WHY I AM LEAVING GOLDMAN SACHS

 

By GREG SMITH

Published:  New York Times, 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.

GOLDMAN SACHS AND THE GREEK CRISIS

Goldman Sachs, acryl on paper.

I had greater expectations of the Dutch TV documentary about Goldman Sachs and the downfall of Greece (Monday, February 13th), but the programme only relied on indirect evidence and contributions. Still very interesting but less so than when we had heard and seen persons directly involved such as Greek ministers and CEO’s of Goldman Sachs. Perhaps the time was not right yet! 

The TV documentary confirmed the image I already had of Goldman Sachs and the Greek affair. It is a very complex case that is difficult to summarize in all its aspects. For that reason I will merely give some impressions here. According to a financial economist and writer, Goldman Sachs is not looking for world power. In stead he compared the bank with a squid whose tentacles are around the globe and slowly sucks the world. Not directly a reassuring picture.

To indicate how strongly committed Goldman Sachs is to get the smartest people Microsoft boss Bill Gates was quoted. He was supposed to have said that his biggest competitor was Goldman Sachs, because it succeeds to attract the brightest people available on the labour-market. These so-called nerds, according to a former employee of Goldman Sachs, are only busy creating canny financial products without ever asking whether this will be social responsible products. The financial derivatives developed by them were compared with a pie from which the top and the bottom looks familiar, but inside there are products of which nobody knows in what way they were created and how they ultimately taste.

Of course, the wickedness of the bonus culture in banks was also raised. This makes that the corporate culture has detached itself from reality so that the question whether it is still humanly justified what you sell, is no longer a matter of debate. In The Netherlands, this corrupt corporate culture at banks became infamous for the selling of insurances that according to the Dutch Financial Markets Authority were too complex for the average citizen to comprehend. Additionally, these products were too expensive for their value and eventually they proved to be too costly to get rid of it. Finally, under pressure of potential lawsuits, some banks in The Netherlands offered settlements to tens of thousands of buyers of these insurances. 

If you want to believe in conspiracy theories you can accuse Goldman Sachs of such a global conspiracy with the aim to get all financial matters into one hand, which is their hand of course. For example, the new Italian Prime Minister Mario Monti and Mario Draghi, the new President of the European Central Bank, were former advisers from Goldman Sachs and could therefore be part of a global Goldman Sachs network. But it is not that simple. Italy is a democracy and the European Central Bank is controlled by the Central Banks of the countries in the Eurozone and the people in charge there have other loyalties than Goldman Sachs. 

The current Greek Finance Minister Evangelos Venizelos of the Social Democratic party PASOK. He gained national fame by his performance as a defender of Andreas Papandreou in a corruption trial. In 2004 he was Minister of Culture and Sport responsible for coordinating among other infrastructure and links with the Olympic Committee of the 2004 Olympic Games in Athens. He followed Giorgos Papaconstantinou on 17 June 2011 as Minister of Economic Affairs in the recasting of the Cabinet of Papandreou in connection with the great economic problems of Greece.

Finally the Greeks themselves or rather their political elite who has for years made a financial mess. For example, both left and right parties give public money and jobs to their voters. It is a political elite that, encouraged by the membership of the Eurozone, was able to continue play fair-weather with borrowed money without explaining to their people and their voters that someday the borrowed money should have to be paid back. They were addicted to credits and when a rearrangement of the Greek debt was needed, they asked Goldman Sachs for help. 

Goldman Sachs is anything but a Santa Claus, however, as everyone knows by common sense. But the problem with addicts is that they only see their own reality and unfortunately at that time EuroStat did not do anything to open their eyes. Thanks to Goldman Sachs the debt mountain could continue to grow more. At the same time Goldman Sachs was the only one that benefited, because it had hedged itself against the risks they understood but the Greek politicians did not. Now the price for their artificial prosperity has to be paid and the Greeks awaken rudely from the dream that their political leaders with other people's money had juggled out of their sleeves.