If client success is key, expect Goldman Sachs to adopt ultra transparency today

In his NY Times' editorial titled Why I am Leaving Goldman Sachs, Greg Smith, the former executive director and head of Goldman's US equity derivatives business in Europe, the Middle East and Africa, observed

[Goldman Sachs] changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence. 

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. 

I attend derivatives sales meetings where not one 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.... 

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. 

Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. 

Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact. 

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

Ultimately, in finance, trust is a matter of transparency.

Selling opaque products might be good for short term profit margins, but as the collapse of the private label mortgage-backed securities market has shown, bad for long term client profitability.

The Telegraph reports

Responding to the article, Goldman Sachs said: 

"We disagree with the views expressed, which we don't think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves."

Was Abacus really about the success of your clients?

If Goldman were serious about putting their clients' interest first, Goldman would lead Wall Street in adopting ultra transparency both in terms of disclosing its current on and off balance sheet exposures and in terms of disclosing all the useful, relevant information in an appropriate, timely manner to investors in its products.

Imagine if Goldman had adopted ultra transparency thirty years ago.

Would it have done the Abacus deal?  Would it have disguised and hidden a secret loan to Greece?  Would it be selling illiquid, opaque derivative products with three letter acronyms?

Mr. Smith's editorial is the story of a firm in the grip of what Damian Reece calls 'market autism'.

If a trade makes a profit and it's within the rules, then do it. Ethics, perception, morals, emotional intelligence and even good old common sense are ignored.

The only known cure for market autism is either voluntarily embracing ultra transparency or having the financial regulators require ultra transparency.