Why I Left Goldman Sachs: Greg Smith on Business Ethics & the Financial Services Company (2013)- Former head of Goldman Sachs US equity derivatives business in Europe, the Middle East and Africa explains the dishonesty and corruption within Goldman Sachs

I don’t blame the banks as much as I blame the credit rating agencies. A business is going to sell whatever products they have so long as there is demand and it’s legal. The big banks had some great securities (like mortgages owed by big businesses with great credit ratings) and some shit securities (like high-risk sub-prime loans). Since no one wanted to buy the shit securities, they bundled a little bit of shit with some of the good securities so they could sell them.

The credit rating agencies, knowing full well there was a bit of shit in each bundle, still gave these bundles “A” ratings or better. Not only would that increase the perceived value and lower the perceived risks of the bundles, but it also allowed very risk-averse funds like pensions buy these bundles. Funds like pensions, which are vitally important for lots of people, are prohibited by law from investing in anything below certain credit ratings in order to reduce risk. By rating these shit bundles so high, they allowed pensions and other protected funds to buy them, which then stoked demand for more.

It’s sort of like the FDA telling fast food companies it’s ok to use cow shit as filler in their burgers. In fact, the FDA will knowingly certify your cow shit filled burgers as “A” grade meat so you can sell it in hospitals, school lunches, or old folks’ homes. Like the FDA, it’s the job of the credit rating agencies to say what is or isn’t fit for consumption and safeguard the consumer.

However, unlike the FDA, the credit rating agencies aren’t government agencies, and their ratings are considered mere “opinions” and “advice” for which they are largely not held accountable. As such, it’s really really difficult to prosecute or sue unless you can prove they were acting deceitfully and deliberately as part of a scheme.

The rating agency system is really what needs more oversight and change, otherwise the same thing will keep happening. Even if big banks like Goldman Sachs stop this and similar practices, if it’s legal you can bet some other banks will keep doing it.

A few people have commented along the lines that I am essentially giving the big banks a “free pass” in terms of their culpability for the 2008 crash. I do think that any of the individuals involved who knowingly did harm or acted unethically bear moral responsibility for what happened. However, my focus is on the systemic factors that allowed for this situation to happen and not who should bear the moral responsibility. In addition, I view corporations (not privately held companies, but large businesses owned by many shareholders) as amoral entities that will inevitably exploit for profit whatever they are allowed to regardless of the morality (so long as the profits outweigh the public outrage). This is because of the structure and organization of corporations as it relates to human nature. The leadership of a corporation is ultimately decided by the shareholders, who by-and-large are unfamiliar and unconcerned with how the company operates outside of whether it is profitable and how that profitability impacts the share price or dividend. When a corporation decides to pursue the ethical path and not exploit an immoral opportunity for profit, they will usually become less competitive than another corporation that decides to do the same. When the ethical corporation starts getting beat up and losing market share to its unethical rivals, the shareholders are liable to replace the people on the board of directors until they get the type of people in charge who are more concerned with profit and keeping their jobs than morality. To be sure, these types of people are douchebag sell-outs for whome I hope there is a hell. Unfortunately, those are the very traits that often place them into positions of power.

 

h/t Wang_Dangler

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