15 March 2012

Wall Street Divided Over Ethics

Three New York Times articles about Greg Smith's resignation from, and experience at, Goldman Sachs:

Op-Ed Contributor
Why I Am Leaving Goldman Sachs
Published: March 14, 2012

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — 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.

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. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

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.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. 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.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

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.
A version of this op-ed appeared in print on March 14, 2012, on page A27 of the New York edition with the headline: Why I Am Leaving Goldman Sachs.

Public Exit From Goldman Raises Doubt Over a New Ethic
Published: March 14, 2012

Behind closed doors, it is a conversation that has been taking place with increasing urgency on Wall Street in recent years: making money is good, but is making more money always better, even if it comes at the expense of clients?

That question is now out in the open, exposed anew by an Op-Ed article in The New York Times on Wednesday by Greg Smith of Goldman Sachs. It could reignite public suspicion that the culture of Wall Street has swung so sharply to the short-term side of the ledger that clients have not been coming in first, or even second, but dead last.

Even bankers who disagreed with Mr. Smith’s conclusions said the piece had struck a chord because it stirred up their own doubts, especially in the wake of the financial crisis. It is a sign of this anxiety that since then, one giant firm after another has publicly proclaimed it is putting clients first.

That much-advertised claim stands in sharp contrast to the world Mr. Smith depicted.

At meetings at Goldman, he wrote, “not one single minute is spent asking questions about how we can help clients,” Mr. Smith wrote. “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.”

He warned, “People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.”

Mr. Smith’s criticism, much more than stories about bonuses or brickbats from the likes of Occupy Wall Street, could be especially painful for Wall Street now. There are still fresh memories of a Securities and Exchange Commission lawsuit filed in April 2010 accusing Goldman of fraud, after it sold clients complicated mortgage backed securities that later soured, and never mentioned that it had bet against them.

The parade of senior Goldman executives who testified before Congress after the case arose seemed to put a public face on what had been a broader sense of distrust of Wall Street in the aftermath of the financial crisis, focusing ever more attention on a firm whose patriarchs have always been adamant about having high standards.

Wall Street, of course, has always sought profits — but if greed were to be countenanced, it should be long-term greed, not short-term greed, in the words of Gus Levy, who led Goldman Sachs in the 1960s and ’70s. With long-term greed, money was made with clients, not from them.

Nostalgic as it might seem, seasoned players at Goldman and other top-tier firms insist that there was a time when long-term greed was the order of the day, at least publicly and often privately, too. But over the last 25 years, as the incentive structure metamorphosed, longtime bankers and scholars say, Wall Street has been remade in ways that Mr. Levy would hardly recognize.

The shift in incentives has come after the evolution of the business itself, industry insiders and other experts said. Partnerships, where the leaders of the firm had their own fortunes on the line, became publicly traded giants. Proprietary trading evolved into a Midas-like source of money, challenging investment banking and client relationships. And with a free hand, thanks to Washington, investment banks could take on ever more risk, amplified by debt.

“When these firms changed from partnerships to public companies, the ethos changed dramatically,” said Charles M. Elson, a professor of corporate governance at the University of Delaware. “The notion of client loyalty went out with the old structure. And as these became public companies, clients looked for the cheapest deal, and the firms looked for as many clients as possible.”

With the rapid growth of proprietary trading beginning the 1980s, as firms used their own capital to make bets, a short-term mentality came to dominate firms, according to Mr. Elson. “You make a much bigger buck on a transaction than on the long-term relationship,” he said. “You have profiteers as opposed to advisers.”

Compensation followed. Before 1990, pay for the chief executives of financial firms were on par with those of chief executives of the largest traded companies, or even slightly lower.

By 2005 the pay was roughly 250 percent bigger on average, said Ariell Reshef, a professor of economics at the University of Virginia. Broadly speaking, between 1980 and 2005, bonuses and salaries in finance increased 70 percent more than average pay elsewhere.

To be sure, longtime bankers say, it is not as if short-term greed was absent in the past. It has been around since traders gathered under a buttonwood tree and founded the New York Stock Exchange in 1792. But the astounding size of Wall Street’s biggest firms — and the fortunes to be made — have altered the calculus.

“When you’ve been around 40 years, you always say things were better back then,” said David Dreman, a longtime money manager who oversees $5 billion in assets. “But it is different now. There have been enormous changes on Wall Street.

“It doesn’t matter which bank — they sell the client what they make the most money on,” said Mr. Dreman. “There’s always been some of it but it’s much more prevalent than it ever was. Unless the client is very sophisticated, the client gets clipped.”

Other Wall Street insiders insisted Mr. Smith had it wrong, arguing that conflicts have always been part of the landscape, and that clients should be sophisticated enough to know that. “These aren’t dumb people,” said one billionaire hedge fund manager who insisted on anonymity because he didn’t want to draw public attention.

The crucial element, he said, is to anticipate the conflicts, and if need be, use them to your advantage. “Find the one that has the biggest conflict and get him on your side,” he said. “You want somebody who understands both sides. “The guy on both sides of the equation will find a deal to get the deal done,” he added. “Is he getting his bread buttered on both sides? Who cares? Just get the deal done.”

Wall Street could now pay a steep price for short-term thinking, experts said, even if salaries and behavior have not caught up with public disillusionment. Hemmed in by new regulations, the big banks are being forced to give up proprietary trading. Fewer graduates of elite Ivy League schools are choosing careers in finance. And the anger is spreading, seen not only in the Occupy Wall Street protests but also in the increasing distrust among the most affluent consumers.

Over all, the percentage of people who have little or no faith in the fairness of investment companies rose to 41 percent in 2011 from 26 percent in 2008, according to Yankelovich Monitor 2011. Only credit card companies, corporate chief executives, the federal government and lawyers fared worse. Even banks and insurance companies did better.

Nor is the outrage a matter of populist revolt. The feelings were identical in households whether they earned $100,000 or $50,000.

While Mr. Smith’s career at Goldman is over, he insisted it was not too late for his former firm and the rest of Wall Street.

“Make the client the focal point of your business again,” he wrote. “Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.”

A version of this article appeared in print on March 15, 2012, on page B1 of the New York edition with the headline: Public Exit From Goldman Raises Doubt Over a New Ethic.

Letters to the Editor support Greg Smith:

The Firestorm Over Goldman Sachs
Published: March 14, 2012

To the Editor:

Re “Why I Am Leaving Goldman Sachs,” by Greg Smith (Op-Ed, March 14):

Bravo to Mr. Smith! While some may chastise him for not leaving Goldman Sachs sooner, I applaud him for having the sense to identify the horrendous changes that have occurred in a company that once stood for greatness in integrity and service to its clients. This must be a huge disappointment for him, and he deserves recognition for taking this drastic step.

Sadly, Goldman Sachs is but one of too many corporations operating today solely for profit with little thought given to consumers other than “how can we get them to buy our products.” If only more bright young people in today’s corporate world could find their way to leaving these corporate monstrosities.

New York, March 14, 2012

To the Editor:

I was depressed by Greg Smith’s article with its lament for the abandonment of the values he felt that Goldman Sachs stood for when he signed on with it: “teamwork, integrity, a spirit of humility, and always doing right by our clients.” What added greatly to my despondency was the important moral value he didn’t mention: doing right by the country and the world.

A conscience ought to be part of a person’s and a firm’s values, and a conscience ought to extend beyond the limited community of one’s firm and clients. The recklessness of Goldman Sachs, after all, harmed millions of people beyond its circle.

Hampden-Sydney, Va., March 14, 2012

To the Editor:

I was very sad to read Greg Smith’s bitter departure letter about the disintegration of the “culture” at Goldman Sachs.

I was fortunate to have worked for the firm for 34 years in two divisions, fixed income and investment management. During my career I had the privilege of working with outstanding people who exhibited the highest business standards and integrity.

The firm’s leadership from the days of Gus Levy, John Whitehead and John Weinberg through present management always stressed the importance of the client’s coming first. All of us in leadership positions were expected to live by a very high standard of excellence and to be role models for our younger colleagues.

Goldman Sachs continues to be a leading market maker in thousands of global securities, and its willingness to risk its own capital on behalf of clients is unparalleled in the industry. Mr. Smith’s comments are inconsistent with the firm I proudly knew.

Hobe Sound, Fla., March 14, 2012

The writer is a retired managing director of Goldman Sachs.

To the Editor:

What Greg Smith’s article leads to is the need for the compensation model for brokers and financial advisers to change.

Instead of fees for transactions, remuneration should be based on a percentage of profit for the institutional or individual investor. That way, the culture will alter for the good.

Great Neck, N.Y., March 14, 2012

To the Editor:

I worked in the derivatives industry at a firm owned by a foreign bank for more than 15 years before voluntarily retiring because I had achieved my career goals there.

When a business or a person deals with a third party that is selling something, the vast majority of sellers are seeking to maximize profits. That’s capitalism, and it’s self-adjusting: if a seller is perceived to provide a poor value proposition by its customers (whether it actually rakes in huge profits or not), the customers go elsewhere and that seller either improves the bargain or eventually ceases to do business altogether. Morally there is nothing wrong with this, and it happens with just about every business in every industry.

When you walk into a car dealer, the No. 1 goal of that dealer is to sell you a car — and quickly — so you don’t buy another brand or even the same brand from another dealer. All other things being equal, he’d like to sell you the car that makes him the most profit.

But before the dealer can do that, he must juggle things to convince you that the car is the best one for you and is a good value. It may or may not be the best car for you or the best value; that’s where you, as the buyer, must decide whom to do business with.

If you perceive the seller as “ripping [your] eyeballs out,” you are likely to go elsewhere, and if you do, you send a message to the seller that he needs to change his strategy. That’s how our system works, and the seller is doing nothing wrong if he is obeying the law, which Greg Smith concedes is true in the case of Goldman Sachs.

The most successful long-term businesses balance doing what’s right by the client with selling a profitable product, and Goldman is no different, never was and never will be. For buyers, the old two-word adage still holds: caveat emptor (let the buyer beware).

Del Mar, Calif., March 14, 2012

To the Editor:

The world will aptly take notice of Greg Smith’s article. He was able to eloquently and resolutely express what is wrong with Goldman Sachs and probably the financial system at large. While unexpected, his commentary is largely a reiteration of what most of us already assumed to be a corrupt system.

Substantially more powerful and disruptive, however, would be if Mr. Smith’s resignation inspired the less vocal minority of “everyday workers” to speak out against the injustices they, too, see in their workplaces.

Coming from a Fortune 500 company, I have seen no lack of barely short-of-illegal corruption, practices well known even at the organization’s lowest echelons.

Mr. Smith’s brave act should be an impetus for others to expose their own knowledge of morally bankrupt business practices, and to reveal even more shocking truths about our broken system.

Denver, March 14, 2012

To the Editor:

Greg Smith’s article about his decision to leave Goldman Sachs highlights only one part of the problem with our financial system. He warns that Goldman’s culture is dedicated only to increasing its own profits at the expense of its clients, and that it risks the loss of these clients if it continues to ignore the clients’ interests. But is anyone surprised by Goldman’s conduct? I think not.

The other half of the problem is that the ultimate clients of Goldman are not truly represented. The large corporations, the asset managers, the hedge funds, and mutual and pension funds are the immediate clients of Goldman, and they are run by fund managers and the corporate officers who are acting in the same fashion as Goldman’s managers — maximizing their own profits at the expense of their clients (the shareholders and investors).

Quis custodiet ipsos custodes? (Who watches the watchmen?) No one.

New York, March 14, 2012

A version of this letter appeared in print on March 15, 2012, on page A34 of the New York edition with the headline: The Firestorm Over Goldman Sachs.
The website of the New York Times newspaper: www.nytimes.com

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