The resignation letter heard round the world proves what we already know: Washington would like to think it can change the culture of Wall Street -- and it can't.



OK, so who do we believe? In a cover story in New York magazine last month melodramatically headlined "The Emasculation of Wall Street," journalist Gabriel Sherman made the case that the big financial firms were engaged in "something that might be called soul-searching" about their many sins and their wildly overcompensated contribution to the U.S. economy. Wall Street, under the whip of the giant Dodd-Frank law, was learning to behave. Reduced compensation packages and increased capital requirements were going to tame or snuff out some of the riskier and most reckless practices that brought the nation to the edge of a second Great Depression, Sherman wrote. Best of all, the domestication of Wall Street would redirect the best minds in the nation back into useful things like real engineering rather than financial engineering. Cool!

Now comes Greg Smith, an apparently conscience-stricken renegade from Goldman Sachs, who tells us that not only has nothing changed in the firm's culture, but he "can honestly say that the environment now is as toxic and destructive as I have ever seen it."

Can these two things both be true?

Actually, maybe yes. But the larger point is: We need to pay a lot more attention to Greg Smith than to Gabriel Sherman. There is, first of all, every reason to think Smith was telling the truth.

Some smart observers of the Street, like the Pulitzer-Prize-winning author ("Lords of Finance") Liaquat Ahamed, say that while Sherman is correct to say Wall Street is much more restrained at the moment, much else has not changed. "Greg Smith is dead right," Ahamed wrote me in an email today. "Goldman and all the other investment banks are plagued by conflicts of interest. The problem is that over time all of them, but especially Goldman, have shifted from the business of advising clients or raising capital for clients to trading on their own account. I have the impression (from books about the Pecora hearings) that in the 1930s Glass Steagall was motivated as much by outrage at conflicts of interest (e.g. Citibank famously stuffing the accounts of its deposit holders with foreign bonds that then went bankrupt) as the desire to make the banking system more stable."