TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.
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.
Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
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.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.
My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.
Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.
Administrator says:
Goldman Responds To Greg Smith, Darth Vader Is Leaving The Empire, And More…
Submitted by Tyler Durden on 03/14/2012 08:10 -0400
Because every former employee confession has an equal and opposite reaction from “toxic and destructive” firms. And what a better way to test the PR disaster damage control skills of the firm’s new global head of corporate communications: former Treasury aide and Geithner lackey Jake Siewert. In other news, Goldman is now promptly adding perpetual non-disparagement clauses to all employee contracts. Retroactively, if possible.
From Bloomberg:
Goldman Sachs Group Inc. (GS) said it disagreed with comments made by Greg Smith, a departing employee who attacked the firm’s “toxic and destructive” culture in an opinion piece in today’s New York Times.
“In our view, we will only be successful if our clients are successful,” the New York-based firm said in a statement today. “This fundamental truth lies at the heart of how we conduct ourselves.”
Elsewhere, Emperor Palpatine is also caught in a PR debacle.
Why I am leaving the Empire, by Darth Vader
TODAY is my last day at the Empire.
‘I no longer have the pride, or the belief’After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, throttling people with your mind continues to be sidelined in the way the firm operates and thinks about making people dead.
The Empire is one of the galaxy’s largest and most important oppressive regimes and it is too integral to galactic murder to continue to act this way. The firm has veered so far from the place I joined right out of Yoda College that I can no longer in good conscience point menacingly and say that I identify with what it stands for.
For more than a decade I recruited and mentored candidates, some of whom were my secret children, through our gruelling interview process. In 2006 I managed the summer intern program in detecting strange disturbances in the Force for the 80 younglings who made the cut.
I knew it was time to leave when I realised I could no longer speak to these students inside their heads and tell them what a great place this was to work.
How did we get here? The Empire changed the way it thought about leadership. Leadership used to be about ideas, setting an example and killing your former mentor with a light sabre. Today, if you make enough money you will be promoted into a position of influence, even if you have a disturbing lack of faith.
What are three quick ways to become a leader? a) Execute on the firm’s ‘axes’, which is Empire-speak for persuading your clients to invest in ‘prime-quality’ residential building plots on Alderaan that don’t exist and have not existed since we blew it up. b) ‘Hunt Elephants’. In English: get your clients – some of whom are sophisticated, and some of whom aren’t – to tempt their friends to Cloud City and then betray them. c) Hand over rebel smugglers to an incredibly fat gangster.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces telepathically. I was taught to be concerned with learning the ropes, finding out what a protocol droid was and putting my helmet on properly
so people could not see my badly damaged head.
My proudest moments in life – the pod race, being lured over to the Dark Side and winning a bronze medal for mind control ping-pong at the Midi-Chlorian Games – known as the Jedi Olympics – have all come through hard work, with no shortcuts.
The Empire today has become too much about shortcuts and not enough about remote strangulation. It just doesn’t feel right to me anymore.
I hope this can be a wake-up call. Make killing people in terrifying and unstoppable ways the focal point of your business again. Without it you will not exist. Weed out the morally bankrupt people, no matter how much non-existant Alderaan real estate they sell. And get the culture right again, so people want to make millions of voices cry out in terror before being suddenly silenced.
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14th March 2012 at 9:11 am
Administrator says:
WSJ Doing their part. Goldman declares he is only a lowly VP and shouldn’t be listened to.
Goldman Rejects Claims Made by Outgoing Executive
By David Enrich
Goldman Sachs Group Inc. is wasting no time fighting back against a disgruntled executive who lit up the Internet Wednesday morning by tendering his resignation via the op-ed pages of the New York Times.
The executive, Greg Smith, blasted Goldman for betraying its historic culture and putting profits ahead of client interests. He said Goldman executives talk openly about ripping off their clients, who sometimes are referred to internally as “muppets.” His incendiary take on Goldman culture quickly became a flashpoint on Twitter and elsewhere. It doesn’t exactly jive with doing “God’s work.”
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.
Not surprisingly, though, Goldman is taking issue with other elements of Mr. Smith’s piece.
“We disagree with the views expressed, which we don’t think reflect the way we run our business,” a Goldman spokeswoman said. “In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”
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.
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14th March 2012 at 10:09 am
Administrator says:
A ‘Different’ Goldman Response To Greg Smith
Submitted by Tyler Durden on 03/14/2012 11:00 -0400
Andy Borowitz provides the one retort to Greg Smith that only free taxpayer money and trillions in bailouts can buy. In other news, we fully expect Mr. Smith to enact a voluntary refund of the 12 years worth of compensation and bonuses earned while working at Goldman any minute now. Or maybe epiphanies on Goldman “culture” following more than a decade of employment comes without compensation clawbacks?
NEW YORK (The Borowitz Report) – The following letter to Goldman Sachs’ worldwide clients was issued today by Goldman Sachs CEO Lloyd Blankfein:
Dear Goldman Client:
By now, many of you have probably read the regrettable resignation letter published in today’s New York Times by former Goldman executive Greg Smith, explaining why he is leaving the firm after twelve years.
In the letter, in which he excoriates Goldman and his practices, Mr. Smith comes across as a man of conscience, ideals, and high moral standards. And as you read his words, you no doubt asked yourself this troubling question: how could Goldman have hired such a person?
At Goldman, we pride ourselves on our ability to scour the world’s universities and business schools for the finest sociopaths money will buy. Once in our internship program, these youths are subjected to rigorous evaluations to root out even the slightest evidence of a soul. But, as the case of Mr. Smith shows, even the most time-tested system for detecting shreds of humanity can blow a gasket now and then. For that, we can only offer you our deepest apology and the reassurance that one good apple won’t spoil the whole bunch.
As to those of you who were serviced by Mr. Smith, it’s understandable that you would be concerned about who will be taking his place going forward. On that front, I have some exciting news: today, Goldman is pleased to announce that our new executive director and head of the United States equity derivatives business in Europe, the Middle East and Africa will be Mr. Joseph Kony. For those unfamiliar with Mr. Kony’s resume, let me assure you that he has the character and moral standards you have come to expect from Goldman, and like the rest of us here at the bank, he has dedicated his life to doing the Lord’s work.
Sincerely,
Lloyd Blankfein
CEO, Goldman Sachs
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14th March 2012 at 12:23 pm
Pirate Jo says:
Sadly, this is the state of the entire finance field. Their mentality of “make myself rich off the clients” goes all the way to the top of all the investment banking firms. Even if you find yourself a “financial planner” who is honest and has integrity, and does actually try to look out for your best interest, he is probably being lied to by the people from his corporate home office, and may not even realize he is screwing you. Manage your own money. Not that you won’t make mistakes, but I’d rather take a chance on an occasional mistake than suffer the losses from being intentionally ripped off every day of the year.
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14th March 2012 at 1:00 pm
Colma Rising says:
Darth Vader….. lolz!
Those are some funny posts. Cracks me up.
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14th March 2012 at 1:10 pm
AWD says:
Talk about a suicide letter. This guy better have a great place to hide. The U.S. government ant he Federal Reserve are wholly owned subsidiaries of Goldman Sachs. Their clients are muppets, as Goldman has their hands up their asses 24/7. Goldman does body-cavity searches for money until they get every last dime.
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14th March 2012 at 3:07 pm
AWD says:
Blankefien is certainly a criminal, but the biggest Goldman criminal of all is Hank Paulson, who stole $750 billion from taxpayers to bail out Wall Street.
A plethora of Goldman Sachs customers:
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14th March 2012 at 3:16 pm
Administrator says:
Submitted by Azizonomics
The Vampire Squid’s Problems
Greg Smith, a now former Goldman Sachs derivatives executive slams his former employer in the NYT:
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
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.
What are three quick ways to become a leader?
a) Persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
b) Get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.
c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
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.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist.
Smith’s sentiments are appreciated, but actually he is wrong about a fundamental point, at least in today’s business environment. Goldman doesn’t have to give a damn about its clients because the vampire squid has found a much more lucrative way of insuring their bottom line: government largesse.
Let’s be clear: the bailout of AIG was not a bailout of AIG. It was a bailout of Goldman Sachs, to whom AIG were a counter-party. AIG’s failure would have meant Goldman’s balance sheet — already stuffed with derivatives dynamite — blew up. Goldman — along with a whole slew of other firms who created and invested in these dynamite products — would have been bankrupt.
And so the real problem is not Goldman’s rapaciousness. It’s the fact that systemic rapacity is being subsidised and protected by the government. Malpractice and malinvestment — such as the current global derivatives mesh which spreads risk around balance sheets like a pandemic — will in nature always eventually be punished by failure. That’s precisely what we saw in 2008, and that’s precisely what governments around the world crystallised and condoned through their bailout programs. Goldman have no incentive to change their business practices under the present conditions, and they won’t.
What’s the point of running a good business when you can run a rapacious and badly-run one and continue to thrive on government welfare? Bailouts destroy the market mechanism, and allow immoral and stupid firms (and systems) to prosper at the expense of better-run ones.
I wish Smith had the moral courage to approach the real problem — the arrogant and deluded central planners who allow the vampire squid to thrive and prosper.
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14th March 2012 at 4:00 pm
Stucky says:
This guy, Greg Smith, said about Golman Sachs ….”always doing right by our clients.”
He also said … “It wasn’t just about making money”.
.
Now, don’t get me wrong. I’m happy he had his come-to-Jesus moment of clarity …. AFTER he made his millions, no doubt. (wink, wink, and chuckle)
But I find it really hard to believe GS always did right by their clients and that it wasn’t about just making money. C’mon now, Greg!! Do I look like a maroon??
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14th March 2012 at 4:16 pm
Administrator says:
On Goldman Executive Greg Smith’s Brave Departure
By: Matt Taibbi
Wall Street is buzzing this morning about a resignation – a historic one. Greg Smith, the executive director and head of Goldman Sachs’s United States equity derivatives business in Europe, the Middle East and Africa, not only decided to quit Goldman, he decided to do it in the New York Times, eloquently deconstructing the firm’s moral slide in a lengthy op-ed piece.
The essence of Smith’s piece is devastating. He points to one simple, specific problem in the company: the fact that Goldman routinely screws its own clients. Anyone familiar with the report prepared by Senator Carl Levin’s Permanent Subcommittee on Investigations will recognize the jargon Smith points to in this line, in which he talks about what one has to do to become a leader in today’s Goldman:
Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
We heard about “axes” before in the tales about loser mortgage-derivative products like Timberwolf – that Goldman gave incentives to executives to unload its most toxic crap on clients. It was one thing to read about it in a Senate report, but here we have it from one of the firm’s own directors. He goes further, talking about the ways in which Goldman executives derided their own clients as fools and dupes:
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on.
The resignation will have an effect on Goldman’s business. The firm’s share price opened this morning at 124.52; it’s down to 120.72 as of this writing (it dropped two percent while I was writing this blog), and it will probably dive further. Why? Because you can stack all the exposés on Goldman you want by degenerates like me and the McClatchy group, and you can even have a Senate subcommittee call for your executives to be tried for perjury, but that doesn’t necessarily move the Street.
But when one of the firm’s own partners is saying out loud that his company liked to “rip the eyeballs out” of “muppets” like you, then you start to wonder if maybe this firm is the best choice for managing your money. Hence we see headlines this morning like this item from Forbes.com: “Greg Smith Quits, Should Clients Fire Goldman Sachs?”
This always had to be the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.
Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren’t just arrogant sleazebags, they’re also not terribly good at managing your money. As Smith writes:
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… These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave.
Banking, and finance, is a business that has to be first and foremost about trust. The reason you’re paying your broker/money manager such exorbitant sums is because that’s the value of integrity and honesty: You’re paying for the comfort of knowing he has your best interests at heart.
But what we’ve found out in the last years is that these Too-Big-To-Fail megabanks like Goldman no longer see the margin in being truly trustworthy. The game now is about getting paid as much as possible and as quickly as possible, and if your client doesn’t like the way you managed his money, well, fuck him – let him try to find someone else on the market to deal him straight.
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. Right now, many clients stay because they think that even if Goldman takes a bite out of them here and there, the bank still has the smartest guys in the room. But as Forbes writes this morning, this incident may turn Goldman into such a pariah that the best young bankers won’t want to work there anymore:
Until a wave of talented people leave Goldman and go work for some other bank, many clients will stick with Goldman and hope for the best. That’s why the biggest threat to Goldman’s survival is that Smith’s departure — and the reasons he publicized so nicely in his Times op-ed — leads to a wider talent exodus.
Anyway, Smith’s op-ed is a brave and thoughtful piece of writing:
My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
There are a lot of people who just want to tear Wall Street down and start over again, but what Smith did in this piece was show that people like him can be part of the solution. What he did couldn’t have been easy – kudos to him, and let’s hope the inevitable blowback sent his way won’t be too rough.
Update: Well, the blowback is already here. The Wall Street Journal this morning has stooped already to helping Goldman smear Smith. Here’s their take:
Goldman is taking issue with other elements of Mr. Smith’s piece.
“We disagree with the views expressed, which we don’t think reflect the way we run our business,” a Goldman spokeswoman said. “In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”
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.
You just knew that sooner or later, the bank was going to come out and say that Smith was actually a janitor in Goldman’s Mozambique office or something. It’s just surprising they did it so quickly.
Anyone who reads these critiques and even thinks about believing them should go back and look at Senator Levin’s report on Goldman. There’s backup in there for all of Smith’s allegations, from the bit about the axes to the derogatory comments about clients (only in the Levin report, they weren’t “muppets,” but a “white elephant, flying pig, and unicorn all at once”). All of this is in internal emails that were published long ago. The only difference now is that it’s coming from one of Goldman’s own people.
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14th March 2012 at 5:12 pm
Thinker says:
A follow-up in tomorrow’s NYT on their site this afternoon; photo of Greg Smith is included. It’s a nice summary of “how we got here.”
A Public Exit From Goldman Sachs Hits at a Wounded Wall Street
By NELSON D. SCHWARTZ
Published: March 14, 2012
Wall Street traders come and go all the time, but few have quit with the flair of Greg Smith. The way he resigned from Goldman Sachs, and what he had to say, could reignite a debate over how much Wall Street has changed in the wake of the financial crisis.
Very little, he said in an Op-Ed column in The New York Times on Wednesday. Mr. Smith, a London-based executive director for Goldman Sachs overseeing equity derivatives, decried a drastic change in culture at the firm since he joined it 12 years ago, with profits now coming before the interest of clients who, he wrote, are often derided as “muppets” by people at Goldman.
Mr. Smith is saying publicly what others whisper privately, which is why his cri de coeur may be so provocative. Even on Wall Street — where making money is good, and making more money is better — a few shibboleths still command respect, including the one that the customer should come first, or at least second, not dead last. Since the financial crisis, in fact, nearly all the big banks have claimed to be client-centric as they seek to rebuild public trust.
At meetings at Goldman, on the other hand, “not one single minute is spent asking questions about how we can help clients,” Mr. Smith wrote. “It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”
“People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer,” warned Mr. Smith, whose biography page traces his time with the firm in New York and Europe.
A Goldman Sachs spokesman responded to the piece early Wednesday: “We disagree with the views expressed, which we don’t think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”
Mr. Smith’s criticism, much more than stories about bonuses or brickbats from the likes of Occupy Wall Street, could be especially painful for Wall Street now. Memories are still fresh of the Securities and Exchange Commission lawsuit filed in April 2010 accusing Goldman of fraud, after it sold clients complicated mortgage backed securities that later soured, and never mentioned that it had bet against them.
The parade of senior Goldman executives who testified before Congress after the case arose seemed to put a public face on what had been a broader sense of distrust of Wall Street in the aftermath of the financial crisis, focusing ever more attention on a firm whose patriarchs had been adamant about having high standards.
Wall Street, of course, has always sought profits — but if greed were to be countenanced, it should be long-term greed, not short-term greed, in the words of Gus Levy, who led Goldman Sachs in the 1960s and ’70s. With long-term greed, money was made with clients, not from them.
Veterans of Goldman and other top-tier firms say there was a time when long-term greed was the order of the day, at least publicly, and it benefited firms and their partners if not enormously, then certainly generously. But over the last 25 years, as that incentive structure metamorphosed, longtime bankers and scholars say, Wall Street has been remade in ways that Mr. Levy would hardly recognize.
The shift in incentives has followed the evolution of the business itself, industry insiders and other experts said. Partnerships, where the leaders of the firm had their own fortunes on the line, became publicly-traded giants. Proprietary trading evolved into a Midas-like source of money, challenging investment banking and client relationships. And with a free hand thanks to Washington, investment banks could take on ever more risk, amplified by debt.
“When these firms changed from partnerships to public companies, the ethos changed dramatically,” said Charles M. Elson, a professor of corporate governance at the University of Delaware. “The notion of client loyalty went out with the old structure. And as these became public companies, clients looked for the cheapest deal, and the firms looked for as many clients as possible.”
With the rapid growth of proprietary trading beginning the 1980s, as firms used their own capital to make bets, a short-term mentality came to dominate firms, according to Mr. Elson. “You make a much bigger buck on a transaction than on the long-term relationship,” he said. “You have profiteers as opposed to advisers.”
Compensation followed. Before 1990, pay for the chief executives of financial firms were on par with those of chief executives of the largest traded companies, or even slightly lower.
By 2005 the pay was roughly 250 percent bigger on average, said Ariell Reshef, a professor of economics at the University of Virginia. Broadly speaking, between 1980 and 2005, bonuses and salaries in finance increased 70 percent more than average pay elsewhere.
To be sure, longtime bankers say it is not like short-term greed was absent in the past. It has been around since traders gathered under a buttonwood tree and founded the New York Stock Exchange in 1792. But the astounding size of Wall Street’s biggest firms — and the fortunes to be made — have altered the calculus.
“I think there was plenty of skullduggery going on,” said Jerome Kohlberg Jr., who worked at Bear Stearns for 21 years before leaving to found Kohlberg Kravis Roberts in 1976 with Henry R. Kravis and George R. Roberts. Still, the trend has accelerated in recent years, according to Mr. Kohlberg.
“When I first started on Wall Street, it was a small group and everyone knew everyone else,” he said. “If you stepped out of line, people would not do business with you.”
Not everyone agrees with Mr. Kohlberg’s view. Anticipating arguments that are likely to be made in the coming days, one billionaire hedge fund manager who insisted on anonymity argued that conflicts have always come with the territory, and that clients should be sophisticated enough to know that. “These aren’t dumb people,” he said.
The key, he said, is to anticipate the conflicts, and if need be, use them to your advantage. “Find the one that has the biggest conflict and get him on your side,” he said. “You want somebody who understands both sides.”
“The guy on both sides of the equation will find a deal to get the deal done,” he added. “Is he getting his bread buttered on both sides? Who cares. Just get the deal done.”
Wall Street could now pay a steep price for short-term thinking, experts said, even if salaries and behavior have not caught up with public disillusionment. Hemmed in by new regulations, the big banks are being forced to give up proprietary trading. Fewer graduates of elite Ivy League schools are flocking to careers in finance. And the anger is spreading, seen not only in the Occupy Wall Street protests but also in the increasing distrust among the most affluent consumers.
Over all, the percentage of people who have little or no faith in the fairness of investment companies rose to 41 percent in 2011 from 26 percent in 2008, according to Yankelovich Monitor 2011. Only credit card companies, corporate chief executives, the federal government and lawyers fared worse. Even banks and insurance companies did better.
Nor is the outrage a matter of populist revolt. The feelings were identical in households whether they earned $100,000 or $50,000.
While Mr. Smith’s career at Goldman is over, he insisted it was not too late for his former firm and the rest of Wall Street.
“Make the client the focal point of your business again,” he wrote. “Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.”
http://www.nytimes.com/2012/03/15/business/a-public-exit-from-goldman-sachs-hits-a-wounded-wall-street.html
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14th March 2012 at 5:36 pm
llpoh says:
Caveat fucking emptor, bitches. If clients had the brains God gave an ant, the “three ways” of becoming a leader would not work. Goldman Sachs hasn’t made one red cent off of my sorry ass, and will not, as I never listen to advisors, I never allow anyone else to have control over my money, and I never invest in something that I do not understand and that cannot be explained so that a 3rd grader can understand (effectively the Buffett rule).
Goldman Sachs gets away with this shit because people are fucking idiots. No surprise there.
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14th March 2012 at 6:06 pm
Thinker says:
Goldman Roiled by Op-Ed Loses $2.2 Billion for Shareholders
By Christine Harper | Bloomberg – 7 hours ago
..
Goldman Sachs Group Inc. (GS) saw $2.15 billion of its market value wiped out after an employee assailed Chief Executive Officer Lloyd C. Blankfein’s management and the firm’s treatment of clients, sparking debate across Wall Street.
The shares dropped 3.4 percent in New York trading yesterday, the third-biggest decline in the 81-company Standard & Poor’s 500 Financials Index, after London-based Greg Smith made the accusations in a New York Times op-ed piece.
Smith, who also wrote that he was quitting after 12 years at the company, blamed Blankfein, 57, and President Gary D. Cohn, 51, for a “decline in the firm’s moral fiber.” They responded in a memo to current and former employees, saying that Smith’s assertions don’t reflect the firm’s values, culture or “how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.”
Former Federal Reserve Chairman Paul Volcker, 84, whose “Volcker rule” would limit banks like New York-based Goldman Sachs from making bets with their own money, called Smith’s article “a radical, strong” piece. “I’m afraid it’s a business that leads to a lot of conflicts of interest,” Volcker said at a conference in Washington sponsored by the Atlantic.
Goldman Sachs slid $4.17 to $120.37 yesterday, leaving the shares still up 33 percent this year. The stock advanced 0.7 percent to $121.20 by 11:16 a.m. in Germany today.
David Wells, a spokesman for Goldman Sachs in New York, declined to comment beyond the contents of the memo and an earlier e-mailed statement in which the firm said it disagrees with the views expressed in the op-ed.
Fraud Lawsuit
Executives at Goldman Sachs haven’t changed their behavior even after the firm paid $550 million to settle a fraud lawsuit with the Securities and Exchange Commission and was accused by the U.S. Senate’s Permanent Subcommittee on Investigations of misleading clients, Smith wrote. The company published a report in January 2011 with 39 recommendations on how to improve its business practices and client focus.
“Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail,” Smith wrote. “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.”
The article was e-mailed across Wall Street. One employee at Bank of America Corp.’s Merrill Lynch division, a competitor to Goldman Sachs, said his team was told not to send copies to clients. Parodies such as “Why I am leaving the Empire, by Darth Vader” on thedailymash.co.uk and theborowitzreport.com’s “A Response from Goldman Sachs” also circulated.
‘Does Hurt’
“It does hurt them,” said Stephane Rambosson, managing partner at executive search firm Veni Partners in London and a former Citigroup Inc. banker. “The perception of the firm has gone down, and a lot of the winners of tomorrow are sitting back and thinking, ‘Do I want to be with Goldman?’”
There’s little evidence that the firm’s popularity with clients has been hurt by the SEC lawsuit, the Senate’s criticism or a recent ruling by Delaware Chancery Court Judge Leo Strine, who faulted Goldman Sachs’s handling of a conflict of interest. The bank won more business than any other in advising companies on takeovers and equity offerings last year, according to data compiled by Bloomberg.
Some clients of Goldman Sachs’s sales and trading department, the business in which Smith worked, said they are always cautious in dealings with Wall Street banks, understanding that their interests can diverge.
‘Prostitution in Vegas’
“The argument that Goldman has become increasingly profit- driven, sometimes at the expense of clients’ best interests, and that some employees use vulgar and disrespectful language, is hardly news,” Whitney Tilson, founder of hedge fund T2 Partners LLC, wrote in an e-mailed commentary. “What’s the next ‘shocking’ headline: ‘Prostitution in Vegas!?’”
Smith was an executive director in London, a title equal to vice president in New York. The firm employs almost 12,000 vice presidents, and most said in a recent internal survey that “the firm provides exceptional service” to clients, Blankfein and Cohn said in the memo. Smith, who sold U.S. equity derivatives to clients in Europe, the Middle East and Africa, didn’t respond to calls seeking comment.
Seven former Goldman Sachs partners and managing directors, positions that are more senior than vice president, said in interviews that Smith shouldn’t be taken seriously because he was a junior employee and may have been disgruntled about his pay or career. All asked not to be identified because they didn’t want to risk ruining their relationship with the firm.
Still, six of the seven said they agreed with Smith’s criticism of how the firm has treated clients under Blankfein and Cohn’s management and that current members of the management committee would, too. Even so, they said they don’t expect the board of directors to take action or that anything will change because the firm has made money and outperformed most rivals.
‘On a Pedestal’
“He may have aired a few comments that are true, but he’s placed himself on a pedestal,” said Jason Kennedy, CEO of the Kennedy Group, a London-based recruitment firm. “The reason he’s been at Goldman Sachs for 12 years is that he liked the name and probably liked the money.”
It’s rare for people on Wall Street, especially at Goldman Sachs, to speak out publicly against their employers or former employees, said Roy Smith, a former Goldman Sachs partner who’s now a finance professor at New York University’s Stern School of Business.
“Who’s going to hire someone who would do that?” he said. “The industry will close ranks on such things as whistle- blowing in this context.”
Sales and Trading
NYU’s Smith, who’s not related to the author of the op-ed, said Wall Street’s culture has changed because trading has become a more important source of revenue than the fees banks get from advising companies on takeovers or financing. Goldman Sachs generated 60 percent of its 2011 revenue from sales and trading.
The relationship with clients in the trading department differs from the investment bank, Smith said. Firms often are on the opposite side of a client’s trade, and can profit at the client’s expense. Still, it’s not as simple as the article describes, he said.
“It just doesn’t happen that it’s easy to make money by ripping off your clients or counterparties because they’re pretty smart people for the most part,” he said.
Though some competitors relished the criticism of Goldman Sachs, which was the most profitable securities firm in Wall Street history before it converted to a bank in 2008, they may not be so different.
Smith’s opinion piece “seems to be symptomatic of many, if not most, of the banks around the world,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “It might be that Goldman, as one of the most successful ones, is also one of the most extreme.”
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.
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14th March 2012 at 2:09 pm
Krell says:
Why I am Leaving Hell
Today is my last day in Hell. After what seems like an eternity in the pit of despair – first as a fledgeling, free-willed angel in Eden.. but eventually as the mighty ruler of legions of demons, I believe that I can say that I understand the culture and identity that made Hell the smoldering lake of fire that it is today. And I can honestly say that this identity is as toxic and confused as I have ever seen it.
To put the problem in the simplest form, the interests pertaining to the collection of damnable souls has become sidelined by the way the demons operate today. No longer are the perished judged by their wages of sin, tested by virtue while being tempted by the minions of Beelzebub or Mammon. No longer is there the teamwork that distinguished itself as the smoldering demonic anguish of mankinds sordid lives.
Sure, our goal was to collect as many souls as possible. But there was always the sense of teamwork and pride that we were achieving the highest quality of despondent souls falling from grace. Today… no longer is that drive the fiber of our wretched being. Today the greed and treachery of our clients, fighting for every dollar without remorse, has made us fat and lazy. We have lost our purpose and drive to fight for those troubled souls trying to lead the path of righteousness.
But this was not always the case. How many eons of temptation and trickery did we go through to achieve what we did? The constant whispers of doubt and uncertainty that captured the quality of clients that we were able to get over the centuries?
As I think back to the proudest moments of my eternal existence. That Adam and Eve thing, organizing all those disgruntled angels including Moloch, who doesn’t agree to anything, the Dark Ages, winning the Mercury medal in Tartarus Table Tennis, otherwise known as the Golgothan Olympics. Those were the days of accomplishment that have all come through hard work, with no shortcuts. Things just don’t feel like it’s contrived evil anymore.
I hope this serves as a wake up call to those that still see the value of a tormented soul. I hope this can be inspiration to the remaining legions of doom that I called colleagues. Make deception and trickery when capturing the client’s soul a focal point of your business again. Remember, without the continuing eternal damnation of souls, there would be no hell.
Get the culture right, make people believe “All Ye Who Enter, Abandon All Hope” again.
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14th March 2012 at 4:27 pm