Inside Financial Services

Goldman Sachs and the Lofty Standards of Greg Smith

His outrage at what he saw when he worked there is entirely out of place. Here's why.

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One of the most memorable openings of any novel in Western literature is the one that starts off The Sun Also Rises. Do you remember from high school? “Robert Cohn was once middleweight boxing champion of Princeton.” Hemingway writes. “Do not think that I am very much impressed by that as a boxing title, but it meant a lot to Cohn.” Yes. I think I know people like that. Robert Cohn came to mind earlier this week when I opened the New York Times op-ed page and was introduced to Goldman Sachs’s newest former employee. It was as if Hemingway were whispering in my ear:Greg Smith won a bronze medal in ping-pong at the Maccabiah Games. Do not think that I am very much impressed by that as a ping-pong title, but it meant a lot to Smith.Oh, did it ever. I’ve never met Greg Smith-but you’ll forgive me if I have the sense that he’s perhaps a bit too impressed with his own accomplishments and sense of moral superiority (typical Goldman!), and that his capacity for loyalty could use some work. And gratitude, for that matter. Say what you will about how Goldman Sachs conducts its business, Smith worked there for a dozen years and was very well paid to do so. He (presumably) leaves behind many friends. And yet he walks out the door and then ostentatiously dumps all over each one of them. That is a scummy thing to do-even for someone as accomplished as a bronze medalist at the Maccabiahs.But while Smith might be a sanctimonious putz, he actually does have a point about how Goldman Sachs has changed over the past 12 years-only it’s not nearly as profound as he thinks it is and doesn’t have much to do with any purported collective moral collapse underway there. It’s a lot simpler than that. The Goldman that Greg Smith went to work for back then was a much different firm than the Goldman of today. It had just transformed itself from a private partnership into a public company, for one thing, and was on the verge of enormous growth. In 1998, the year before Goldman came public, the firm ended the year with $217 billion in assets. By 2007, that number had quintupled, to $1.1 trillion. And as that growth happened, Goldman changed its basic business in an important way. The firm went from being primarily an investment bank to a trading shop. Trading profit accounted for just 23% of net revenues in 1998; by 2007, they were 64%.None of this is a secret. For years now, the throwaway line has been that Goldman Sachs has become a huge hedge fund. Goldman’s last three CEOs have come from the trading side of the business. Greg Smith knows this. Everyone knows this.I have a message for Smith-and anyone else who’d like a basic understanding of how Wall Street works: trading isn’t the same as investment banking. More to the point, traders don’t operate under the same set of obligations and constraints that investmentbankers do. They can’t. The successful investment banker’s stock in trade is prudent, disinterested advice. Sometimes the advice will result in a deal, other times it won’t. In theory, at least, the banker doesn’t care. He knows he’ll get paid eventually. Regardless, credibility and a commitment to the client’s interests are paramount. Without them, he’s out of business. That’s why Goldman has traditionally emphasized teamwork, integrity, and putting clients first. It used to be a pure investment bank. It goes without saying that trading isn’t like that. At all. If investment banking involves (in theory, anyway) a certain indifference to transactions, trading by definition is all about transactions. Greg Smith ran the U.S. derivatives desk in Goldman’s London office. Did he feel like he was “ripping his clients’ eyeballs out” when he traded with them? I doubt it. Did his desk earn an adequate return as a result of that trading? I suspect it did. So was he putting his clients interest first, or not? And if he was, where were all those profits coming from?You’ll get no argument from me that Goldman Sachs occasionally finds itself in an interesting set of circumstances on certain deals it’s involved in. That NYSE-Archipelago three-way was one for the books, that’s for sure. And no one’s going to forget the Kinder-Morgan/El Paso deal anytime soon. But if Goldman Sachs really has become the corrupt enterprise Greg Smith seems to believe, its clients (who aren’t exactly babes in the woods, remember) would have long ago stopped doing business with it. But they have not. Goldman Sachs may not measure up to Greg Smith’s standards anymore, but that’s because his standards are beside the point. What do you think? Let me know!

29 Responses to “Goldman Sachs and the Lofty Standards of Greg Smith”

  1. Robert Ward

    The trillions of dollars invested by state and teachers’ retirement are run by completely unsophisticated political appointees. Wall Street is ripping these people off and everyone who depends on these plans. They are the muppets referred to by Smith.

  2. phil

    Hey – Ole Holsti – why do you even read this – evrytime i see a cooment its about First Marblehead – GET OVER IT – everybody is wrong sometimes, do your own frickin work and stop complaining

  3. koch

    Mr.Brown, you also are a product of the mess we are in……..or at least the little people know they are in a mess financially. Greed has no boundry or conscience as you would have us believe and in fact the wealthy embrace the concept of greed by any means available…how they reach their goal of obtaining more wealth is not defined by their moral structure. My point is that clients would not leave if the assertions are correct…they would flock to the most corrupt and therefore the most profitable.

  4. koch

    Mr.Brown, you also are a product of the mess we are in……..or at least the little people know they are in a mess financially. Greed has no boundry or conscience as you would have us believe and in fact the wealthy embrace the concept of greed by any means available…how they reach their goal of obtaining more wealth is not defined by their moral structure. My point is that clients would not leave if the assertions are correct…they would flock to the most corrupt and therefore the most profitable.

  5. sevencar

    Well Tom, I don’t know what planet your living on but in my experience of 43 years on Wall St., I have found that it is a mentality of make as much as you can anyway you can without regard to the consequences or to the interest of the customer or client. I saw it first hand many times through my dealings with numerous financial firms. I personally admire Greg Smith for his conviction and his willingness to voice them. Maybe we need a few more like him in addtion to more stringent government regulation over the “hotshots” who think they are above it all.

  6. Former GS Guy

    Goldman’s last three CEOs have come from the trading side of the business. Don’t think this is true. Hank Paulson was an investment banker.

  7. Capt. Boyd (40 Second Boyd)

    I have much respect for Mr. Smith. It takes courage and maturity to check your ego at the door and admit when you’re wrong. So he may have “ripped his clients’ eyeballs out,”, but at least he has the moral fiber to man up. Regarding client retention: as your rightly stated, if they knew what was going on, they would have stopped doing business with Goldman. Sun Tzu said that most deception goes unnoticed and the greatest deception leaves no trace. Goldman managed to get inside their clients’ OODA loop – military planners would be proud.

  8. Mitch Rapp

    and then we have AIG, or was it 2008′s financing of the Obama Regime to get favors. And, then Goldman graduated John Corzine into the world of BIG TIME Ponzi Guys while also buying favors out of Washington.

    Goldman bought themselves a seat on the “To Big To FAIL” chair with donations to Obama and a favored few in the Banking Committees,

    Look what unfettered corruption has brought us – We will soon be envied by Greece!

  9. Former B of A Employee

    Having worked as an investment manager at B of A for many years I saw many things that rivaled what Greg Smith witnessed. I will never forget when the head of the asset management division said ‘F*** any client that has less than $1 million dollars with us.”

    Publicly traded companies have an obvious conflict of interest with its clients. The goal of a publicly traded company is to maximize profit for shareholders. How do they do this? By maximizing revenue from their clients. When anyone does business with a publicly traded company, it should be ‘Buyer Beware’. The clients always have the option of going somewhere else.

  10. Antipodean

    Tom is absolutely right about traders versus advisers. To hammer the point further home, traders don’t have clients (other than their own capital). Indeed, in electronic markets they won’t even know who the counterparties are. So, with culture so important to the approach to business, if you are anything more than simply a trading counterparty, the message is “service buyer beware”.

  11. alorchip

    This was the best commentary I have read so far. Of course dealing with the other side of a securities trade is like buying a new car. No fraud allowed, but don’t expect the dealer in either transaction intentionally to leave money on the table.

  12. Bill Dunnell

    Well said! Your thoughts are spot on because they come from a guy who lived in this arena and who counted his reputation and integrity more valuable than hush money.

  13. Ole Holsti

    Boy am I glad that you are not on my Christmas card list, and that you are not one of my running partners. As a Stanford grad, I am very proud of Smith.
    Before you get off your high horse, how about telling us your history on pumping First Marblehead?

  14. cobrapilot6869

    Ah….the sanctimonious. Not you, Tom,,,,Greg Smith. Your writing hit the nail on the head. As a 31 year veteran as a Financial Advisor, I have witnessed a degrading of our blessed structure of wealth accumulation. Firms with no loyalty to clients or FAs. A government that has no loyalty to wealth generators. One that only looks at how much revenue we can produce for profligate expenditure. And some clients with absolutely no loyalty to anyone but themselves. But, we soldier on anyway. Because we care. Somewhere along the line, Mr. Smith lost his “caring gene.” To Mr. Smith……Good Riddance. You will do well as a political tool in testimony before Congress. Your 15 minutes of fame is over.

  15. Income & Yield

    The primary allegation remains: The firm in question knowlingly rep’ed housing related bonds as AAA, when they knew they were not even close to investment grade, and they sold them to clients (some relatively unsophisticated) based on that representation.

    In addition, the firm in question “took the other side” by actually shorting the instruments, on the one hand, that the other hand was selling to long only customers.

  16. Slackdaddy

    It is interesting that you attack Greg and not the ideas he talks about as much. His ideas are beside the point? Our society needs more public discourse on ideas. State the facts and let them speak for themselves Tommy.

  17. Income & Yield

    How and why the rating agencies assigned AAA to the junk, when they also knew better and apparently some have admitted so, is another issue yet to be fully investigated and resolved. Madoff-like claw backs should be vigorously pursued wherever and whenever possible. Many innocent bystanders were hurt.

  18. Income & Yield

    How and why the rating agencies assigned AAA to the junk, when they also knew better and apparently some have admitted so, is another issue yet to be fully investigated and resolved. Madoff-like claw backs should be vigorously pursued wherever and whenever possible. Many innocent bystanders were hurt.

  19. Income & Yield

    How and why the rating agencies assigned AAA to the junk, when they also knew better and apparently some have admitted so, is another issue yet to be fully investigated and resolved. Madoff-like claw backs should be vigorously pursued wherever and whenever possible. Many innocent bystanders were hurt.

  20. Robert Ward

    The trillions of dollars invested by state and teachers’ retirement are run by completely unsophisticated political appointees. Wall Street is ripping these people off and everyone who depends on these plans. They are the muppets referred to by Smith.

  21. Income & Yield

    not sure what’s going on — only posted once

  22. Read This Instead

    An alternative read on the subject can be found at Epicurean Dealmaker.

  23. etoleary

    Smith’s very public departure speaks volumes about his own judgment. First, who would want to hire him if this is the way he expresses “loyalty” to his firm and his colleagues? Second, who really cares? This to me is another case of the pot calling the kettle black.

  24. Are U. Kiddingme

    You don’t get it, doubtful you ever will. It’s about abusing it’s customers for personal gain….. Yes personal gain as it flows so easily to the the top tier…. Top tier not to be confused with best. GS should earn its income as a result of providing a beneficial service to its clients. Now they earn income contrary to the benefit of their clients. Not impressive really.

  25. jj

    The commies on this board are a joke

    They understand nothing about this business and use Bill Maher , Michael Moore and Susan Sarandon as their sources of knowledge , then tell everyone that they know what’s wrong and how to deal with it.

    Obama’s minions are not that smart , they prove it every day —- following an affirmative action fraud to the White House is what’s wrong with this country

  26. Frank Quattrone

    “…The successful investment banker’s stock in trade is prudent, disinterested advice…”
    +++++++++++++++++++++++++++++++++++++++++++++++++++++++

    I haven’t laughed so hard since Bruce Wasserstein croaked.

  27. JRG

    Do any of the bankers on this board remember the Morgan Guaranty culture? . This was the gold standard of relationship banking – a complete focus on the needs of the customer based on the belief that developing strong long term customer relationships was the best way to create long term sustainable earnings and value for the bank. Morgan’s reputation and its customer ‘s trust were sacred. With GS the focus apears to be on maximizing short term profitability even at the expense of its customers. I don’t think anyone would argue that Goldman’s reputation and it’s customer’s trust has taken a major hit even before the article. Who really benefits when the focus is on the short term? As a shareholder or a customer which strategy would you want Goldman to follow?.

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