Michael Lewis, possibly most famous as the author of Moneyball, started his rise to fame as a non-fiction author with an exposé of his years at Solomon Brothers, the hilarious and revelatory Liar's Poker. The main subject of that book was all of the ways in which investment bankers are (a) really unpleasant people and (b) nowhere near as smart as they think they are, but (as with a lot of books, thanks to lazy reviewers) the only really famous chapter in the book is the first one. In the first chapter, Lewis tells the story of his first day at Solomon. Literally the very first thing they told him to do, his very first day there, was to rip off a client's money.
The way Lewis explained it was this: there are important clients, VIPs, and there are the rest of us. Investment banks would like to make all of us profitable, and when the markets are going up, they do. But when the markets go down, there are a few really big-money clients who know that if they move their money out of the firm, the firm gets a lot less profitable, and they use that leverage to get out of having to pay off on their really bad bets. They tell Wall Street: find one or more of your less important clients, the ones that won't wreck your company if they go away or go under, and trick them into taking my bad investments off of my hands at a profitable price for me. Lewis said that Solomon (and, as far as he knew, every firm on Wall Street) absolutely would rip you off for every penny you have saved up if that's what it takes to keep a really rich client from having take even a tiny loss.
In the introduction to his latest book about economics, the second best book I read about the 2007 financial crisis, The Big Short, Lewis tells the story of having lunch with his former big-boss, the ex-CEO of Solomon Brothers. He says that the ex-CEO of Solomon blames him, Michael Lewis, having told that story for the fact that there no longer is such a firm. He seems to feel unfairly singled out, and it's possible it's true. It may well be that that's what all Wall Street firms' CEOs were doing at the time that Lewis was writing about it, and that it's just unfair that only one of them had an ex-employee turn out to be an award-winning insightful and hilariously funny best-selling novel-length journalist.
But here's what the entire industry didn't learn from Liar's Poker. If you can only keep the high-roller clients by destroying your small-fry clients every time the economy tanks? Well, here's the problem with that. Thanks to the powerful deregulation lobby, the economy is going to tank every four to ten years. If you, and everybody else, blow up lots and lots of your middle class customers every four to ten years, word will get around. If word gets around, middle class customers will no longer be willing to put their money in your firm. If middle class customers stop investing with you, then you've got a problem: nobody left to take the bad investments off of your profitable clients' hands. No matter how relatively unprofitable your middle class customers are by comparison to your wealthy customers, if your business model depends on having them around, and they go away, you're out off business.
I mention this because a middle manager at Goldman Sachs, an insider echoing the criticisms of outsider journalists like Lewis and like Matt Taibbi, is saying the exact same thing about Goldman Sachs that Michael Lewis said about Solomon Brothers. In an op-ed in today's New York Times, an outgoing executive director in Goldman Sachs' European equity derivatives division in London, accuses his now-former employer of just that same attitude: naked enthusiasm about, a feeling of being entertained by, ripping off middle class clients in order to protect the profitability of wealthy clients. Will Greg Smith have done to Goldman Sachs what Michael Lewis supposedly did to Solomon Brothers?
(See Greg Smith, "Why I Am Leaving Goldman," NYT, 3/14/12. See also the reaction piece for tomorrow's paper, Nelson D. Schwartz, "A Public Exit from Goldman Hits at a Wounded Wall Street," NYT, 3/14/2012.)