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Last updated: March 14, 2012 9:40 pm
The most extraordinary aspect of Greg Smith's opinion piece in yesterday's New York Times about why he was leaving Goldman Sachs after nearly 12 years was not that he called out Lloyd Blankfein and Gary Cohn, Goldman's chief executive and president, respectively, for ruining the bank's vaunted culture of being long-term greedy, in favour of short-term profits. Nor was it that Mr Smith pointed out what we all know already, that Goldman had long ago reneged on its claim that it puts its clients interests before its own. Nor was it that Goldman's bankers and traders have been short on humility and long on arrogance.
No, the extraordinary thing about Mr Smith's column is that it appeared at all. That an executive of Goldman Sachs, filled to the gills with corporate Kool-Aid and a large chunk of the bank's treasure, would break its century-old omerta and fire off an angry resignation letter about how Goldman no longer lives up to its cherished ideals is simply unprecedented.
For most of the bank's storied 143-year existence, the unwritten rule around Goldman was to stay as far away from the press as possible. It wasn't until the 1970s that the bank even employed someone responsible for handling its press relations. And that person "“ Ed Novotny "“ did not even have an office at the bank. He worked out of his Manhattan apartment and press calls made to Goldman would ring there, not at the bank. Mr Novotny's only rule was never deal with the press. His operating principle was that any interaction with the media would end badly. Even the society photographer for the New York Times was to be avoided at all costs.
To be sure, the bank would occasionally grant access to a reporter at a publication deemed sufficiently friendly and unthreatening. In 1953, Fortune profiled Sidney Weinberg, the bank's longtime senior partner, and pointed out what a fabulous corporate-board director he was "“ Weinberg was at one point on something like 30 corporate boards "“ a storyline that was very good for business.
Then, in 1956, the respected New Yorker writer E.J. Kahn penned an extraordinary, two-part profile of Weinberg. It was nothing short of a glorification. Gus Levy, who succeeded Weinberg as senior partner, also let the New York Times and Institutional Investor tag behind him on a few, rare instances. One high point in the strategy came in 1982 when The Wall Street Journal ran one of those coveted front-page articles on the bank that extolled Goldman's virtues as a company that would never advise a client on a hostile takeover. It wasn't the least bit true "“ during Levy's time, Goldman was involved in many hostile takeovers on the aggressor's side "“ but it made for great reading and was also great for business. This was not just a historical fact. Even as recently as April 2006, The Economist featured Goldman on its cover in an effort to try to figure out how the bank had achieved its "magical hold at the summit of the industry."
Whether Mr Smith is just a disgruntled low-level employee "“ as the bank is now portraying him "“ is irrelevant to the fact that he has given voice, from inside the bowels of the company, to just how much the worm has turned on Goldman's image since the onset of the financial crisis.
In private, the top executives of the bank like to portray it as a victim of politicians and the media eager for someone or something to blame. How, they wonder, can it be that the bank that made it through the crisis the least scathed is the one that gets tarred and feathered in public over and over again? They seem determined to weather the storm by reverting to the Novotny strategy of laying low and hoping the whole thing blows over. But the truth is more complicated.
The current leaders of Goldman have badly damaged the bank's image precisely because it continues to try to convince the public that it still lives by the 14 business principles that former senior partner John Whitehead penned a generation ago when most people who work there or who do business with the bank know that these principles no longer even remotely apply to the way it does business.
During the tenure of Mr Blankfein, Goldman not only constructed the "big short" "“ in the words of Goldman's longtime CFO David Viniar "“ against the mortgage market "“ netting the bank $4bn in profit in 2007 "“ but it also continued to sell mortgage-backed securities to investors at par. This behaviour caught the ire and attention of Congress, which hauled Mr Blankfein and Mr Viniar over the coals.
How to respond to the firestorm of criticism led to much debate inside the bank. Should it strike a more conciliatory pose or a more defiant one? There were clashes between John Rogers, the longtime Goldman consigliere, and Lucas van Praag, the communications chief. In the end, Mr Rogers' preference for a tougher approach won out. Mr Van Praag is soon leaving the bank and is being replaced by Jake Siewert, a former White House press secretary.
Mr Smith's letter lays bare the acute need that Goldman faces: to either once and for all do what it must, to live up to its supposedly sacred principals "“ including actually putting its clients first "“ or stop the charade that can be found in every aspect of its public communications, including Mr Blankfein's page-long response to Mr Smith's piece. If Goldman cares any more about returning to a position of leadership on what remains of Wall Street "“ and it may not "“ the bank had better fix this problem, and fast.
Goldman has been in and out of trouble its whole existence. It almost went out of business because of self-inflicted wounds in the Depression, again in 1970 with the bankruptcy of the Penn Central Corporation, in 1987 when the bank was nearly indicted after one of its most senior partners was arrested on suspicion of insider trading and in 1994 when massive trading losses almost did it in and some 40 partners voted with their feet and left.
This is another such existential moment for Goldman. The sad thing is the bank's leaders don't seem to realise it.
The writer is author of "?Money and Power: How Goldman Sachs Came to Rule the World'. He is a columnist for Bloomberg View
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