Goldman Sachs and the Two Smiths

“If the moral sense is the result of nothing more significant than a cultural or historical throw of the dice, then it will occur to some people who by reason of temperament or circumstances are weakly attached to their own moral senses that they are free to do whatever they can get away with by practicing indulgent self-absorption or embracing an angry ideology.” — James Q. Wilson, The Moral Sense

 This week, close on the Ides of March, saw Greg Smith, an executive director at Goldman Sachs of London, resign in disgust at the moral degeneracy he saw up close for 12 years. In an articulate and scathing op-ed piece in The New York Times, Smith recounted how the culture that had sustained the trust of clients for 143 years has disappeared. “The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for,” said Smith. “It astounds me,” he went on, “how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.”

Smith recounted how he had recruited and managed the 80 student interns who had survived the process that winnowed out thousands.  “I knew it was time to leave,” he says, “when I realized I could no longer look students in the eye and tell them what a great place this was to work.”

He signed off with a plea to the board of directors to “get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm—or the trust of its clients—for very much longer.” 

The next day Goldman Sachs stock dropped by $2.7 billion, a fact that some market analysts rushed to explain as just the daily vicissitudes of the market. 

Smith’s op-ed piece went viral, Goldman Sachs’ PR machine responded aggressively, and the thundering herd of pundits, Wall Street wonks, and competitors formed up for the ritual denunciations, analyses, and prognostications. Mayor Bloomberg even took time out of his busy schedule to go down to Goldman Sachs and offer his condolences on such a public drubbing. 

There were a variety of responses to Smith’s cri de coeur. Many, like Bloomberg, took it personally and saw it as a betrayal of corporate loyalty. Others, like The Daily Beast’s Tunku Varadarajan, couldn’t resist going for Smith’s jugular and heaping scorn on his shock. Zachary Karabell, also writing for The Beast, likewise took Smith to task for naiveté. “What profession did he think he was entering?” he asked, “Social work?” Karabell called for us all to lay off Goldman Sachs, to realize that people can be greedy anywhere, and that Wall Street should not be held to a higher standard than other professions. 

A common assumption running through much of the commentary is that this is the way things are and there’s nothing to be done about it. Everybody looks out for Number #1, everybody gets ahead by any means necessary, and everybody’s Greedometer is bending the needle. Much of the huffing and puffing over Greg Smith’s op-ed was of this defensive tone, evidence, it seems to me, of the elite closing ranks to justify their actions. 

This is an assumption that should be scrutinized. The implication is that this is how successful business is conducted; those who would win—or just break even—have to be willing to cut ethical corners and kill when necessary. This is turning an “is” into an “ought,” or at the very least turning ‘the way things are’ into de facto rules of the universe. It takes utilitarian ethics (the greatest good for the greatest number of people) and turns it into ‘the end justifies the means and we’ll get there by any means necessary.’

There are those who seem to actually believe this, and a few of them are now in jail—Jeffrey Skilling of Enron, Bernie Ebbers of WorldCom, and Bernie Madoff come to mind. But there are many more who accept this passively and live as if this were Reality. 

James Q. Wilson, whom I’ve quoted at the top of this essay, was probably the leading social scientist of his generation. In his book, The Moral Sense, he cautioned that we must resist the temptation to chalk up all the problems in our society to moral failure. Nevertheless, he makes the case that there is a moral sense in people which guides them in making decisions everyday. If it is not relativized away or simply ignored because ‘everyone else is doing it,’ this moral sense generally guides us to do the right thing. 

Like Wilson, “I am interested in why people act as they do, but I am more interested in why people judge actions as they do.” The outrage at Greg Smith’s dramatic exit from Goldman Sachs reveals a bedrock belief that free market capitalism is as cutthroat and duplicitous as it needs to be. But Wilson argues that a social order that shifts individual responsibility to expedient cultural norms will not question such unethical means because 1) they work in the short term, and 2) we lack the ability to speak and to reason of moral matters anyway. We have a moral sense, Wilson asserts, “but it is not always and in every aspect of life strong enough to withstand a pervasive and sustained attack.”

Greg Smith’s op-ed piece came at a time when people are fed up with the callousness of Wall Street and bankers in general, and are realizing that no amount of cajoling on the part of government or occupying of property will change the ingrained habits of a relatively few powerful and morally twisted people. I don’t believe—and neither does Smith apparently—that everyone who works at Goldman Sachs buys into the toxic culture he described. But enough of the leadership seems to practice it that many of the employees feel it’s in their best interest to comply. It’s that shrug of the shoulders, the non-verbal equivalent of our ubiquitous dismissal of things difficult to think through with the blasé ‘Whatever’, which reveals the herd mentality. 

Before Adam Smith wrote his Wealth of Nations, the Bible of free market capitalism, he wrote The Theory of Moral Sentiments, a work of social and ethical philosophy that is stunning in its psychological insights into our motives. 

He begins by describing sympathy and the natural human capacity to imagine the pain that others must feel as the result of injustice. For Smith, sympathy is the source of human moral sentiments, indeed, of ethics. A society made up of people with the capacity to put themselves in another person’s place will likely be more just than one where people don’t give a damn about anyone but themselves. The one virtue that a society most certainly cannot live without is justice. “The violation of justice is injury: it does real and positive hurt to some particular persons, from motives which are naturally disapproved of.” It was Adam Smith’s firm conviction that kindness and beneficence could not be coerced by force. If a society that is unjust is to change it could only happen if those whose actions hurt people receive widespread condemnation. The ‘invisible hand’ of public morality would drive people away from corrupt markets and would reward the honest ones. 

This may be the only thing that finally brings about change on Wall Street and in the banking industry. Since the language they understand is only that of profit and loss, investors and customers should learn to speak it fluently. Those with money to invest should look for the firms whose ethics are proven by their actions, not by their public relations statements.  There must be some out there who can do right by their clients and the country and still make a profit. Adam Smith believed that all people desire “not only to be loved, but to be lovely.” He thought that those who were condemned would eventually come to judge themselves and thus would undergo a transformation. Wilson, commenting on this, says “At first we judge others; we then begin to judge ourselves as we think others judge us; finally we judge ourselves as an impartial, disinterested third party might . . . . We can fool our friends, but not ourselves.” 

Well, there’s some hope. If losing profit results in some soul-searching among bankers and traders there may be a gradual detoxifying of their poisonous culture. And if Greg Smith’s brave act makes us question unfettered greed as the engine of capitalism, then we may have reached a tipping point.  

On a more personal note, this entry marks a year of weekly posting to Wretched Success. I’ve learned a lot in the process—and I’ve signed up for another round. I hope you’ll join me!

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