obnoxious behavior is known as the "Golden Rule," as in, "whoever has the gold makes the rules." Smith's objection comes down to the fact that those who have the gold - the traders of complex derivatives - are making the wrong cultural rules, or at least not the ones he would make.

Consider his subtextual swipe at his colleagues/rivals/frenemies who trade much more profitable debt derivatives. The emphasis is mine:

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings 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.

Doesn't that sound like that line from Broadcast News about the devil? "He will look attractive and he will be nice and helpful and he will get a job where he influences a great God-fearing nation and he will never do an evil thing... he will just bit by little bit lower standards where they are important. Just coax along flash over substance... Just a tiny bit. And he will talk about all of us really being salesmen."

The thing is, they are salesmen. And you don't need an op-ed to tell you that sales tactics in any industry tend to veer towards the aggressive.

What Smith is saying there is: the guys who run derivatives - especially debt derivatives - have the gold, they're making the rules, and their rules are not putting the client first. They are putting their fees first. The addendum is, of course, that this puts Smith - the only member of his team - in a disadvantaged position to get ahead.

This is internecine warfare, and more than any assault from the outside, it has always been the factor that came closest to tearing Wall Street investment banks apart. In the 1980s, Lehman Brothers and Salomon Brothers, among others, nearly went to the graveyard because of epic battles between "traders" and "bankers," fighting over which faction would get to call the shots and win the biggest bonuses. As momentous to Wall Street as the battle between Good and Evil is to almost everyone else, the war between "traders" and "bankers" was based on the tension between profitable, short-term traders and whether they were smarter, better, or or more financial value to a firm than investment bankers, who advise CEOs over the course of months, years and decades.

And this is where and why I titled this post The Devil Wears Pinstripes.

Because a senior banker who read Smith's objections might honestly reply that of course they're thinking about fees. Of course they're obsessed and aggressive and not observing the niceties of old-fashioned dealmaking; finance was always hand-to-hand combat, wars fought in pinstripes, and it's not getting any gentler. Goldman and other banks are struggling to thrive in an era of more potential regulation and certain-to-shrink profits. Layoffs are sweeping the Street. As any senior banker will complain - and have complained to me - investment banking has struggled to maintain its social and cultural prestige in the era of Occupy Wall Street; the profits and the egos required to make profits are the only thing keeping the business bearable. 

It's important to understand the dynamic here. From the point of view of a senior banker, the dynamic Smith describes in derivatives sales meetings, and his obvious disdain for them, is the same as that when Anne Hathaway's character Andy - a fashion assistant with literary ambitions - looks down on minuscule, apparently flighty discussions of the color cerulean, only to be corrected by an imperious Meryl Streep who describes the vast scope and power of the fashion industry through Andy's ratty, shapeless mass-market pullover.

Similarly, there is an entire financial machine behind the sometimees cutthroat sales practices at Goldman and other banks, and that machine starts grinding our stocks and mortgages to keep trillions of dollars for companies, banks and governments flowing through the system. That machine could also easily end up grinding a bank that makes the wrong move and fails to deliver to shareholders or the markets, as it did Bear Stearns and Lehman Brothers and Washington Mutual. The way to stay ahead of the machine, to keep shareholders happy, to survive and thrive, is to generate profits. Even while paying out fat multimillion-dollar bonuses, banks see themselves in a hand-to-mouth struggle for survival. Investment banks will explain away any amount of aggressive behavior with this rationale.

In this context, Smith's complaints about the rise of morally bankrupt investment bankers and traders also recall another scene in The Devil Wears Prada where a horrified Anne Hathaway objects to her boss Meryl Streep's handy and deeply manipulative elimination of a frenemy: "Oh no, I could never be like you. I could never do what you did."

Streep then icily and memorably reminds Hathaway's character of her eagerness to take a plum assignment from a colleague and replies, "Oh, but you already did."

Later, Hathaway reacts by throwing her constantly ringing BlackBerry into a fountain and walking away from her oppressive job with obvious freedom and glee.

That seems a good cinematic metaphor for Smith - who was a loyal Goldman soldier for years until he quit in spectacular fashion - and his relationship to upper-level Goldman managers, who have suggested that he was upset not by a righteous sense of moral justice about Wall Street's misdirection, but by a disappointing bonus. (Of course, both things can be true: he may have had strong reservations about the industry and its culture already and the bonus could have been just the last straw.)

But back to the internecine warfare and the 99% of Wall Street. Smith's remarkable op-ed is remarkable because he was within the system, and saw its flaws, and spoke about them. That took an enormous amount of courage.

But it did not require a lot of insight. Did Goldman change the way it did business? Maybe. But the more likely view is that those flaws - in the industry, in the firm, in other firms - have been there for a long time and the scales just fell from his eyes when it finally turned against him.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.
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Disagree. As someone who exited the the financial industry,i appreciate Mr Smith's point. Your point that excesses in finances have always been that bad is not accurate_ watch inside job.

Poor, poor misunderstood GS. I just had to stop typing, my tears were soaking the keyboard.

Anyway, the tension between IBankers (corp advisors) and Traders is due to the fact that their roles are often countercyclical in the business cycle - when markets are busy, traders are busy but M&A may not be; when markets are quiet, M&A may be very busy (if you're using cash instead of stock for deals, not lately). There is also a cultural component, Ivy League silk shirt bankers vs. street smart traders. So, depending on where you are in the cycle, one side or the other will push for advantage. But the real reason, which you touch on, glance at, but do not explore sufficiently, is a point made by Smith that the relationship business has been replaced by a very short term oriented grab for market profits. And, it is impossible for any IBanker to bankrupt their firm overnight, but a trader can, and many have done so, with one or a few bad trades. (In fact, the entire process of turning the house mortgage industry into a monster CMO 'market' could be seen as really just one or few bad trades.) A truly adroit firm has a Caesar or an Eisenhower at top who can balance these interests in the larger interest of the firm over time, and thereby maximize profits and longevity for everyone (or at least persuade them to believe it or at least go along for the moment). This lack of leadership is also what Smith laments in current GS management. Despite all the carping about Smith, why he spoke out, etc., etc., there hasn't been, AFAIK, one single point of rebuttal to the facts he alleges, not one. Just explanations, excuses, understandings, pop psychology, nods, winks, etc. etc. In law, when an allegation is uncontested, it's deemed admitted or proven. I think Smith has a point, and it's larger than just which phase of the trader vs. banker business cycle we're in at the moment, much larger. His point is that GS has gone so far beyond that model to one of mindless rapaciousness (e.g., structuring deals for clients designed to fail and then betting in the market that they will fail without, of course, disclosing to the client that that's what you've done or will do) that it risks its own survival, from regulatory, legal or market forces. Just look at the recent El Paso deal, where GS is from day one on all sides of the deal, apparently the 'new normal' for GS. Well, Ozymandias, it may not last.

A refinement. A trader doesn't have to bankrupt the firm, although some have, all they have to do, which they can and have, is in one or a few bad trades (brought on by hubris, Master of the Universe stupidity, etc), wipe out all the profits for the entire firm in one fell swoop. No banker can do that, but a insufficiently supervised trader can. So the bankers say, sure we're slow at the moment, but we won't always be, and we have these clients. The traders say, what have you done for the bottom line in the last 30 seconds. Unfortunately, as said, the traders can vaporize the bottom line, but the larger point is the lack of leadership to meld these disparate parts into a firm and keep them there (adjust bonuses, etc). When you look at Blankfein do you see Eisenhower keeping the Allied command together? Didn't think so.

Couldn't resist just one more insight I just had, remembering the 'atmosphere' of the current GS being so all-consuming rapacious. Back in the day, like the 80s, I remember another such force which ultimately came to be the sole center of the deal universe, the very Death Star, until it too imploded. It was everywhere, no deal was done without it, and it grabbed all it could too. The firm was Drexel Burnham and the person was Mike Milken and his famous "X" shaped trading desk. Capitalism just abhors when the market is cornered, and indeed MM and DB had d0ne so in junk bonds, having created that instrument and market, at least for M&A. No DB 'highly confident ' letter? No deal. Anyway, for perhaps different specific reasons, but the same larger point, it didn't last. But I do remember the atmosphere, it was a lot like the one now ascribed to GS.

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