- Smith, Greg.
Why I Left Goldman Sachs.
New York: Grand Central, 2012.
ISBN 978-1-4555-2747-2.
-
When Greg Smith graduated from Stanford in 2001, he knew precisely
what career he wished to pursue and where—high stakes
Wall Street finance at the firm at the tip of the pyramid:
Goldman Sachs. His native talent and people skills had landed him
first an internship and then an entry-level position at the
firm, where he sought to master the often arcane details of
the financial products with which he dealt and develop relationships
with the clients with whom he interacted on a daily basis.
Goldman Sachs was founded in 1869, and rapidly established itself as
one of the leading investment banks, market makers, and
money managers, catering to large corporations, institutions,
governments, and wealthy individual clients. While most
financial companies had transformed themselves from
partnerships to publicly-traded corporations, Goldman Sachs
did not take this step until 1999. Remaining a partnership was
part of the aura of the old Goldman: as with a private Swiss bank,
partners bore unlimited personal liability for the actions of
the firm, and clients were thereby reassured that the advice
they received was in their own best interest.
When the author joined Goldman, the original partnership culture
remained strong, and he quickly learned that to advance in the firm
it was important to be perceived as a “culture keeper”—one
steeped in the culture and transmitting it to new hires. But then the
serial financial crises of the first decade of the 21st century
began to hammer the firm: the collapse of the technology bubble, the
housing boom and bust,
and the sovereign debt crisis. These eroded
the traditional sources of Goldman's income, and created an incentive
for the firm to seek “elephant trades” which would book
in excess of US$ 1 million in commissions and fees for the firm
from a single transaction. Since the traditional business of buying
and selling securities on behalf of a client and pocketing a
commission or bid-ask spread was highly competitive (indeed, the kinds
of high-roller clients who do business with Goldman could see the bids and
offers in the market on their own screen before they placed an order),
the elephant hunters were motivated to peddle “structured
products”: exotic
financial derivatives
which the typical client lacked the resources to independently value,
and were opaque to valuation by other than the string theorist
manqués who
invented them. In doing this business, Goldman transformed itself
from a broker executing transactions on behalf of a client into a
vendor, selling products to counterparties, who took
the other side of the transaction. Now, there's nothing wrong with
dealing with a counterparty: when you walk onto a used car lot with
a wad of money (artfully concealed) in your pocket and the need
for a ride, you're aware that the guy who walks up to greet you
is your counterparty—the more you pay, the more he benefits,
and the less valuable a car he manages to sell you, the better it
is for him. But you knew that, going in, and you negotiate
accordingly (or if you don't, you end up, as I did, with a 1966
MGB). Many Goldman Sachs customers, with relationships going back
decades, had been used to their sales representatives being
interested in their clients' investment strategy and recommending
products consistent with it and providing excellent execution on
trades. I had been a Goldman Sachs customer since 1985, first
in San Francisco and then in Zürich, and this had been my
experience until the late 2000s: consummate professionalism.
Greg Smith documents the erosion of the Goldman culture in New
York, but when he accepted a transfer to the London office, there
was a culture shock equivalent to dropping your goldfish into a
bowl of Clorox. In London, routine commission (or agency) business
generating fees around US$ 50,000 was disdained, and clients
interested in such trades were rudely turned away. Clients were routinely
referred to as “muppets”, and exploiting their
naïveté was a cause for back-slapping and booking
revenues to the firm (and bonuses for those who foisted
toxic financial trash onto the customers).
Finally, in early 2012, the author said, “enough is enough”
and published
an op-ed
in the New York Times summarising the indictment of
the firm and Wall Street which is fully fleshed out here. In the book,
the author uses the tired phrase “speaking truth to power”,
but in fact power could not be more vulnerable to truth: at the heart
of most customer relationships with Goldman Sachs was the assumption
that the firm valued the client relationship above all, and would
act in the client's interest to further the long-term relationship.
Once clients began to perceive that they were mocked as “muppets”
who could be looted by selling them opaque derivatives or
unloading upon them whatever the proprietary trading desk wanted
to dump, this relationship changed forever. Nobody will ever do business
with Goldman Sachs again without looking at them as an
adversary, not an advisor or advocate. Greg Smith was a witness
to the transformation which caused this change, and this book
is essential reading for anybody managing funds north of seven
digits.
As it happens, I was a customer of Goldman Sachs throughout the
period of Mr Smith's employment, and I can completely confirm
his reportage of the dysfunction in the London branch.
I captured an hour of pure comedy gold in
Goldman
Sachs Meets a Muppet when two Masters of the Universe
who had parachuted into Zürich from London tried to
educate me upon the management of my money. I closed my account
a few days later.
October 2012 