It was only a matter of time before Goldman Sachs would start to smear their former employee, Greg Smith, who published his resignation letter in a celebrated op-ed in the New York Times. At first they merely denied the change in culture that Smith stressed, one from nurturing a relationship with their clients to field-stripping their clients for as much money as they could get. But now they’re bringing out the big guns.

A Goldman official confirmed that Mr. Smith, who worked for the Wall Street firm for nearly 12 years, most recently in London, resigned from Goldman this morning [...]

Mr. Smith described himself as an executive director and head of Goldman’s U.S. equity derivatives business in Europe, the Middle East and Africa.

A person familiar with the matter said Mr. Smith’s role is actually vice president, a relatively junior position held by thousands of Goldman employees around the world. And Mr. Smith is the only employee in the derivatives business that he heads, this person said.

So he only had a fake title, is the claim. He wasn’t in a position to know anything. He was isolated over there in London.

Forbes chalked it up to a midlife crisis. Other employees blabbed to Charlie Gasparino that Smith was a small-timer, never making more than $750,000 a year. And the financial press on cable TV went on an all-out attack.

This sounds like a last gasp to me. Matt Taibbi’s excellent piece makes the point that Wall Street was always going to have to reform itself, when the clients stood up for themselves rather than continually handing over money to firms committed to ripping them off. If Goldman wants to shift from a client relations firm to a trading firm, fine. But clients should know that, and they should direct their money accordingly. I don’t know if we’re even at the point now where reputational risk can sink a Wall Street firm, but this is the best shot:

These guys have lost the fear of going out of business, because they can’t go out of business. After all, our government won’t let them. Beyond the bailouts, they’re all subsisting daily on massive loads of free cash from the Fed. No one can touch them, and sadly, most of the biggest institutional clients see getting clipped for a few points by Goldman or Chase as the cost of doing business.

The only way to break this cycle, since our government doesn’t seem to want to end its habit of financially supporting fraud-committing, repeat-offending, client-fleecing banks, is for these big “muppet” clients to start taking their business elsewhere.

The blowback, in my view, is a glancing blow that reinforces the fact that Smith has a real point here. The question is whether the investors will recognize this as well.

…from a policy standpoint, Bartlett Naylor of Public Citizen ties Smith’s op-ed to the Volcker rule:

Explosive revelations today from an outgoing Goldman Sachs executive emphasize the need for Wall Street agencies to finalize the Volcker Rule reform, which would prevent many significant conflicts of interest in the financial industry [...]

The Volcker Rule, approved as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, prohibits banks from engaging in trades for their own profits and strictly bars trading that conflicts with customers’ interests. But a barrage of self-serving industry comments have led regulators to signal they will delay implementation beyond the statutory deadline of July 2012. Goldman Sachs submitted two comment letters and met with regulators personally an unprecedented six times. Regulators should put Smith’s candid and brave words on the top of any analysis about how best to reform Wall Street and weigh them when considering the motivations behind Goldman’s official comments and meetings.

After all, Smith’s op-ed, at the root, describes massive conflicts of interests between Goldman and its clients.