Hats off to Greg Smith, the Goldman Sachs executive who published his resignation from the firm in a New York Times Op-Ed this week.

In his piece, Mr. Smith highlighted a decline in Goldman’s culture, describing a firm that has a contemptuous attitude toward its own clients.

Not surprisingly, Goldman didn’t waste any time spinning Mr. Smith as a disgruntled employee who should have aired his grievances to the HR department (that would have gone over well). Many in the media have dismissed Mr. Smith’s concerns, pointing to the fact that Goldman has been profiting from trading with its clients for nearly 150-years.

Yes, firms like Goldman have always run very profitable principal trading operations, buying stocks and bonds for their own accounts and reselling them to either other brokers or to their own clients. By definition, any time you run a principal trading operation you’re on the other side of trades with clients. These trading operations have generated huge profits for the likes of Goldman. But it needs to be recognized that these firms’ trading operations also provide the marketplace with much needed liquidity by putting huge amounts of their own capital at risk. Customers trade with these firms because they understand that providing liquidity adds value.

However, in recent years, advances in technology and regulatory changes ushered in the era of virtual stock exchanges, decimalization, and trade through rules, and the entire game changed. Just look at the floor of the New York Stock Exchange – the place is empty. These firms were forced to reinvent themselves.

So the Goldmans of the world turned to derivatives, structured products and synthetic securities. These highly illiquid securities are literally created out of thin air. At Merrill Lynch, where I worked for many years in equity sales, we were suddenly expected to sell CDO equity, the illiquid highly leveraged toxic leftovers of the Collateralized Debt Obligation creation process. We were told that if we expected to get paid, we had to sell these “high margin” products, regardless of the fact that selling CDO equity was akin to selling your accounts financial poison. We were constantly reminded that Goldman was doing it, and that was why their ROE was so much better than Merrill’s.

Indeed, firms like Goldman still trade against their clients, but what they’re trading has drastically changed. The complex and illiquid securities of today are very different from what these firms traded in the past. And since these firms often create the securities they trade, they can incorporate nuances into them that put customers at a greater disadvantage.

Wall Street’s Cultural Decline

The declining culture Mr. Smith describes isn’t unique to Goldman, it’s widespread on Wall Street. At Merrill the culture had a name, “Mother Merrill.” Anyone who ever worked at Merrill for any length of time knows exactly what Mother Merrill means. It’s what made Merrill such a great firm. The firm genuinely cared about their employees as well as their customers.

Enter Stan O’Neal. It was no secret that Stan, Merrill’s former CEO, despised the idea of Mother Merrill. He took a scorched earth approach to extinguish Mother Merrill, effectively gutting the firm’s culture.

Critics of Mr. Smith’s op-ed contend that if firms like Goldman were so bad they would go out of business. In many respects they did. Just look at Bear Stearns and Lehman. Merrill Lynch was on death’s doorstep when Bank of America came to the rescue and Goldman scrambled to convert to a commercial bank, taking cover behind the Fed.

It was Wall Street’s cultural changes – things like “book the trade and get paid today, who cares if it blows up down the road” – to thank for the financial crisis. Anyone who thinks that the relationship between firms like Goldman and their clients hasn’t changed over the past 10 – 15 years clearly doesn’t have a deep understanding of the business.

Mr. Smith’s Op-Ed was spot on. The culture of Wall Street has declined across the board, not just at Goldman Sachs.