Three years ago, I began my career in the Ross School of Business, aiming to become a successful financier like many others that graduated from the fine institution. After reading Greg Smith’s op-ed piece in The New York Times last week, “Why I Am Leaving Goldman Sachs,” I gained some new perspectives.
Picture the following: You are an unemployed, 21-year-old living in Berlin in 1938. Your leader — the man who promised to “repudiate the Versailles treaty, strengthen the economy and provide jobs” — requested your devotion and service to the Wehrmacht just years after the world’s worst economic recession. Your comrades are all in your age group and came from the same background: poverty, illness and a world devoid of hope and happiness. Your job is simple: For every bomb you drop from your aircraft at the target sites you will receive 1,000 Reichsmarks, which is about the average nine-month salary. In addition, you will receive an additional 20,000 Reichsmarks each year if your performance is in the top fifth percentile of your comrades. You know deep down that what you are doing will result in death and tragedy, but all of your comrades are performing their tasks diligently and competitively, and you know that if you don’t carry out your mission, your position in the Wehrmacht will be effectively terminated. You and your family will live a life in peace and prosperity if you “just don’t think too much and do it.”
Tempting? Now imagine all you have to do to make, say, $50,000, instead of dropping a bomb, is to convince a client to buy a product called a Collateralized Debt Obligation Cubed. You are not given information about what it does, just that it makes money and has some risks involved that your clients should not trouble themselves to understand.
Do you see how the lines can get blurry in that type of culture? Greg Smith, a former executive director at Goldman Sachs, described this type of toxic environment that pervades the bank. In his controversial op-ed in The Times, Smith explained his reasons for quitting Goldman Sachs. “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money,” he said. Smith said he could no longer accept the type of environment that teaches junior analysts that it’s all right to call their clients “muppets” and incentivizes them solely on how much they can make for the bank.
The deterioration of corporate culture and personal integrity is not an unaccustomed matter on Wall Street. In the book “The Big Short: Inside the Doomsday Machine,” author Michael Lewis describes the many questionable things that investment bankers and traders did prior to the 2008 financial crisis, including creating and selling unfathomable, and sometimes toxic, financial products, using monetary incentives to control rating agencies and blatantly disregarding clients’ interests.
Get this. These arguably immoral acts may appear to make the banks money, but without their customers’ trust and future business, these bankers simply end up screwing their shareholders, other firms and themselves. A recent example involves Bankers Trust, the star quarterback of commercial banks 20 years ago. Though the bank had stellar performance and was the go-to bank at the time, people began to uncover evidence that the bankers were misleading their clients by selling complex and overly risky products. The executives at the bank even coined the term “R.O.F.,” which stands for rip-off factor. Soon the company’s profit started to dip. In 1998, Bankers Trust pleaded guilty to defrauding the State of New York. Deutsche Bank later acquired it.
I wrote this article not to criticize the banks for their past but to address what they can change now and in the future. Don’t get me wrong; investment banks are essential for our economy. Without them, there would be no one to take care of financial transactions that enable you to get mortgages and student loans at reasonable rates, have decent retirement plans or open small businesses. But banks must stop reinforcing this type of mismanaged culture whereby people narrow-mindedly focus on profit numbers and ignore their clients’ interest. The Nazis stood on the wrong side of history because they couldn’t see the forest through the trees, but there is still much hope for our financial system.
Jason Pang Jao can be reached at pangjao@umich.edu.