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. He left quite a parting shot, writing a scathing oped in the NYT which has set the internet on fire.
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.
Smith has worked for Goldman for 12 years and talks about what the firm used to stand for–unparalleled client service, teamwork, humility–and how that has been destroyed during his tenure. ”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.”
This indeed a stark reality many had guessed at–including Michael Moore’s “Capitalism a Love Story“–but rarely have we heard it from the horse’s mouth inside the bowels of power.
Before we get too carried away it might be wise to keep a few things in mind.
Mr. Smith worked for Goldman for 12 years and achieved the title of executive director. That sounds like a big title but it really is not. The most senior members of management are partners. Next are managing directors. Executive director is a distance third. So the truth is Mr. Smith got passed over more than once if he has been working for the firm for over a decade. All investment banks are an up or out mentality and if he was around that long and didn’t make it to the next rung of the ladder. That doesn’t mean that anything he is saying isn’t true–it undoubtedly is. Only that his motivations are not pure. I am not sure he would have done the same thing if he was part of the gravy train.
I know at least something about all this because I too worked for Goldman–albeit briefly–and was also a corporate client of the firm when I was CFO of The Providence Journal Company. I was a Summer Associate at Goldman in 1990 between first and second year of business school. I really can’t say if it was Goldman or the general Wall Street culture but I went into shock. Shock at the way people treated each other. Shock at the opulence. Shock at what went on. My clearest memory was of an intimate lunch with the head Partner Rubin (who would go on to become Treasury Secretary) as he casually munched on celery sticks at the head of the table in the executive dining room while a half dozen Ivy League business school students hung on every nonsensical word.
I remember leaving that lunch just wanting to vomit. “What a complete flaming asshole”, I remember telling the guy at the cubicle next to mine when I got back downstairs. “He said absolutely nothing that wasn’t just about his ego.” For 90 minutes we sat with rapt eyes while perhaps the most powerful man on Wall Street at the time went into kind of a soliloquy of life lessons that were so meaningless, so arrogant, so intended to show that he was king that my whole body physically shut down. Right then and there I realized the emperor has no clothes.
There was no way that aspiring to be Robert Rubin was what I wanted to do with my life. So I set out to find a job in industry where I could actually make something that matter, produce a product and make money the old-fashioned way.
A few years later I had become the Chief Financial Officer at The Providence Journal Company, a sprawling media conglomerate that included a big cable business, 12 network television stations, start-ups like the Food Network, and the historic newspaper. The company had a long-standing relationship with Goldman as it’s investment bank.
The first major deal I worked on at ProJo was the sale of our cable business. Early in the strategic discussions that lead to our deciding to sell that part of our company, our Goldman partner spent a lot of time “advising” us. I put that in quotes because he really didn’t do much of anything but hang around in the back of the room while the most important debates were going on.
I just remember looking at the guy’s shoes. From having been at Goldman I knew for a fact this guy was perhaps one of the richest human beings I was likely to come in contact with. Ever. But he had these cheap rubber soled black shoes. And a very unflashy blue suit.
We became friendly since I think he wanted a spy on the inside, and as a 29 year-old at the table with the big boys he took me as an easy mark, and I had once worked at Goldman. So I asked him about the poor man get-up and his tendency to lead from behind in strategic conversations. ”You always want the client to think it was their idea not yours,” is what he told me.
I thought that was such a cop-out. If you are getting a huge fee to sell an asset or take a company public shouldn’t you actually advise the client?
Eventually we decided to force our do-nothing Goldman banker to compete against other firms for the right to sell our cable business–what they call a “bake-off” in the trade. They declined.
“Goldman doesn’t participate in bake-offs,” he said. “If you need to ask other firms to the table you aren’t someone we want to work with.”
So they didn’t help us sell our cable business for $1.4 billion, nor did they underwrite our IPO a couple years later, nor the sale of the entire company shortly after that.
Perhaps the biggest change in Goldman culture came in 1999 with the IPO which forever broke up the intensely private partnership. It’s interesting to note that Mr. Smith never worked for Goldman during its days as a partnership. But what he describes seems to be a direct result of the move to a public company.
I spoke to a hedge fund manager who knows Goldman intimately this morning after the oped had hit. “It used to be as a partnership they could do whatever they wanted, pay themselves whatever they wanted, and that club was everything. Becoming a partner was a promise of enormous wealth in perpetuity. And it depended on partners being deeply tied to one another economically, socially, and in every way. As a public company, everybody knows that only a certain percentage can get paid out every year and it’s a cut throat competition between you and the guy sitting next to you. No matter what your title and his.”
I certainly do not condone the overt greed described in the “new” Goldman by Mr. Smith. But to my mind it is actually a lot more honest that the old Goldman epitomized by Robert Rubin pontificating while munching a celery stick or our partner showing up to similarly say close to nothing of consequence at The Providence Journal with the full expectation that he would get a huge fee once we decided to do anything strategic just for being in the room and having the name Goldman attached to his being. And while we are at it let’s make sure the client doesn’t know that as a Goldman partner we are a lot richer than he is by dressing down for the part.
I for one would rather know where the wolves are rather than have to pick through the sheep to try to figure out which one is hiding in sheep’s clothes. But maybe that is just me.