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Mar 15 2012

Goldman Sachs “Old Days” Not So Rosy Either

A Goldman Sachs executive resigned in a lengthly and scathing op-ed in the New York Times. Greg Smith worked at Goldman Sachs for 12 years, rising to executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa. His latter shreds Goldman Sachs policies and employees:

   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 […]

   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.

Smith lays the blame for this climate of greed at the feet Goldman’s CRO, Lloyd Blankfein and the company’s president, Gary Cohn.:

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.

Matt Taibbi at Rolling Stone asks, like Forbes, should clients fire Goldman:

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.

Speaking at the Atlantic Economy Summet in Washington, DC, former Federal Reserve Chairman, Paul Volker, said that Smith’s letter proves the need for the his rule

“[Trading] is a business that leads to a lot of conflicts of interest. You’re promised compensation when you’re doing well, and that’s very attractive to young people. All these firms can attract the best of American graduates, whether they’re philosophy majors or financial engineers, it didn’t make any difference,” Volcker said.

“A lot of that talent was siphoned off onto Wall Street. But now we have the question of how much of that activity is really constructive, in terms of improving productivity in the GDP,” Volcker said. “These were brilliant years for Wall Street by one perspective, but were they brilliant years for the economy? There’s no evidence of that. The rate of economic growth did not pick up, the rate of productivity did not pick up, the average household had no increase in their income over this period, or virtually no increase.”

Volcker noted that commercial banks hold the money of average Americans, and are insured by the federal government. “Should the government be subsidizing or protecting institutions that…are essentially engaged in speculative activities, often at the expense of customer relations?”

Yves Smith at naked capitalism, who also has been at the Atlantic conference weighed in that those good old days of the ’90’s weren’t as “rosy” as Smith remembers:

Earth to Greg: the old days were not quite as rosy as you suggest, but it is true that Goldman once cared about the value of its franchise, and that constrained its behavior. So it was “long term greedy,” eager to grab any profit opportunity but concerned about its reputation. I knew someone who was senior in what Goldman called human capital management, and even though, in classic old Goldman style, he was loath to say anything bad about anyone, he was clearly disgusted of Lloyd Blankfein and the crew that took over leadership after Hank Paulson, John Thain and John Thornton departed. Before the firm before had gone to some lengths to preserve its culture and was thoughtful about how to operate the firm. One head of a well respected investment bank told me in the mid 1990s: “It isn’t that Goldman has better people. All the top firms have good people. It’s that they make the effort to manage themselves better than anyone else.” That apparently went out the window when Blankfein came in. My contact said all his cohort cared about was how much money they could make in the current year.

Wall St. responded defensively calling Smith a “small timer” having a “midlife crisis“. That “crisis” so far has lost Goldman $2.5 billion in its market value:

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.

Stephen Colbert “disapproves” of Greg Smith, after all Lloyd Blankfeid said Goldman was just doing “God’s work.”

1 comment

  1. TMC

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