MY WORD IS MY BOND
Thoughts on the state of Wall Street after Greg Smith
By DONALD CROOKS
Wagner College News Service
Dictum meum pactum — my word is my bond.
That’s the motto drilled into every Wall Street trader from day one. It applies to dealings with competitors and customers, foes and friends alike. Without it, Wall Street couldn’t function for one second.
That’s why Greg Smith’s very public indictment of his former employer, Goldman Sachs, sent such a shock through Wall Street when his letter of resignation was published on the New York Times’ Opinion page last week. According to Smith, Goldman could no longer be relied upon to put the interests of its clients first; in fact, according to him, the firm’s policy was to maximize its own profits, no matter the cost to the customer.
Before I became a business professor at Wagner College, I spent 30 years working on Wall Street. I was asked to bid competitively on billions of dollars of stock sales: from the French government’s divestiture of Total Petroleum, Saudi Prince Alwaleed’s sale of Citigroup shares, and George Soros’s portfolio sales during the crash of 1987. While at Morgan Stanley, and later at Lehman Brothers, I regularly competed against Goldman — and won. I liked them about as much as the Yankees like the Red Sox — but I respected them.
As chairman of the Disciplinary Committee for the American Stock Exchange in the late 1980s, I developed a pretty strong sense of the difference between what was legal and ethical, and what was not — and I routinely suspended or expelled from the Exchange those who broke the law and unethically profited at the expense of the customer.
I feel strongly that if any senior manager at Goldman broke the law, they should pay the price, and that could and should mean criminal prosecution.
On the other hand, being familiar with how Wall Street works, both on the trading and the enforcement side, I can’t help but wonder why, if laws were broken during the financial meltdown of 2008, how come there has been no litigation?
Investment banking has evolved at a revolutionary pace, caused by advances in technology and the diminution of agency-generated revenue. The days are over when brokers could make a living on commission generation. Customers require — indeed, insist upon — “instant liquidity” as well as the construction of products to fulfill their investment needs.
The Securities and Exchange Commission, however, has not kept up with the changes that have swept the investment banking industry. The SEC should shoulder at least some of the blame for what happened in 2008, at Goldman and elsewhere, because they were not providing the type of surveillance that was required to keep firms from overleveraging themselves — which, by the way, is surely an act of hubristic excess, but not a crime.
The multiplication of risk was propelled by market forces. Left to their own devices, many individuals and firms overstepped their bounds and paid a severe price for “not knowing what they didn’t know.” But Goldman Sachs is not a candy store; it is a highly sophisticated investment bank, with equally sophisticated clientele. Make no mistake: If its clients felt like they were being taken advantage of, they would leave the firm faster than did Rush Limbaugh’s advertisers.
While on Wall Street, I certainly had major disagreements with others, subordinates and superiors alike — but, unlike Mr. Smith, most professionals choose to work within the system to make positive change possible rather than trumpet their dissatisfaction on the Opinion pages of the New York Times as they stomp away in a fit self-righteousness. The people Smith recruited and mentored at Goldman are left to live with and defend against his allegations.
We live in a very competitive world. We can’t afford the luxury of observing it through rose-colored glasses, especially when things go wrong. As an academic, it would be easy to pile on an entire industry, but my career experience does not allow me to do that. Wall Street is not perfect, nor has it ever been, but to write it off as the embodiment of everything evil is not just simplistic — it’s not just.
Professor Donald Crooks, director of the Executive MBA and Accelerated MBA programs at Wagner College, is a former managing director at Morgan Stanley and Lehman Brothers, where he was responsible for global trading and risk for all equity products and stock exchanges worldwide. Crooks is a retired member of the National Organization of Investment Professionals, a former member of the Competitive Review Committee of the New York Stock Exchange, and a former chairman of the Disciplinary Committee of the American Stock Exchange.