If Andrew Ross Sorkin is mad at him, then Greg Smith might just be on to something.
Until this morning, it was all too easy to laugh at the goofiness and naivete of Greg Smith's tell-all book about Goldman Sachs, "Why I Left Goldman Sachs." The bank itself is reportedly relieved that the book offers few scandalous revelations. I've read it all, and it's true: There's not much.
But then Sorkin piled on this morning, accusing Smith of having conned the New York Times into getting attention, and a $1.5 million book advance, for himself. And when you wake up in the morning and find that Wall Street's chief water-carrier Sorkin is on your side, it's time to question some stuff.
And what we may be missing amid all the laughter is the public service that Smith is doing.
Admittedly, he's not a perfect messenger. It still stretches the imagination that, in the decade-plus that Smith was with the firm, it changed from a place where clients were treated like gentle lambs into a vicious muppet slaughterhouse. It has been a vicious muppet slaughterhouse all along. Smith is either naive or being disingenuous.
Throughout the book Smith keeps trumpeting his personal value to the firm, talking about what a rock star he was, and he talks a lot about his compensation -- all evidence that maybe he really is just bitter about not getting paid a million dollars, as Goldman claims.
And much of the color in the book, which is scheduled for release on Monday, is unfortunately giggle-inducing at best: The time a managing director threw out a cheese salad to teach an intern a lesson. The time Smith saw Lloyd Blankfein naked. His going-away party at New York's SPiN ping-pong club, where "a lot of alcohol was consumed, and a lot of table tennis was played." My former colleague Liz Rappaport lists many of these details at the Wall Street Journal's Deal Journal blog.
But with this book Smith is also giving us a portrait, in Proustian detail, of a world and a mentality that is utterly alien, and should be infuriating, to most of us on Main Street.
Toward the end of the book he rattles off one muppet-fleecing scheme after another, from letting clients place mistaken orders that netted Goldman millions, to constantly switching up the firm's recommendations to clients about whether to buy or sell options on European banks in the middle of the European debt crisis, taking the opposite side of the trade each time. He says these shenanigans were jerking around European banking stocks, contributing to the panic in the market, all while Goldman was also helping hedge funds profit from the chaos and trying to win contracts to help governments sort out the mess.
He accuses the firm of making recommendations to clients in a way purely designed to help its own trading positions, which he calls "axes" and, um, Krispy Kreme doughnuts:
An axe is a position the firm wants to get rid of or a risky position it wants to shore up. The firm believes, deep down, that one outcome is going to transpire, yet it advises the client to do the opposite, so the firm can then take the other side of the trade and implement its own proprietary bet.
One way to understand this is to think of selling doughnuts. Say you own a Krispy Kreme doughnut store, and you have too many doughnuts in stock and need to sell them before they go bad. In order to drive up sales, you could say, "Our doughnuts are now fat-free!" That would technically be a lie, but it wouldn't get you sent do jail. ... Axes are something like surplus Krispy Kreme doughnuts that Goldman wants to clear from its inventory, making a compelling, but not always competely accurate, case for clients to buy them.
Of course, this should hardly be shocking. If you make a trade with Goldman and don't expect it to be screwing you somehow, then you shouldn't be making trades.
But, as Smith says he told NYT reporter Landon Thomas, "let's say this is the way things have always been done on Wall Street. Why does that make it okay?"
And maybe laughing off Smith's naivete makes it a little easier to give a pass to this sort of behavior. As Smith notes in his Afterword, these shenanigans ultimately affect many people -- from residents of Jefferson County, Alabama, to Greek citizens, to Mom-and-Pop investors -- that never asked to be involved in a trade with Goldman Sachs.
His book is yet another reminder that our capital markets are a casino where the game is rigged in favor of the house. Banks like Goldman have all of the information, and they take advantage of it. That doesn't always lead to financial blowups, but when it does, it affects all of us, and our faith in capital markets erodes a little more.
And his book also reminds us that these banks are fighting tooth and nail to make sure the game stays as rigged as possible, fighting regulation of opaque derivatives and prohibitions on proprietary trading.
Again, none of this is shocking. But it's sure worth keeping in mind.
Update: James B. Stewart of the NYT has a great review of the book, and he has done some reporting legwork, tracking down some of the interns in Smith's class, who suggest Smith may not have written accurately about the already gentle-seeming hazing his intern class got. Smith does change names in his book, which makes it harder to verify some stories. This is another potential dent in the side of the messenger, but it still does not change the message.
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