Now quite famously, formerly of Goldman Sachs, Greg Smith kicked up a firestorm with his op-ed piece in The New York Times on Wednesday. He lambasted his former employer (he’d quit just minutes earlier), decrying a culture “where not a single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.”
His sentiments captured the day’s news cycle, with the requisite talking heads debating whether or not Wall Street has changed its ways since the depths of the financial crisis and what impact, if any, this might have on the firm. Even the stock market joined in, knocking $2.2 billion off Goldman’s market value for the day — it was the third-largest decliner in the S&P 500 Financials Index — though the stock managed to reclaim $1.4 billion of that Thursday.
Bloomberg View concluded the day with an acerbic editorial after the close of trading that openly mocked Mr. Smith for “apparently” thinking of Goldman early in his career as, “something like the Make-A-Wish Foundation — existing only to bring light and peace and happiness to the world.”
“It must have been a terrible shock when Smith [later] concluded that Goldman actually was primarily about making money,” the editorial added.
The tone and content of the editorial seem to reflect the perspective of Goldman, investment banks broadly, and their many related and supporting industries. (It should be noted that Bloomberg LP’s primary source of revenue is the rental of its data terminals to firms across the financial services sector.) But the piece closed with a fundamental and ultimately unassailable truth.
“Goldman and other investment banks do perform an important role in our economy,” Bloomberg’s editorial board wrote, “but it is not charity work. Goldman’s clients are mostly very well-off. Smith’s lament that the bank no longer serves their needs above and beyond its own does not tug at our heartstrings.”
Darwinian though this may sound, these statements and much of Wednesday’s debate may well be just what corporate officers and directors — and investors — need: to engage in an intellectually honest assessment of the relationship they have with their banks. One might argue a host of stories, data, and events that have come to light over the past few years should already have given rise to such assessment, but the perspective of an investment bank “insider” clearly packs additional punch. Who, after all, wants to think of themselves referred to as a “muppet” by bankers plotting to extract the highest possible fees from them for services rendered?
So let’s accept as fact that investment banks operate not only “for profit,” but with a view toward maximizing profit. In this, we can agree, they are no different than most industries. But if we think further about the services they provide and access to capital they both offer and aggressively protect (as a middleman between issuer and investor), their ability to capture value (read: make money) becomes clearer.
And if we think further about the degree to which banks’ profitability enables them to attract and incent the best and brightest in continued pursuit of new, large, and sometimes ever-more-complex revenue opportunities, we start to get a more accurate picture of the playing field. Indeed, what we get is the picture Greg Smith drew so clearly with his farewell flourish.
Companies seeking to access capital via Wall Street, Smith effectively tells us, should therefore do so with a clear understanding of the profile and motivations of those they hire to manage the process. It is also incumbent upon management to prepare itself as fully as possible for a process outside its core area of expertise, particularly when this process falls squarely within the core expertise of its bank counterparties.
A company’s best means of doing so requires access to resources that reduce the product knowledge and experience gap between securities issuers and their banks. Such resources, as evidenced by Smith’s op-ed, serve to level the playing field by making corporations more educated consumers of Wall Street’s services.
And what “muppet” could disagree with that?
David Pritchard is a principal at Aequitas Advisers, a capital markets advisory firm. He has more than 18 years’ experience in institutional sales and capital markets origination and execution. He was most recently co-head of equity capital markets at CIBC World Markets.