Wednesday, March 14, 2012

Smith Leaves "Toxic" Goldman Sachs

Greg Smith, Goldman Sachs' London-based equity derivatives boss for Europe, the Middle East, and Africa resigned today, citing severe and unsustainable moral decline at the bank. His resignation letter, published today in the New York Times accuses Goldman of severe ethical problems in its corporate culture. Reflecting on the "decline in the firm’s moral fiber", Smith asserted that in the past, "leadership used to be about ideas, setting an example and doing the right thing," while today he is outraged concerning "how callously people talk about ripping their clients off". 

Ethical Concerns
While Goldman's reckless behavior in the Housing bubble in the US and its involvement in the Greek Sovereign Debt crisis (by helping Greece hide part of its sovereign debts, then betting against Greece) are well-known and well-documented, Smith cites a general culture of unethical business, which involves pitching lucrative and complicated products to clients, which are not the most aligned with the client’s goals.

Furthermore, the BBC reminds us that in 2010, Goldman Sachs was fined $550m for civil fraud charges of misleading investors  - the biggest fine for a bank in the SEC's history. Less well known perhaps, is the alleged role of the Goldman Sachs Commodity Index in the 2007 world food price crisis.

What Needs to be Done?
Goldman Sachs is the Standard Oil of our day. Then, as now, something has to be done. While Goldman is clearly an investment bank that is too big to fail, the concern is, that it might also be too big to bail. On top of that, Goldman is also the bank which is at the center of the world's financial system. This is why it way bailed out by US taxpayers.

Since dismantling the beast might create some quite severe global economic fallout, a better option would be to keep  it on a tight leash. Not only do rules such as Basel III and Dodd-Frank need to be put in place and strictly enforced, but acquiring a stake in the bank large enough to sit on the board and improve Goldman's corporate governance from the inside might also be a good idea. After all, the taxpayer has already paid a sizable chunk of money into Goldman's and deserves to be compensated for his investment. A seat on the board would go a long way towards properly compensating that.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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