Is Wall Street Like Big Tobacco?

In April 1994, tobacco industry executives testified under oath on Capitol Hill that nicotine wasn't addictive - and that cigarettes didn't kill.

(Tobacco executives, top left, in 1994. Bottom, Goldman Sachs employees, today.)

That hearing was memorable, and a turning point for tobacco companies. It opened the spigot of litigation and legislation. Since then, the tobacco industry has paid out hundreds of billions of dollars in lawsuits and settlements. Now the federal government is regulating cigarettes under a law passed last year.

The Goldman Sachs executives testifying today before the Senate Subcommittee on Investigations could take a lesson from the tobacco industry's experience. "Goldman Sachs is to Wall Street as Philip Morris is to tobacco," said one former tobacco industry executive who was at the Congressional hearing sixteen years ago. At that time, Phillip Morris held an estimated 45 percent share of the U.S. cigarette market.

His advice to Goldman Sachs executives: "If these guys come across as arrogant or confrontational, it won't be good for them."

Fabrice Tourre said in his testimony today that "to the average person the utility of these products may not be obvious." But viewers of his testimony may hear a different message -  that the average person isn't smart enough to understand what Wall Street does.

To the former tobacco executive, it doesn't sound much different than the message some in the tobacco industry sent back in the 1990s. "What people heard from big tobacco was 'if you're stupid enough to believe us when we say cigarettes don't kill, that's your own problem.'"

Of course, cigarettes aren't Collateralized Debt Obligations. Lung cancer is easier to understand than a CDO or derivative. It's too early to know if public outrage, Congressional investigations, lawsuits and regulatory reform will change change the culture and incentives of Wall Street, but the road ahead for investment bankers could be bumpy.