Goldman Sachs vs. Greg Smith

| March 15, 2012 | 0 Comments

“He’s having a midlife crisis.”

“He wasn’t very senior, anyway.”

“It’s just sour grapes.”

All of this is being said about Greg Smith, the former Goldman Sachs executive who exited the firm and left a blistering farewell note on the New York Times op-ed page on his way out. Many are pooh-poohing him as a vampire squid gone rogue, accusing him of false naïveté. They say that he was perfectly happy to feed at the trough for 12 years and is only piping up now because his career there is stalled.

This all may be true, but who cares? The important question is, is he actually telling the truth when he says that the firm cares only about money, is out to fleece its clients and won’t ask any pesky ethical questions as long as its salespeople keep bringing it in?

Goldman begs to differ.

[W]e 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.

And in its response the firm essentially goes on to say, “Oh yeah? Well that’s not what we heard!”

First, 85 percent of the firm responded to our recent People Survey, which provides the most detailed and comprehensive review to determine how our people feel about Goldman Sachs and the work they do.

And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high.

A word about these internal surveys. They’re clearly somewhat of a fad within blue-chip financial firms. How fondly do I recall Anonymous Survey-Taking Season at my old employer. Only 85% of Goldman’s employees even bothered to fill the thing out? That in of itself speaks volumes. Interesting that it’s not even higher; it would be difficult for a firm to find an audience more captive than its own employees. If the process was anything like at my own firm then it’s quite likely that they were given several days, if not weeks, to do so. Didn’t Goldman’s MDs and team leaders walk around and pour the pressure on their subordinates to fill the darned thing out? Was pretty standard procedure in my old neck of the woods.

As for the remark of “exceptional” client service by 89% of those who answered, well it could be that they honestly felt this way. Or, did they just put their cynical hats on and give the answer that they knew their bosses wanted to hear? Did they wonder whether the surveys were really anonymous? After all, as Goldman’s response continues:

Anyone who feels otherwise has available to him or her a mechanism for anonymously expressing their concerns. We are not aware that the writer of the opinion piece expressed misgivings through this avenue [...].

If it were truly anonymous then how could they ever have been aware, even in the hypothetical case?

Regardless, it’s far better to judge Goldman not by what it says its other employees say, but by its own actions.

We are far from perfect, but where the firm has seen a problem, we’ve responded to it seriously and substantively. And we have demonstrated that fact.

Really? Then why, as Matt Taibbi tells us, have they just promoted one Jeff Verschleiser? Verschleiser used to be at Bear Sterns and has been accused of co-running the lucrative double-dipping scheme in which Bear would purposely sell dodgy mortgage-backed securities to investors, knowing they’d go bad. When that happened, the investors would shunt them back to Bear and Bear would put them back to the bank that made the mortgage in the first place, at a discount. Instead of passing on this refund, Verscheiser and his team would pocket the cash. As Teri Buhl writes in the Atlantic, “Bear was cheating the investors they promised to have sold a safe product out of their cash.” Verschleiser, one of the key architects of this scheme, is now Goldman’s global head of mortgage trading.

What about Goldman’s advice to Kinder Morgan when the firm wanted to buy El Paso last year? The fact that Goldman owned almost 20% of Kinder did not stop it from taking a formal advisory role to El Paso. El Paso paid it $20 million to do so, a fee that Goldman did not disclose until it was forced to by a lawsuit. It also did not disclose its own ownership stake in Kinder, nor the fact that the Goldman exec who advised El Paso, himself, owned $340,000 of Kinder stock!

Who dares to defend Goldman when we have so much evidence that it hasn’t changed? Far better to ask why it is the way that it is. As always, the answer has to do with incentives.

Before 1970 investment banking firms were not allowed to be public companies. Instead they were partnerships, and partners would reap all the awards via bonuses in good years, and none of the rewards — or even some personal losses — in bad years. After 1970 the ban was repealed and many investment banks went public in order to benefit from the greater access to capital and compete on a bigger, more international scale. Goldman did so in 1999. Now, even though it likes to call its most senior employees “partners”, nothing could be further from the truth. They have far less skin in the game than they would have under a true partnership and that explains a lot. Note: this timeline also matches up with Greg Smith’s assertion that the culture of the firm has changed drastically from the time that he joined, 12 years ago.


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Category: Banking