Nearly 20 years ago, Bankers Trust was riding high. The bank, based in New York, had become known as an expert in then-newfangled derivative securities, and the profits were flowing in. In an era where commercial banks were often viewed as stodgy and unimaginative, it stood out as a shining light. Corporate treasurers sought its insights about ways to maximize income from idle cash. Wall Street firms scrambled to compete.
Then the tapes came out.
On those tapes, recorded in 1993 and 1994, Bankers Trust executives were heard to discuss how they were misleading customers who did not understand what they were doing. Speaking among themselves, bankers used the term “R.O.F.” It stood for “rip-off factor,” the amount the bank could take from unsuspecting clients.
Those clients included Procter & Gamble and Gibson Greetings, which had entered into contracts with Bankers Trust for complex interest-rate swaps that would raise the companies’ incomes a little if interest rates continued to fall — as the conventional wisdom then said they would — but result in enormous losses if rates rose only a little bit. Rates rose more than a little, and the companies soon found evidence they had been told lies and sued. Eventually, Bankers Trust was forced to settle.
Bankers Trust was never the same after that. It was still a swashbuckling trading firm, but in 1998 it made some bad bets of its own. It wound up being acquired by Deutsche Bank. On the way out, the company pleaded guilty to defrauding the state of New York by seizing abandoned funds that should have gone to the state.
The fate of Bankers Trust came to mind this week when a midlevel Goldman Sachs banker chose to leave the company with a blast delivered through the Op-Ed page of The New York Times. “I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients,” wrote Greg Smith. “It’s purely about how we can make the most possible money off of them.”
Bankers Trust gave us the term “R.O.F.” Mr. Smith says Goldman referred to its clients as “Muppets,” talked about “ripping eyeballs out” and rewarded employees for “hunting elephants,” a term he said meant persuading clients to do whatever would be most profitable for Goldman.
In finance, acting like a shark who will rip your opponents into little pieces has long been viewed as a positive thing. Such a reputation will even draw in clients who want to harness those tactics for their own benefit. The catch for Goldman could be, as it was for Bankers Trust, that the clients will flee if they think the firm intends to rip them off.
Goldman has a far stronger market position now than Bankers Trust ever did. Its competitors may not be as publicly aggressive as Citiwas back in the 1990s, when it went after Bankers Trust customers with an ad proclaiming, “You expect derivatives to solve problems, not create them.” But they will be quietly courting clients by saying they will work for the customer, not against him.
Mr. Smith will be offered opportunities, possibly by clients whose trades did not work out, to get specific about how Goldman ill-served its customers. If he takes any of them, Goldman’s pain may endure.
One of the amazing stories of this year has been the fact that Wall Street, for all its public opprobrium, is on the brink of a major legislative victory to roll back decades of regulation and rules aimed at preventing underwriters from ripping off customers.
Last week, the House of Representatives, with the support of every Republican and most Democrats — as well as a White House endorsement — passed something it called the “Jump-start Our Business Start-ups Act,” or JOBS for short. The logic is that if we can just make it easier for companies to raise capital, they will hire more people.