I worked in the business trading interest rate products before deciding to return to school. I still miss the game a lot and waste way too much time trying to supplement my PhD stipend trading stocks, equity options, and futures.
Mr. Smith's editorial describes a lot of the reasons I left when paired with the dire outlook for the business now and back then. As others sort of noted, much of the business changed simply from the sources of profits. OTC (Over the Counter, i.e, non exchange traded) derivatives dealing and proprietary trading started driving all revenue. From a cursory glance OTC derivatives create a zero sum game with the client. The bank takes one side, the client takes the other. Yes, on a large enough scale things should balance out, and perhaps no moral hazards will develop, but at the most fundamental level the client or the dealer wins.
This opens the door to a very unique class of businesses including casinos, some annuity providers, buyers' agents in real estate where the provider has a strong conflict of interest with their client. Previously banks did not have these conflicts, or the divisons with these conflicts were not the dominant earners. Well maybe M&A advisors on the buyers' side had an issue, but that was generally less lucrative to advising the seller or on a hot IPO.
The question becomes, is this a Goldman problem, or a banking industry problem? I am studying for the CFA, simply because the information is fresh in my head, and I may need it some day. CFA ethics clearly states that one must always put the client's interests ahead of the firm. I remain foreign to the sort of magic that allows for this, while allowing one to operate as a derivatives dealer and stay solvent.
Simultaneous, Mr. Smith forgets about the sort of horrible clients these banks must deal with on a daily basis. Remember that the best guys at these firms are the ones that get spots at hedge funds, asset managers, and sovereign wealth funds. They know how to screw a counter-party better than anyone. Anyone who has ever sat on a fixed income trading desk knows how viciously PIMCO swings around their size to trade through the market. Every junior trader has gotten crossed by a non-repetent small hedge fund. I doubt the clients ever thought Goldman or any other bank was their friend. To assume that a bank would help a client when there is blood in the water is lunacy.
You can probably tell I still have a lot of unresolved issues about exactly what is right here. I have major issues with conflicts of interests. If I ever return to finance, I will stay on the buy side. At least that way my interests and the client's are fully aligned. I deliver higher returns and get paid more.