Easy Street

The Birth (and Death) of the Moral Age of Wall Street

Heidi Moore Mar 27, 2012

It’s well over a week since Greg Smith threw his Molotov cocktail of a resignation at his former employer, Goldman Sachs, and it’s fair to say that he and his claims on the bank are still a cultural sensation.

Goldman is searching its e-mail archives for any mention of the word “muppet” — an English epithet that means “idiot” — allegedly launched by Goldman traders against their clients, acording to Smith. Smith is talking to publishers about a book about his coming-of-age in finance; my vote for the title is Mr. Smith goes to Wall Street. And one hedge-funder turned chicken-farmer sees the Smith scandal as a good time to pursue his own grudge against Goldman for its behavior towards him during the financial crisis.

Smith’s outraged resignation letter hinged on one idea: that the “commercialism” and bald pursuit of money that he saw at Goldman perhaps wasn’t illegal, but it was, to him, immoral.

And that’s why Smith’s screed continues to produce aftershocks. He identified the rift in language and thought that has divided America from its financial system since the crisis began. While capitalism tends to see behavior in terms of “profit” and “loss,” most of the finance industry has been either slow or helpless to engage on the different scale that has obsessed everyone from Occupy Wall Street to the President of the United States: that of “right” and “wrong.”

The New York Times Web site had a fascinating “Room for Debate” feature on this, with perspectives from all sides. It’s an excellent read. And there’s no question that some of the best books on the causes of the financial crisis have a moral undertone to their titles: All the Devils Are Here, by Joe Nocera and Bethany McLean; A Demon of Our Own Design, by Bookstaber; The Devil’s Casino, by Vicky Ward.

Perhaps one of the most touching – nearly, actually, adorable – parts of Smith’s resignation was his conviction that there existed a time in his 12 years at Goldman Sachs when the bank was ruled mostly by honor rather than profit: “Culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients.”(I’ve talked to Goldman employees who have had a hearty chortle at the “humility” part in particular, but let’s not dwell.)

Smith’s blinkered, or maybe just naive, idea was the most skewered by most commentators familiar with Wall Street’s harsh ways, which are by no means less evident at Goldman. The most sarcastic was Michael Kinsley at Bloomberg, who acidly commented, “Apparently, when Greg Smith arrived at Goldman Sachs Group Inc. almost 12 years ago, the legendary investment firm was something like the Make-A-Wish Foundation — existing only to bring light and peace and happiness to the world…. one imagines Goldman bankers spending their days delivering fresh flowers to elderly shut-ins and providing shelters for abandoned cats.” (As an aside, PETA did actually ask Goldman to establish animal shelters back in 2010.)

It’s hard to say what Wall Street could possibly do to either vindicate or avenge itself against Smith’s charges. E-mail searches for “muppets” or even “Smurfs” are probably not going to work. But a look at history – at the history of Goldman, in particular – shows that there was  another time when Wall Street’s perceived lack of immorality was threatening to spin the industry into chaos, and there was a man who tried to codify what it meant to behave honorably in finance.

The man was John Whitehead, the former CEO of Goldman Sachs, who spearheaded the firm’s business principles back in the 1950s after a years-long government investigation of collusion threatened to destroy investors’ faith in Goldman and other banks. The business principles, which are recited like catechism and which Greg Smith kept at his desk, are here.

What’s more interesting is how and why Whitehead created them – his ideas and his state of mind, the perspective that would cause him to want to impose some kind of moral order on the unchecked pursuit of profit.

The scholar Marcy Murninghan shared with me an unpublished interview she did with Whitehead in the late 90s as part of a book that, unfortunately, never saw the light of day. As Murninghan writes in the chapter on Whitehead, “at the time Whitehead is talking about – the late 1950s and 1960s – a conscious corporate commitment to ethical standards was not common. And on Wall Street, no less!” That’s easy to picture: consider the venal hucksters of Mad Men on Madison Avenue, and you see the business environment Whitehead – a graduate of the Quaker-influenced Haverford – was functioning in.

Here are some excerpts from Murninghan’s wonderful interview with Whitehead, taken from her unpublished manuscript that she generously provided to me. Marcy, thank you for your eye-opening work.

It all has to do with what I would call moral principles and sort of the basic American principles of hard work and doing your best and things of that kind of nature—or the combination of things…..I felt that it was very important that any organization that I worked for – or particularly any organization where I had a leadership responsibility and was known to be the leader – that it be an organization that had high ethical standards, and that it conducted its business in a highly professional, responsible, ethical way.  And so I stressed that at Goldman Sachs in everything we did, and ultimately developed a what we called “Our Business Principles”.  It was a written statement of what we felt Goldman Sachs stood for, and there were fourteen of them.  I won’t burden you with going through them one by one, but we liked to feel that more than just a sort of expression of motherhood, they represented the special features that we liked to feel that Goldman Sachs stood for.[i]  Plus, the clients’ interests always come first, and if we serve our clients well, our success will follow.  That was one of the principles.  That was the kind of thing we talked about.

Whitehead is most interesting in his interview with Murninghan when he talked about the firm’s business principles as a way to elevate the firm’s culture as new people were coming in – that Goldman’s way of doing business had been intuited before, but needed to be codified: 

And at a period when we were growing quite rapidly and adding new people, I wondered whether these principles – which historically had always been passed on by osmosis and by observation of new employees— “Wow, here’s how they do this at Goldman Sachs.  I’d better live up to that myself!” – I wondered whether with so many new people, and some attrition of old people and replacements, whether we could really successfully keep that culture and those standards, high standards.  And so one Sunday afternoon, I remember quite vividly, I sat down and tried to write them out.

With the next copy of our annual report—we sent the annual report to the home address of our employees, and we attached to the front of it a printed edition of this – “Our Business Principles,” as we called them – with a little note saying, “We’re sending this to your home because we thought your family would also be interested in knowing what your company stands for, and we hope you will, we expect,” we said, “that you will also live by these principles.  This is what Goldman Sachs stands for.”  And that made quite an impact, especially the idea of sending it to the homes.  It sort of brought the family into some appreciation of what their fathers or husbands – mostly male employees at that stage, I’m sorry to say – of what they thought, and exposed them in a different way to this company that was really quite demanding of the father’s life, and absorbed a good deal of his time and energy, and made them maybe a little more appreciative that we were a highly responsible firm that they could be proud of, too.

Perhaps the most fascinating chunk of Murninghan’s interview with Whitehead was this part, where he talked about how Goldman indoctrinated the Business Principles into its employees. He and the firm’s leaders made a point of firing employees that violated the Business Principles – a practice that, according to former Goldman Sachs partner Jacki Zehner – is exceedingly rare now if the employee brings in big profits.

Then we wanted to be sure that people didn’t just read it as an expression of high principles, but that they really applied it to their job.  And so we asked each department head to have a meeting of his department every six months, and to talk with people in his department about what this meant for them in their job—what did Principle No. 1, what does that mean to us in the work that we do every day?  And somebody would raise some question, maybe, about, “Oh, you’re talking about the customers’ interest always come first, that the customer wants to sell some bonds, and we could buy them at 106_  or 106¼, and the customer really wouldn’t know the difference—which do we do?”  And they would discuss very specific examples of how it affected their job and their department. 

We asked the department head that minutes be taken without names, and to submit the minutes to their management, so that was the way we made sure that these meetings were actually held.  And it turned out to be quite successful.  The people enjoyed them and were interested in them and really participated actively.  I think it helped the people understand that these principles and codes of conduct were not just something to put in the annual report, but were something that they really were expected to live by. 

I remember in the next year or two, we had several problems with individual people that were clearly violations of these principles.  Instead of just firing the people because they had done something dishonest or something – I forget the exact circumstances – we tied their departure to violations of the code of conduct instead of to some regulation, and that made a big impression.  They saw that the code was broken and that there was a penalty for it—that this wasn’t just something that would be nice if you did this.  It was something that really had teeth in it.  So that was effective.

Whitehead, now 90, spent 34 years at Goldman before retiring in 1984 to pursue a career in diplomacy. (To Murninghan, Whitehead called his work in Eastern European human rights “God’s work,” marking a rather painful counterpoint with Lloyd Blankfein’s misfire of a joke about banking being God’s work.”)

Whitehead’s parting thoughts on the Business Principles and his efforts to strengthen the moral sense of Goldman are particularly fascinating – mostly because he jokes that he’s offended by the suggestion that he wasn’t also a big moneymaker.

I can’t really say the extent of how this code of conduct still survives and exists.  I don’t really know, but people tell me – people who are still at Goldman Sachs tell me – that this code of conduct, which they attribute to my era of management, was the most important thing that I left behind me during my ten years of being chairman of Goldman Sachs.  It was actually instituted before I was chairman, but [they tell me] that that was the most important thing that I did.  And I guess I’m sort of proud of it, although I must say, I thought that some of the money-making things that I’ve left were at least as important, and [he chuckles] I’m slightly offended by that…

We’ll chalk that last part up to the fact that you can never take banking out of the boy. Whitehead’s thoughts, in all seriousness, raise some questions about Wall Street’s current direction and whether any firm can provide now a moral education to employees such as he tried to provide back in the 1970s*. Probably what a lot of investors want to see at the moment is that Wall Street is at least trying, and while the industry tends to scoff at all this criticism from the outside, there’s very little evidence for that kind of effort now.

 *Update: Whitehead’s principles were adopted by Goldman in the ’70s.

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