It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

Most career guides counsel discretion when quitting a job. As good as it would feel to tell your boss what you really think of him or her, it’s never a good idea, for many reasons.

The main one, of course, is that it’s a small world, and you never know when your paths will cross again.

Obviously, former Goldman Sachs (NYSE: GS) executive Greg Smith doesn’t think he’ll be working for anyone at the investment firm again. Yesterday was Mr. Smith’s last day at Goldman, and he chose to go out with a bang, writing his resignation letter in the form of an op-ed in The New York Times. (One suspects that his final day was a short one.)

Smith: Environment at Goldman Sachs Is “Toxic and Destructive”

In his letter, Smith called the company’s culture “toxic and destructive.” His main accusation was that Goldman Sachs repeatedly puts its profits ahead of its clients’ interests, or in his words, encourages its advisers to “get your clients—some of whom are sophisticated, and some of whom aren’t—to trade whatever will bring the biggest profit to Goldman.”

He singles out the company’s current leadership for creating the situation:

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Blankfein and Cohn responded with a statement disagreeing with Smith’s remarks and pointing out that, according to company surveys, 89% of Goldman Sachs’ employees felt the firm provided excellent service to its clients. But the damage was already done. On a day when most other financial stocks rose thanks to the largely positive results of the Fed’s “stress tests,” Goldman slid 3.35%, closing at $120.37.

As MarketWatch.com pointed out yesterday, many of Smith’s points will ring true with the public:

Smith’s grievances don’t come out of the blue. There is plenty of external evidence that Goldman has put its own interests before those of its customers: selling securities designed to fail, shorting the mortgage market and, most recently, another case in which Goldman had an obvious conflict of interest in advising both sides of Kinder Morgan’s agreement to buy El Paso Corp.

Was Smith too Soft for Goldman Sachs?

Some, including former Goldman Sachs intern Aveneesh Singh Saluja, defended Smith:

I hold him in very high regard. He took care of us junior guys, gave us great pieces of advice, and in general came across as one of the more personable, friendly, and genuine guys on the floor.

But for everyone who stood up for Smith, there was at least one detractor. The editors of Bloomberg.com, for example, suggested that Smith was simply too naive about the rough-and-tumble world of investment banking. In a piece entitled “Yes, Mr. Smith, Goldman Sachs Is All About Making Money,” they write:

Smith, who was executive director and head of the firm’s U.S. equity derivatives business in Europe, the Middle East and Africa, does not go into details in his already notorious op-ed … But one imagines Goldman bankers spending their days delivering fresh flowers to elderly shut-ins and providing shelters for abandoned cats.

Bloomberg.com’s advice was blunt:

If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs. That’s not its function, and it never will be. Go to work for Goldman Sachs if you wish to work hard and get paid more than you deserve even so.

“Cruel Wind” Could Be Just Picking up for Goldman Sachs

In the near term, Goldman shares will likely remain under pressure in the wake of Smith’s letter. That pressure could intensify if more of the firm’s employees follow Smith and break its notorious code of silence.

That’s a real possibility. Rumors are circulating that a memo encouraging mass resignations is now circulating throughout Goldman. The email contains a missive by fictional sports lawyer Jerry Maguire (it never actually appeared in the film Jerry Maguire, but was supposedly written by the film’s director, Cameron Crowe):

There is a cruel wind blowing through our business. We all feel it, and if we don’t, perhaps we’ve forgotten how to feel. But here is the truth. We are less ourselves than we were when we started this organization.

Goldman Sachs, along with the rest of the financial sector, is also facing stricter regulation as the 2010 reforms passed by Congress come into effect. That’s a tough subject for many investors, as Investing Daily’s Jim Fink outlined in a 2010 article entitled “It’s Time to Regulate the Investment Banking Psychopaths”:

So, being the free marketeer that I am, I must be against financial regulation reform too, right? Wrong. The financial crisis of 2008 and deep recession that followed is a glaring example of complete market failure. Even Ayn Rand disciple and former Federal Reserve Chairman Alan Greenspan … now realizes that free markets, left to their own devices, sometimes screw up big time.

One doesn’t have to look too far to find a correlation between stricter regulation and a healthier finance sector. The tightly regulated banks in Canada and Australia, for example, came through the 2008/09 meltdown largely unscathed, and that’s been an inspiration for the changes now coming into effect in the U.S. The big question is whether the new rules will have an impact on Wall Street’s culture.

One thing that’s certain is that Greg Smith will be in another line of work by the time we start to see the results.