Greg Smith’s book on his time at Goldman has generated a hailstorm of criticism, aptly summed up by Jesse (on Naked Capitalism):
But the absolute trashing and personal attacks on Greg Smith in the past week that were orchestrated by Goldman and supported, heavily, by the US financial networks got my attention. Generally ad hominem attacks are used by those who consider the facts of the case to be dangerous ground, and wish to do anything that they can to avoid discussing them. So instead they seek to discuss the person bringing them to light…
The rationales in favor of Goldman quickly take on the character of the schoolyard. Everyone does it on Wall Street, and singling out Goldman isn’t fair. And what was Greg Smith expecting? Everyone knows Wall Street is predatory and will do whatever it takes, even abuse their customers and make millions out of it. And if the customers are dumb enough to fall for it, they deserve it. Don’t be a fool like him, be a sophisticate and move along.
What people do not realize is that the fraud cuts so deep and wide that it hard to escape it, even if one has no dealings personally with any of these firms. These Wall Street financiers have their hands in everyone’s pocket through the manipulation of the financial system, the price discovery mechanisms, and the money supply. And if you do not understand this by now, you understand nothing.
Smith’s sin seems to be that he’s an insider from an uber prestigious, connected firm who dared say something bad about his former employer. The “don’t rock the boat” attitude is so deeply ingrained in America that it’s considered reckless to be candid about why you are quitting a job in an exit interview. And it’s not a stretch to call the reaction totalitarian when it’s Wall Street that is on the receiving end of criticism. Look how, despite running again and again to Wall Street’s aid, Obama is an official enemy for a mere “fat cats” remark. Similarly, the industry depicts Elizabeth Warren as a power-mad Commie bank serial killer, when her fault-finding is based on clear eyed analysis of how deceptive and predatory practices hurt consumers.
I’ve not read Smith’s book, but based on the extensive commentary on it, it appears that Smith intended it to serve as an insider caveat emptor for people who need financial product warnings. From Clusterstock:
‘Why I Left Goldmanc Sachs’ isn’t for people who know the Street. It’s not even for anyone who’s read Liar’s Poker (that’s way more advanced). It’s for the millions of people who have no idea what Wall Street is. It’s for the people who only heard about Goldman Sachs or Lehman Brothers in 2008, when it seemed like the world was collapsing under the weight of Wall Street’s complex business.
This isn’t hard to pick up. Smith talks about complicated things like markets and hedge funds in simple terms meant to be understood by someone who’s never heard of a derivative.
And while the negative commentary will likely succeed in killing book sales, that may not matter much, since Smith reached more people than were ever likely to read his work via his 60 Minutes appearance, in which he comes off well.
By contrast, as Pam Martens describes Goldman’s brass knuckles reaction in making extensive disclosures from Smith’s personnel files is unheard of outside litigation. Moreover, she highlights a stunning comment by Edith Cooper, the head of pretentiously-named Human Capital Management in a Bloomberg interview, that “Our interests are 100 percent aligned with our clients.” Bloomberg has since edited that world class whopper out; you can go see that it’s missing from the segment, but Bloomberg failed to scrub the lone comment on the video from four days ago calling out the remark (I’ve taken screenshots for posterity since I assume Bloomberg will complete its Goldman-flattering airbrushing now that I’ve pointed out their lapse).
And some of Goldman’s reactions were telling. Smith charged that the firm changed its recommendations on specific European bank stocks frequently, based on the firm’s position. Goldman’s defense was legalistic: that wasn’t Smith’s area (so gossip doesn’t travel? Please), and the firm didn’t have prop trades on (hello, the customer desks have positions as well).
But let’s get to the more interesting question: why is Smith’s book thin on the sort of salacious detail that the many of his critics clearly wanted him to serve up? There may have been legal concerns. Note that fellow Goldman alum Tetsuya Ishikawa wrote a thinly disguised autobiography in the form of a novel; it’s not hard to tell which of the several firms his main character worked for is meant to be Goldman, and his book is full of the liberal use of drugs, hookers, and very expensive wine as inducements in the sale of drecky CDOs, combined with pretty good primers on the products themselves). But we’ll put that aside and offer some possibilities.
Smith was simply too junior. Ironically, Goldman had this as a defense in its “toolkit” circulated before the Smith book hit the newsstands.
By e-mail, excerpted from a book in progress, by Michael Thomas, second generation Lehman partner, back in the days when, pound for pound, Lehman had the best investment bankers on the Street:
In no form of human endeavor does history count for as little as in finance. The more I read, however, the more I’m struck by how little top-level insider material there is. Maybe I should make that “how little honest top-level insider material.” There’s a reason for this: Wall Streeters may be exorbitantly well paid for what they do, but ex-Wall Streeters, especially those with first-hand knowledge of the location of the bodies, and super-especially the big hitters who called the shots, who made things happen and denominated their triumphs in nine digits or more, seldom speak for the record – which is how and why they get to keep the money.
If you ask me, what we really need are accounts dictated by the devils in the details, tell-alls that offer Satan’s first-person account of his evil angels’ handiwork. An insider account, for example, of Michael Milken’s Drexel Burnham junk bond daisy chain, preferably by the man himself. Forget it: ain’t going to happen. When Long Term Capital Management (LTCM) went down the tubes (despite its pretentious name, what killed it were short-term problems), John Meriweather didn’t waste time writing the whys and wherefores and certainly not the mea culpas; he didn’t hire a ghostwriter; he went out and raised a new fund, and if this one taps out – one hears not-so-good things about its performance – he’ll doubtless return for a third at-bat. If he had set down a written record of how he pissed away billions, he wouldn’t have a chance in hell of a do-over. But Wall Street is the mother of career reinvention, the working motto of the place is “This time is different” (which old-timers say it never is), so why screw up the possibility of a second or third go-round with a mea culpa or a mea whatever?
The problem is, most Wall Street books written by so-called “insiders” turn out to be by low-level functionaries. The definitive book in this genre, Michael Lewis’ Liar’s Poker, is an account written by a guy who I’m told was perhaps a couple of rungs up from clerk at Salomon Brothers. What we never got was Salomon CEO John Gutfreund’s side of the story. When he got the boot, he kept his mouth shut, took his money and left the firm.
Smith was in an area where the opportunity for ripping off clients was circumscribed, so he wasn’t likely to have real dirt. If you listened to the 60 Minutes video, what Smith says, in essence, is that the best profit opportunity lies in selling a really complex product to a naive client. After seeing Jefferson County, German Landesbanken, and Australian town councils as world famous stuffees, this should comes no surprise. Smith does provide further confirmation in hinting hard that client who are so trusting that they “don’t know how to ask questions” are well represented in Goldman’s top 25 clients (by profits) list.
Ishikawa who was in the middle of precisely that type of
rape and pillage activity (for instance, he was on the team that marketed the Abacus CDO that was subject to a $550 million SEC settlement). By contrast, Smith was selling fairly simple derivatives to pretty savvy clients. From Craig Heimark, who has been in the OTC derivatives business from its early days:
The profile and expertise of buyers of equity derivatives (and equity products generally) are quite different from the profile of fixed income. Obviously, the fixed income buyers are more conservative and looking for a safer, more guaranteed investment product. Because of this, their independent skills to evaluate the investment product sold to them are far lower than buyers of equity. In more formal terms, not only is their utility curve different than equity buyers, their expertise to understand complex products is much lower. Recognizing the skill set differential is important – because one of the standard mantras – to which I subscribe, namely transparency – addresses information asymmetry, but not expertise asymmetry.
The fundamental assumption that institutions are sophisticated enough to fend for themselves simply does not work in this age of infinite complexity. So your guess that Greg Smith might have a restricted view of abuses is consistent with my observations, and originates with three factors. One – the equity side has fewer abuses because of the nature of the buying segment. Two – Greg may be using a wholesale definition of what is the responsibility of the seller – i.e does it comply with all rules to be a proper product, versus a consumer view ie is is safe for this customer to consume. Three – many of the customers don’t know they are getting fleeced because of the opaque market structure of OTC derivatives and complex structure products (this is more an excess margin to the financial supplier than and product design issue, but it is a market failure nonetheless, because perfect competition assumes perfect information – and we are VERY far from this in OTC and Structured products)
Wholesale market regulation needs to be completely overhauled as a result of several factors, but the most important is technology. Complex product design is fundamentally related to IT systems capacity. Far too much of the blogosphere focuses on greed. People are just a greedy now as ever, but financial products have gone from something that a person of reasonable intelligence and a college education could understand to something that requires at least a specialist degree in financial design from Wharton or perhaps an advanced physics degree. So financial products have become very sophisticated embodiments of Intellectual Property. In the pharmaceutical industry we have elaborate FDA safeguards to ensure the products produced are fit for consumption. The financial market has yet to adjust is regulatory principles to the current set of technologically sophisticated products.
Smith doesn’t get, and therefore couldn’t articulate, the implications of Goldman’s cultishness. Just the way fish don’t recognize that they are swimming in water, Smith likely does not appreciate how insular and inward looking Goldman is. The aggressiveness of Goldman’s response isn’t just to protect its external reputation; it’s also because, on some level, people at Goldman really believe their PR. Look at how remarkably thin-skinned Wall Street employees have been in the wake of the crisis, how utterly unwilling the overwhelming majority are to take any responsibility for blowing up the global economy. Goldman, with its exaggerated sense of righteousness, is even less willing to hear even a very watered down version of reality.
It’s been nearly 30 years since I worked at Goldman, but even back then, Goldman was quite explicit about the lengths it went to to build and reinforce its “culture,” and from everything I can tell, it has if anything gotten more extreme since then. For instance, it still puts recruits through far more interviews than other firms do, which helps screen not just for “fit” but also for how badly they want the job (most sane people would lose patience with the process). Goldman then, and I believe still, prefers younger MBAs (as in those with less rather than more work experience) because it likes to “shape” people.
Even though the investment banking industry is famous for requiring that staffers be willing to put in punishing hours, in my era, Goldman was unique on the Street in thinking it was perfectly normal to ask people to reschedule their wedding if it conflicted with a deal timetable. I did a summer at Salomon, and Salomon people didn’t socialize much outside of work, while at Goldman, there was quiet pressure to; junior Goldmanites were encouraged to get their summer “shares” in the same area frequented by other Goldman employees. To give an idea of how insular Goldman was then: of all the married non-secretarial women, the only women who were not married to Goldman men had come to the firm married.
The firm enforced behavior on far more levels than other firms: dress code, communication (both frequency, which was one of the firm’s strengths, but also mode: a sort of PC-ness about giving credit, not being openly political or self-promoting, not denegrating competitors or clients). The firm was dead serious about preferring people who hewed tightly to the Goldman cultural ideal. Guys who drove fast cars, got divorced and were a bit too flashy would not be promoted as quickly as guys who were somewhat less big producers but were complaint Goldman soldiers (yes, I can name exceptions to that pattern, but they were far fewer than you’d see anywhere else on the Street).
The firm was Machiavellian in its organizational design. In investment banking, it had product specialists (corporate finance, meaning stock and bond underwriting, M&A, real estate) and salesmen who covered clients and sold all products to them (Hank Paulson came out of that corporate calling group, called Investment Banking Services). The party line was that this promoted expertise and made sure there was consistent attention to corporate clients and prospects. That no doubt was true, but I doubt this was the operative truth. This structure also circumvented the way big producers normally had leverage over a firm, that if push came to shove, they could leave and take clients with them. If you have one person who has the relationship dependent on other people executing the business, neither group can readily leave with clients. Similarly, in my day (and it has changed since then) people were hired into a department and people very very rarely switched departments; the internal PR was that (again) it was to promote expertise. Again, the operative truth was that Goldman went to great lengths to keep politics to a bare minimum, recognizing how it diverted energy from making money for the firm. Having partners poach on other departments for talent would be enormously divisive, so best to make that an exceptional event.
Goldman people then genuinely believe Goldman was the best place to work; leaving was seen as a fall from grace. I knew very successful individuals who departed after I did, and were 6-10 years into their careers, and each said virtually the same thing, verbatim: that it took them two years to get over the idea that leaving Goldman meant they had taken a big career step down (and objectively, none of them had).
This is a long winded intro, but the critics of Smith’s naivete about Goldman’s conduct don’t get that the failings he saw were a big deal if you’ve identified strongly with the Goldman culture, and the firm works extremely hard to recruit and inculcate people with that end in mind. It appears from Smith’s age and his tenure at the firm that this was his first real job, so he was the perfect sort to be imprinted by Goldman. It’s like having been a loyal Catholic, say 40 years ago, and realizing not only that the church had pedophile priests, but the top leadership was aware of it and refused to do anything about it. Now with hedge and PE funds having knocked Goldman off the apex of financial glamor jobs, and the firm now a sprawling global enterprise, it’s actually remarkable that it has managed to maintain as much of its cultishness, um, cohesiveness as it has.
Goldman’s dedication to clients has fallen in the Blankfein era. Even though Smith doesn’t deliver the goods in his book, his bottom line is correct: Goldman’s internal ethics have declined, and the fall over Smith’s tenure likely is on a steeper trajectory than in its peers.
I’d have dinner a few times a year with a senior Goldman officer in a staff function that put him in front of the of the Executive Committee and department heads on a regular basis. He was extremely circumspect about his day-to-day activities. However, he found it pretty much impossible not to convey to me how the firm was changing, and how disturbing he found it to be. While he did not think much of Hank Paulson, he did regard the co-presidents under him, John Thain and John Thornton as both concerned with preserving Goldman’s culture and franchise (Thornton had been particularly opposed to going public for that reason) and were long-term oriented. By contrast, he was distressed by and contemptuous of Blankfein and the new leadership, who largely came out of the commodities/trading side of the firm (the view from the old Goldman that commodities was lower class and less ethical than the more highly regulated securities markets was strong in my day and was confirmed by the negative reactions internally by non-partners to Goldman’s acquisition of J. Aron. I was the most junior staffer on that deal). My dinner buddy made it clear he thought the new management team was less able, less thoughtful, concerned only about as much money as possible now, and didn’t care much about what impact that might have long term.
Confirmation of the change in the firm under Blankfein comes from former Goldman co-chairman John Whitehead’s unusually direct criticism of Goldman’s bonus policies in 2007. Similarly, I’ve been told that the Weinberg family (Sydney Weinberg played a huge role in Goldman’s rise to pre-eminence; his son John was co-chairman with Whitehead) is distraught over the disclosures made over firm practices in recent years.
Goldman has such a strongly developed internal culture that even a change at the top would take a while to percolate through, and Smith appears to have seen the impact.
Finally, critics don’t recognize a hidden upside to Smith’s dramatic exit. If you leave Goldman, the assumption is you are some sort of loser and perhaps on the verge of being fired. Yet in Goldman’s efforts to trash Smith, the worst they had on his was his bonus ask was way too high given the firm’s overall results; one managing director even told him that he needed to be patient, it had taken him a long time to become managing director and Smith needed to keep the faith. So Goldman officially confirmed that while Smith was not on the fast track, he was still a contender, which is a lot more than most places will say when someone slams the door on their way out.