Now-former executive Greg Smith’s departure from Goldman Sachs via the New York Times editorial page sparked a flurry of commentary, much of it restating the tired criticism that, in Mr. Smith’s words, the “toxic and destructive” firm is dominated by “morally bankrupt people” who “callously […] talk about ripping their clients off.”
The curiosity of such a public and sanctimonious resignation aside, Mr. Smith’s argument that Goldman cares more about making money for itself than effectively serving its clients begs the question: why do clients put up with this kind of abuse? The financial services market is highly competitive, and Mr. Smith counted among his former clients “two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia,” who can surely recognize when they’re getting a raw deal.
The painfully obvious answer is that clients are willing to put up with being mocked as “Muppets” (by people who are themselves publicly mocked for their ostentatiousness and arrogance) to gain access to all the financial services offered by the vampire squid; in economic terms, marginal benefit exceeds marginal cost. Costs need not be financial: if you’ve ever waited in line for something that was “free,” you paid the cost of the value of time spent waiting in line instead of doing something else. If you’ve ever qualified enrollment in a demanding professor’s class with, “I will learn a lot,” you’ve determined that the value of such knowledge justifies the rigor of the course.
Clients make the same cost-benefit analysis every time they transact with Goldman Sachs. If they were sick of Mr. Smith’s alleged abuses, they’d go to Morgan Stanley or Bank of America. Last fall’s Move Your Money project successfully galvanized popular awareness of modern finance, so aren’t Goldman’s sophisticated clientele capable of making the same calculation? They are, but they are making the politically unpopular (if financially prudent) decision of giving their business to Goldman Sachs.
Mr. Smith’s detractors have called him naive for working at an employer widely known for its aggressive ethos and high-stakes culture, and complicit since his decade-long tenure as a derivatives salesman coincided, ostensibly, with the myriad offenses he describes, though he happily accepted millions in compensation. These criticisms may well be accurate, but they’re irrelevant to the fundamental question: if Goldman Sachs really is a terrible business partner, why does it still attract a staggering amount of business?