Goldman Whistleblower: High on Indignation, Low on Facts

Greg Smith, a former Goldman Sachs executive, marked his exit with a public condemnation of his employer. He missed the opportunity to hit them even harder. 



Greg Smith's public resignation on the Times op-ed page raised a host of important, recurring issues about Goldman Sachs and the financial services industry. The immediate result has been a typical media event: volleys of opinion pieces in print and electronic media repeating anti-or-pro positions on all those issues, praising Smith for candor or criticizing him for delay and disloyalty.

But this week's media event will in all likelihood soon wisp away with no meaningful movement on the host of important issues. The reason is simple: Smith flunked the first test of whistleblowing. He didn't present a single hard fact.

Take his main assertion that, at least in his derivatives business, Goldman put its interests ahead of clients (people "....pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals."). But no example. No real parties. No real transaction. A very dramatic but very general assertion.

Contrast this with the complaint filed by the SEC in 2010, alleging detailed, specific facts about how Goldman misled some of the parties to a billion dollar synthetic, collateralized debt obligation transaction. These factual allegations led to a robust debate on the propriety of the actual transaction, which was emblematic of excess in the financial system; congressional hearings and grilling of Goldman execs; a Goldman settlement with the SEC for $550 million; and a Goldman report from a new, internal business-standards committee on how to approve products and reduce conflicts across the firm (which Smith doesn't discuss). Similarly, after a Delaware Court recently criticized Goldman for very specific failures to disclose a banker's interest in a company on the opposite side of a merger, the firm and other Wall Street banks have tougher rules under consideration for constantly tracking and automatically disclosing banker's stock holdings.

Take another major, related assertion: that people are promoted to leadership positions in the firm by foisting products on clients that were not suitable for them. But, again, the article offers no examples of firm leaders who committed these sins, or clients harmed by them. Very dramatic allegations, but, without concreteness, what are we to make of them?

And the ultimate assertion -- that Goldman's culture of teamwork, integrity, humility, and client concern has given way to a culture of avarice and self-interest -- is boldly stated but murky in its scope. Goldman performs a number of different functions: from advisor to fiduciary to market-maker to underwriter to asset manager to investor for its own account. But there is no discussion in the article of the different roles and the possibility of different cultures for the groups that play them.

Make no mistake. I have no interest in defending Goldman. I have long been a harsh critic of the role played by major financial institutions in causing the 2008 meltdown and in their response to needed financial-services regulation. Nor do I mean to say that Greg Smith does not make potentially important points about Goldman and other financial-services institutions, although the points are not new.

Presented by

Ben W. Heineman Jr.

Ben Heineman Jr. is is a senior fellow at the Belfer Center for Science and International Affairs, in Harvard's Kennedy School of Government, and at the Harvard Law School's Program on Corporate Governance. He is the author of High Performance With High Integrity.

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