From the man who left Goldman Sachs, advice to Stanford about saving Wall Street from itself

Greg Smith, a Stanford alumnus who resigned from Goldman Sachs in a New York Times op-ed last year, gave an Ethics of Wealth talk Thursday at the Stanford Graduate School of Business.

By Max McClure

L.A. Cicero Greg Smith speaking at Stanford on Thursday about the 'behavioral and cultural shift' that has tilted the Wall Street playing field over the past decade.

Goldman Sachs is a notoriously secretive company, even by Wall Street standards. So when the head of the company's U.S. equity derivatives business in Europe, the Middle East and Africa publicly resigned in early 2012 with a New York Times op-ed criticizing the firm's corporate culture, he drew instant attention.
"If you were an alien from Mars and sat in on [a derivatives sales meeting], you would believe that a client's success or progress was not part of the thought process at all," he wrote.
The opinion piece drew praise from figures like Paul Volcker and Mike Bloomberg, sparked counters from Goldman Sachs and spawned a book-length reflection on Smith's Wall Street experience, Why I Left Goldman Sachs.
On Thursday, Smith, a Stanford alumnus, spoke on campus about the "behavioral and cultural shift" that has tilted the Wall Street playing field over the past decade.
"I don't think Goldman Sachs is the problem," he said. "I think this is a systemic problem."
The talk was part of the Ethics of Wealth lecture series, organized by Stanford's Bowen H. McCoy Family Center for Ethics in Society in collaboration with the Graduate School of Business.

'Very much a capitalist'

Smith went to work for Goldman Sachs straight out of college, and he maintains a love of finance. His reviewers have often characterized his early relationship with the firm as a love story, and he characterizes himself as "very much a capitalist."
But, Smith said, the culture of Wall Street changed in the mid-2000s. Trading began to account for a larger and larger share of Wall Street's profits, and bankers were encouraged to view the client as "an information provider that can make you rich, rather than as a partner."
Smith views this as a switch from Goldman Sachs's traditional "long-term greedy" approach – in which profit is maximized, but over a long time scale, with a focus on maintaining relationships with clients – to "short-term greedy." Analysts were expected to encourage unsuspecting clients to buy products the company knew were risky.
Admitting that Wall Street has always been a gamble, Smith pointed out that the average casino offers much fairer odds. The average dealer isn't actively misleading a blackjack player about the value of the cards he's holding, he pointed out. Nor is he secretly looking at the other players' hands and then going out and placing his own bets.
"You would expect someone not to lose very often when you can see everyone's cards," Smith said. And it's not uncommon for Wall Street traders to post huge profits – a phenomenon made possible by the fact that Wall Street firms know more about their products than their clients do, he said.

Way forward

Little has changed since the global economic meltdown, Smith said – there have been zero criminal prosecutions of Wall Street executives, and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has been slow and ineffective. He pointed out that America's five largest banks are bigger now than they were before the financial crisis.
Three basic steps are needed in order to rein in the financial sector, Smith said: regulate derivatives markets, outlaw proprietary trading and split banks into smaller units.
His recommendations aren't radical – in large part, they derive from the Glass-Steagall Act, the Depression-era regulatory legislation repealed in 1999. And Smith repeatedly assured the audience that he wasn't a fan of regulation.
"I think people should be able to get rich," he said. "I just think they need to do it in a way that's transparent."