JUDY WOODRUFF: The investment bank Goldman Sachs is back at the center of public attention again over questions about its culture and business practices and whether it and other firms are too focused on their own profits.
As the New York Stock Exchange opened this morning, the financial world was still buzzing about an op-ed article in yesterday’s New York Times. Greg Smith, a vice president at Goldman Sachs in Europe, resigned with a series of broadsides aimed at the bank.
He wrote that the firm cares about money, not about its customers — quote — “I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients,” he said. “It’s purely about how we can make the most possible money off of them.”
Smith did not accuse Goldman of anything illegal, but he said CEO Lloyd Blankfein and president Gary Cohn had — quote — “lost hold of the firm’s culture on their watch.” And he warned that the decline in the firm’s moral fiber is the single biggest threat to its survival.
In response, Blankfein and Cohn issued a public letter to employees, saying, “We are far from perfect, but where the firm has seen a problem, we have responded to it seriously and substantively. And we have demonstrated that fact.”
But former Federal Reserve Chairman Paul Volcker said yesterday that Goldman’s character changed after it went public in 1999.
PAUL VOLCKER, former Federal Reserve chairman: Like other investment banks, became a trading operation, rather than a largely customer-oriented, underwriting, M&A kind of operation. And that changed the mentality, and I’m afraid it’s a business that leads to a lot of conflicts of interests.
JUDY WOODRUFF: Goldman Sachs had already come under fire after the 2008 financial meltdown. At a hearing in 2010, Sen. Carl Levin charged, the company had deceived clients.
SEN. CARL LEVIN, D-Mich.: You are betting against the very security that you’re selling to them. You don’t disclose that. That’s worse — that’s worse than not being a fiduciary. That’s being in a conflict of interests situation.
LLOYD BLANKFEIN, CEO, Goldman Sachs: We don’t — we don’t — I don’t think our clients care or they should care.
JUDY WOODRUFF: Anger at Goldman and other big banks sparked Democrats to push through the Dodd-Frank financial regulatory reform act. But battles over its implementation continue. The financial industry was also targeted in last fall’s Occupy Wall Street movement.
We get two takes now on the criticism of Goldman Sachs and the larger picture surrounding the industry with James Angel. He is a professor at Georgetown University’s McDonough School of Business. He focuses on the structure and regulation of financial markets and has served on advisory boards to major stock indexes. And Michael Greenberger, he’s a former regulator who was director of trading and markets at the Commodity Futures Trading Commission. He’s now a professor of law at the University of Maryland.
Thank you both for being with us.
Michael Greenberger, I’m going to begin with you.
Is Goldman Sachs as bad as Greg Smith says in this article?
MICHAEL GREENBERGER, University of Maryland: I’m sorry to say I think there’s no doubt that that’s the case.
I mean, in your lead-in, you have got Sen. Levin, who’s given the Justice Department several hundred pages of investigative files. He believes that they not only deceived their customers, but deceived Congress by not telling Congress the truth.
Paul Volcker, former fed chair, reaches that result. Frankly, many people have said about Mr. Smith’s op-ed that this is like telling you that the sun rises in the east in the morning about Goldman and, for that matter, the ethics on Wall Street in general. But it’s still — as this uproar demonstrates, it’s a terrific sore, not only with people who are involved with Wall Street, but with the American public as a whole, who spend trillions bailing these companies out and continues to find out that there is conduct here that really defies common sense and good ethics.
And, with Goldman, it’s especially troublesome, because Goldman had its famous 14 basic principles of business. Principle number one was. . .
JUDY WOODRUFF: Well, let me just stop you there. And I want to just pick up on your first basic point and turn to Jim Angel, I mean, just on this essential criticism from Greg Smith in that piece yesterday that the moral fiber has deteriorated.
JAMES ANGEL, Georgetown University McDonough School of Business: There have always been conflicts of interests in financial markets. And charges of these conflicts are really not new, even at Goldman Sachs, whether it was the IPO spinning scandal of the late ’90s or the excesses of the 1920s.
If you go back in financial history, you’ll see that there have been plenty of these kind of allegations.
JUDY WOODRUFF: What about at Goldman itself? I mean, he makes some pretty terrible charges.
JAMES ANGEL: Yeah.
JUDY WOODRUFF: He talks about a toxic atmosphere, a focus only on profits, at the expense of what’s in the clients’ best interests.
JAMES ANGEL: And, unfortunately, you could make the same charge against many businesses.
JUDY WOODRUFF: So, you’re saying there’s nothing — either nothing to these charges or you’re just saying everybody does it?
JAMES ANGEL: I’m saying that it is, you know, commonly widespread.
Now, on the one hand, we expect companies to work on behalf of their shareholders and try to be making money for their customers, but we also expect intelligent — intelligent companies to understand that if they don’t provide a good service and good product, the customers won’t come back.
JUDY WOODRUFF: Michael Greenberger, I think you were getting to the point about the culture changing at Goldman, that it was one kind of company and that it’s changed in some ways.
MICHAEL GREENBERGER: Yes, absolutely.
Really, it’s good will was built on its number-one principle of doing business: We always act in our customers’ interest. If we follow our customers’ interests, profits will follow.
And Goldman was sort of a beacon of that kind of ethical conduct. And I think, as former Fed Chair Volcker said, when they moved from a partnership to a corporation, it was — it’s more difficult to instill the ethical culture that really made them so prominent on Wall Street and really put them at the front of all these investment banks.
Right now, this is a huge black eye, not only for Goldman, but for Wall Street as a whole. And what is happening is, you know, not all of Goldman’s customers are widows and orphans. There are a lot of very sophisticated pension funds, very big hedge funds.
And, basically, I have been at meetings with those people, and they’re saying, look, if this is the way business is being done, we’re going to stop trading in these products.
JUDY WOODRUFF: Let me. . .
MICHAEL GREENBERGER: They don’t have to trade in these products to make money. And the markets are just going to become dysfunctional.
JUDY WOODRUFF: Professor Angel, let me come back to you on this question that we heard from Paul Volcker, the former Fed chairman, that when it became principally a trading institution, I guess when it went public and did more trading, starting in 1999, was that some sort of turning point for the company?
JAMES ANGEL: I don’t think it’s the big turning point that some people say it is, because, as I mentioned, in the 1920s, Goldman was roundly criticized for many of the activities that they engaged in then, which sound a lot like the current allegations.
JUDY WOODRUFF: So you’re saying you don’t — you don’t see that much of a change? What about this — in terms of comparing Goldman Sachs to the rest of Wall Street?
JAMES ANGEL: Yes.
JUDY WOODRUFF: How do you see that?
JAMES ANGEL: I see them as pretty similar. These — whenever there’s big money, there’s big temptation. And yet they operate in a very competitive business.
People don’t have to do business with Goldman Sachs. If their customers don’t trust them, they will take their business somewhere else. So, even though they may be very competitive and very profit-driven, if they’re not providing services their customers want, if their customers don’t trust them, they’re going to lose that business.
JUDY WOODRUFF: So, it’s sort of a buyer-beware philosophy.
Or is it, Michael Greenberger?
MICHAEL GREENBERGER: Well, first of all, if everybody does it, it’s hard to take your business somewhere else. And, basically, what that’s leading to is withdrawing from some of these markets, and therefore shrinking the economy.
I should say that Dodd-Frank — you know, this man was a derivatives trader. Derivatives are widely believed to be the cause of the meltdown. There were toxic bets that were undercapitalized. And in this derivatives market, Congress and Dodd-Frank said that the big dealers like Goldman must abide by business conduct rules of good faith and fair dealing.
Unfortunately, in the implementation process, Goldman and the trade associations for Wall Street have watered this down, so that their customers can sign standardized documents that waive their right to good faith and fair dealing.
The American people — really, this has been a catastrophe for the American people. They have had to bail these companies out. This kind of conduct leads to further systemic risk. And unless the American public — and most especially our prosecutors, the Justice Department, get on top of these issues, we’re going to destroy our economy again.
JUDY WOODRUFF: Do you see it as the catastrophe that Mr. Greenberger is describing?
JAMES ANGEL: Well, we certainly have just been through a financial catastrophe, but the real question is, what do we do about it?
I mean, Wall Street serves an essential economic purpose. It helps to allocate capital. When a company needs to raise money, to expand their business, they go to the financial markets to get it from investors. When companies need risk management solutions, things like derivatives, they go to the financial markets to get them. These are essential tools in our complex economy.
So the real question is, what do we do about it? How do we make sure that we have, you know, the right incentives in place and the right kind of regulation?
JUDY WOODRUFF: And are you saying that’s in place now, or it needs to be put in place?
JAMES ANGEL: Oh, it needs to be put in place.
Dodd-Frank dumped a bunch of new rules on an already dysfunctional regulatory structure. It’s not a question of more or less regulation. It’s not like there’s a regulation thermostat that you can turn up or down a degree. Instead, what we need is more intelligent regulation.
JUDY WOODRUFF: And, finally, Michael Greenberger, in brief, what’s the message the public should take away from this article, this, as you said, latest furor about Wall Street and the way it works?
MICHAEL GREENBERGER: This goes to the core of the way vast amounts of money, trillions of dollars, are traded back and forth.
And besides the lack of ethics, this leads to catastrophes. And we’ve been through one. And if we’re not to go through another one, where we, the taxpayers, have to bail these guys out, we’ve got to support our federal regulators and our prosecutors. This is — could be prosecutorial offense. Certainly, Sen. Levin said so. The Justice Department hasn’t done anything. We’ve got to move on it.
JUDY WOODRUFF: Michael Greenberger, James Angel, thank you both very much.
JAMES ANGEL: Thank you.