Greg Smith Isn't the First to Leave Goldman Sachs Over Morals

In last week's New York Times, a Goldman Sachs "executive director" named Greg Smith wrote what just about everyone on earth should - and probably did - already know: Wall Street puts its own interests ahead of its clients'. Far ahead. Smith claimed that Goldman's culture has deteriorated dramatically since his arrival a dozen years ago.

In the days since, snipers have taken shots at Smith's competence: not yet a "managing director" -- i.e., partner -- after fully 12 years with the firm?
At his tardy conversion: "Did Smith think," asked Lauren Collins on the New Yorker blog, "when he signed on with the bank, that he was joining a charitable organization?"
At his self-esteem: Smith boasts in his op-ed of getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel. His U.S. ping-pong rating was estimated at about 1800, "way below any serious competitive ability," Collins said.
But I haven't seen anyone, besides Goldman Sachs itself in its official response, suggest that Smith wasn't telling the truth. In fact, two years ago, we ran a series of stories on Goldman Sachs that detailed many of the points Smith made in his exit statement.
One of our key sources was Nomi Prins, who worked at Lehman Brothers for a decade, then Bear Stearns in London, and wound up as a managing director of Goldman Sachs in New York in the year 2000, responsible for elaborate trading strategies. She quit after Sept. 11 and became a journalist, reporting on Wall Street and finally writing a book that's bitterly critical of her former industry: It Takes a Pillage.
'Did Goldman have its clients' interests at heart?' we asked Prins. No, she said. They're primarily a trading firm, trading on knowledge that comes in with every trade a client asks Goldman to make on the client's behalf.
"And just by evidence from the profits they make and where they make them, what divisions they make them in," said Prins, "they're not sitting on that knowledge. They are trading on that knowledge."
I followed up: "So they know somebody is going to buy a commodity or currency, so they either buy that commodity or currency first or a commodity and currency very much like it."
Prins: "Any information that you get, particularly if it's going to move the markets a lot, is going to filter into the trading positions you take."

Watch: Unraveling the Profit Puzzle at Goldman Sachs

But isn't this "front running" -- trading ahead of your clients (to profit from the price changes that will come from the clients' trades) for your own firm's benefit? And isn't that, strictly speaking, illegal? We put the question to David Stockman, President Reagan's former head of the Office of Management and Budget who went on to a long, successful and controversial career on and around Wall Street.