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Greg Smith Leaves Goldman Sachs, But It's Not Just A Goldman Problem

Posted: 03/14/2012 11:40 am

There is really nothing else you should be reading right now, if you haven't read it already, than the laugh-out-loud hilarious New York Times op-ed by a Goldman Sachs executive director who is leaving the firm in a huff, final bonus check presumably cleared, because the culture at the firm has become too "toxic and destructive."

The second thing you should then read is the Daily Mash's brilliant parody of this op-ed, entitled "Why I Am Leaving The Empire, By Darth Vader."

Thoughtful readers will note, hopefully, one very large similarity between the two pieces. Both Darth Vader and our ex-Goldman hero, the Jewish Olympics ping-pong champion Greg Smith, went to work at organizations that did not have, shall we say, spotless records of humanitarianism.

This would seem like a massive public-relations problem for Goldman Sachs, a heck of a welcome-aboard gift for Goldman's new PR rep Jake Siewert, just in through the revolving door from the Treasury Department.

But this is more than a PR problem. And it's more than a Goldman problem.

Smith joined Goldman in 2000, which according to his memory was a time when noble directors gently guided clients like bleating lambs to untold riches, all the while resisting their more primal urge to throw those clients to the ground and feast on their tender flesh.

That has changed over the years, he writes:

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.

...

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs's success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients' trust for 143 years. It wasn't just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

...

It makes me ill how callously people talk about ripping clients off.

Goldman, denies Smith's charges and say they do nothing but think about their clients, day and night.

"We disagree with the views expressed, which we don't think reflect the way we run our business," a spokesman told The New York Times. "In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves."

The actual record raises questions about both Smith's and Goldman's accounts of Goldman's record of client care. Tim O'Brien, now executive editor of this here Huffington Post, immediately recalled a story he co-wrote for the New York Times about how Goldman Sachs had made millions in fees by helping the Russian government -- not exactly composed of babes in the woods -- borrow to the hilt just ahead of its debt crisis in 1998.

This story, which also involves a complex debt-swap deal, will sound awfully familiar to Greece, which was more recently also paid Goldman millions in fees for a debt-swap deal just ahead of its own debt crisis.

And Josh Brown at the Reformed Broker points out that Goldman and other brokerage firms managed to avoid total destruction during the Crash of 1929 because they dumped all their holdings before informing their clients that the market was melting down:

"The 'culture' of Goldman Sachs was, is and always will be about making money, often at the expense of a client," Brown writes.

So will Smith's op-ed, coming on the heels of the Greek debt deal, Abacus, the El Paso-Kinder Morgan deal, and more, chase clients away from Goldman Sachs? Will it lead to the departure of Lloyd Blankfein, which Forbes called for this morning? Maybe so. But where else are these clients going to go? Will they dump the Vampire Squid in favor of a small brokerage firm? That doesn't always work out so well, as MF Global customers can tell you.

See, this is not just a Goldman Sachs problem, but a Wall Street problem. Goldman was not alone in selling clients CDOs stuffed with shaky subprime mortgages, for which it paid the SEC $550 million a couple of years (and two Greg Smith bonuses) ago. Nor was it alone in pumping Russia full of debt in the late 1990s, nor was it alone in parachuting out of the market ahead of its clients in 1929.

The problem is the conflict of interest built into the relationship between Wall Street firms and their clients. Both are trying to make as much money as humanly possible, but the Wall Street firms will always have an advantage in expertise and information, and it is almost impossible to avoid benefiting from that advantage. Goldman has long been better at this business than most, but it doesn't mean that others aren't trying to emulate its success.

As Paul Volcker put it in that 1998 story about Goldman and Russia:

''What the Russian problem reflects is that today's bankers often don't have long-lasting concerns about customer-client relations,'' said Paul A. Volcker, the former chairman of the Federal Reserve and an occasional adviser to Russian government officials. ''You just do the deal and get out.''

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One last check of Goldman's stock price just after the closing bell, and then we'll shut this thing down.

Goldman shares ended the day down 3.35 percent, in contrast to the rest of the market, which was flat. The Dow industrials rose about 15 points to 13194.10.

Sadly, they just missed closing down 3.14 percent, in honor of Pi Day.

Thanks very much, everybody, for reading today.

And Greg Smith, if you're out there, come visit us at The Huffington Post. We have table tennis.

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Hmmm, they may not be marching out of the door en masse behind their "piss ant of sorts" leader, Greg Smith, but Goldman Sachs employees are starting to get a little chatty with the media.

One of them emailed John Carney at CNBC to tell him that people at Goldman are forwarding the text of the fictional Jerry Maguire memo, "Things We Think And Do Not Say," which is sort of like the Greg Smith op-ed, only involving fictional sports agents instead of vampire squids.

And then others are complaining anonymously to the Financial Times about Lloyd Blankfein, with one managing director -- a rank higher than piss ant -- calling the CEO "a big millstone around our neck."

It's enough to get some folks to talking that maybe there's something brewing here, that maybe the Smith op-ed and all this chatter is evidence of a war inside Goldman Sachs. One of those folks is Robert Teitelman, editor in chief of The Deal. This is just a theory, Carney writes, but worth watching. Smoke, fire, etc.

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There is at least one Goldman Sachs client who has not been scared off by Greg Smith's noisy kiss-off, and that brave soul is Whitney Tilson of the hedge fund T2 Partners (not pictured -- that is Lloyd Blankfein looking scary in the picture above).

In a letter to his own clients, obtained by DealBreaker, Tilson writes that he has never had a bad experience with Goldman -- but he also knows Goldman would very possibly steal his wallet if it could:

Our direct experience as a client of Goldman has been universally positive. The many people we have dealt with there have all been exceptionally talented and high-grade, and never once have we had a negative experience in which we felt that they took advantage of us or didn’t do what they said they would do.

That said, we are not naïve. In all of our dealings with Wall Street firms, we assume that they are looking out for their own bottom lines, not ours.

...

In fact, we believe that Goldman still has a better culture and is more ethical than most of its competitors – though this is a very low bar to be sure.

Um, thanks? I guess?

Read the whole thing here.

Of course, circles inside of circles, Tilson's T2 Partners is also a ginormous owner of Goldman Sachs stock.

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So it would seem, Kyle. So it would seem. But the only wall post is a link to his op-ed piece, so hard to tell.

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Over at DealBook, Kevin Roose has rounded up a bunch of reactions from some other ex-Goldmanites. Their general consensus? This Greg Smith fellow, poor and useless though he may be, is on to something.

This one stood out as particularly tangy:

Goldman in 1982 under John Weinberg and John Whitehead was also very focused on profits, and most traders back then wouldn’t hesitate to take advantage of an unprepared PCS salesperson or a less-knowledgeable client.

That said, it will be close to impossible for Goldman Sachs to respond to this op-ed in any way. The firm has changed over the years. The investment banking side and the Goldman Sachs Asset Management side are pretty clear with respect to firm mission and aligned compensation. Those people who both trade for the firm and trade for clients have conflicts that are virtually impossible to successfully manage.

I guess what I’m saying is that if Greg Smith had his eyes truly open, he would have had the same issues six years ago as he had last week. He just didn’t want to leave yet.

Read the whole thing here.

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The anonymous quote gnomes at Goldman Sachs are working overtime today. Fresh off the phone with Charlie Gasparino, they have told The Wall Street Journal that Greg Smith was, contra Ron Burgundy, kind of not a big deal.

Despite Mr. Smith's seemingly lofty title, a person familiar with the matter said, he actually is a vice president, a position held by thousands of Goldman employees around the world. And Mr. Smith is the only employee in the derivatives business that he heads, this person said.

The circumstances of Mr. Smith's departure aren't entirely clear. When Goldman doled out annual bonuses earlier this year, Mr. Smith's small payment became a point of friction, according to people familiar with the matter.

Read the whole WSJ story here.

Sounds like a certain ex-Goldman Sachs vice president needs to write a follow-up op-ed piece. Or give Huffington Post a call, would be better.

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Charlie Gasparino of Fox Business News tweets that Goldmanites are scoffing to him that Greg Smith was basically just a poor, having never made more than $750,000, so he couldn't have known anything about Goldman, really:

people at GS say greg smith doesnt know what he's talking abt 'cause he "never made more than $750,000 a year' nice logic

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Pay attention, MBA candidates: Apparently having an ex-employee writing in The New York Times that you treat clients like the big rubber doormat at the bottom of the stairs going into Penn Station is not so good for your stock price. Goldman shares were down 3.14 percent at last check. Goldman got to enjoy passing the Fed stress tests for less than 24 hours.

Wait, 3.14 percent? Oh, yeah, Happy Pi Day!

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Business Insider has also tracked down somebody who interned for Greg Smith at Goldman Sachs. This individual calls him "one of the more personable, friendly, and genuine guys on the floor."

Read it all here.

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This was an early reaction to the Greg Smith bombshell, from Lisa Pollack at the Financial Times' Alphaville blog: A wonky chart plotting the "Rights to bitch about banking" against the "Years one has received a bonus that is over 50% of base pay."

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Because your cards and letters demanded it, Business Insider has already found the Chinatown club where Greg Smith played ping pong. He was pretty good, apparently.

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Comedian Rob Delaney tweets:

"My new table tennis instructor says he used to work at Goldman Sachs?"

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Andy Borowitz has dug up another Lloyd Blankfein reaction memo, this one sent to Goldman's clients (note to readers/lawyers: it is a joke):

In the letter, in which he excoriates Goldman and his practices, Mr. Smith comes across as a man of conscience, ideals, and high moral standards. And as you read his words, you no doubt asked yourself this troubling question: how could Goldman have hired such a person?

Very funny. Read the whole thing here.

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Julie Hyman of Bloomberg TV tweets a brief explainer about Smith's use of the term "muppet" as a pejorative, which has a lot of us frightened and confused today:

For all you folks scratching your heads over the use of muppet: think it's common Britslang. Friend used to use it all the time for "idiot."

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The Wall Street Journal's Deal Journal blog just posted in its entirety a memo to employees written today by Goldman Sachs CEO Lloyd Blankfein and COO Gary Cohn.

By now, many of you have read the submission in today’s New York Times by a former employee of the firm. Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.

It goes on for a while. Read the whole thing here.

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Herb Greenberg of CNBC tweets:

This [Goldman Sachs] "I Quit" story is just an updated version of that 1920s classic: "Where Are The Customers' Yachts"

He's referring to a 1940 book on Wall Street by Fred Schwed. It features an anecdote about a visitor being shown banker and broker yachts in New York Harbor and naively asking where the customers' yachts are. They don't have any, is the hilarious part!

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The world needed to know immediately what Matt Taibbi, the writer who coined the phrase "Vampire Squid," had to say about the Greg Smith brouhaha, and he did not disappoint.

"Smith’s op-ed is a brave and thoughtful piece of writing," he writes, adding that a piece like Smith's might be enough to help change the culture of Wall Street, by doing damage to Goldman's reputation and maybe encouraging employees and clients to flee.

I'm not so sure about that, but I am also finding myself in the shocking position of being a little more jaded about this than Matt Taibbi. I hope he's right.

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