I just watched young Greg Smith from Goldman Sachs being grilled by Anderson Cooper on CBS's "60 Minutes". It was an entertaining 10 minute piece; I think Anderson Cooper was reasonably probing on Greg's motives. For my readers' entertainment, I present below my notes on the interview. Errors and omissions excepted, do not trade on the basis of these scribblings, I have no idea what I'm doing.
Goldman Sachs was characterised as "the smartest, most profitable place on Wall Street; the toughest place to get a job." So why did Greg end up leaving? He wanted to hit the board of directors round the head, and hoped that his NYT op-ed would be a wake-up call to them; forcing them to change the direction of the bank by saying something publicly.
Greg was 33 years old, had been at the firm for 12 years (in Securities). He was recruited as a summer intern from Economics major at Stanford. He was earning about $500K when he left, and he claimed "I loved the place, I put a lot of my heart and soul into it". Yes, bankers have souls. Apparently.
The idea of the NYT op-ed was apparently not to be destructive or a betrayal. Greg liked the Goldman Sachs Business Principles, particularly the one about reputation:
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION.
If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.
So where did it all go wrong? "Goldman Sachs started to learn how to use information which they got from clients to bet with their own money, and sometimes against their own clients." That's going to be a pivotal point in the book, I'd bet. This won't be specific violation of the Chinese wall between buy-side and sell-side; rather, a more general picture of what clients are doing and what overpriced products Goldman might be able to sell to them (or their rivals) if they're in a tight spot.
Greg sold pretty vanilla derivatives, but the promotions and big money went to people selling complex products with big fees. They were selling these to pension funds, educational institutions who weren't well suited for the products, or indeed well enough educated to understand how steep the GS fees were. Within the firm, an unsophisticated client was the golden product; they aimed to sell them the most sophisticated product and "kerching!". An example quoted was Abacus which generated an SEC case, Senate subcommittee hearing and record fine in 2010.
Greg seems to be making the conjecture that many institutional investors are not as sophisticated as the customer suitability guidelines think they are. So what about the bank's ethics? An economics + Law professor opined "I think Goldman Sachs is one of the most ethical banks out there - not sure that says much though." Talk about damning with faint praise.
Anderson Cooper wanted to know why haven't we heard from Goldman Sachs leavers before. "People who work at GS don't talk about working at GS" - the inevitable comparisons to Fight Club, Mafia arose, and the point was made that people making the money don't want to kill the golden goose.
Greg recounted a discussion with a major Asian investor who said "We don't trust you at all; but that's OK, we're going to keep doing business with you as you're one of the biggest banks out there." Greg was shocked but the senior partner he was with was jubilant after the meeting, and didn't seem at all concerned at the lack of trust displayed. Now I'm not surprised by this attitude of the major investor - you don't get rich by trusting people - but I'd bet this causes a few ulcers in the GS ethics committee.
Muppets had to feature in the interview, and sure enough Greg confirmed that London co-workers repeatedly refer to clients as muppets. (The first time I saw the term in a non-Kermit sense was in a dictionary of prison slang, and sure enough the Muppet Wiki confirms this use.) He gave an example of junior guy (24 years old) selling a product to a client who was a muppet and getting them to pay GS $1mm over the odds; his managing director just laughed at the news. If true, I'd imagine that such behaviour would cause another round of antacids for the ethics committee.
Anderson Cooper pressed Greg: why not raise the issues confidentially internally, rather than publicly? Greg says that he talked to 9 senior partners at the firm so it shouldn't be a surprise - he wasn't specific about the timeline, I have no idea whether this was before or after his resignation, but I suspect it was after submitting the resignation but before the op-ed. Goldman Sachs said he wanted $1mm and promotion - so Anderson asked "if you had got those, would you still have quit?" "Absolutely," he claims, "I didn't go to Wall Street purely to make money. I definitely wanted to make money but I left because things had veered so far from what I think is right." Well, to be honest, the money he's likely to make from the book would only cover 3-4 more years at Goldman Sachs, so if he wanted money he should have kept his mouth shut.
According to the professor, there are no significant allegations of fraud are in the book; I'm not surprised, as they'd have to be cast-iron to get past the lawyers. What he does note is that the current environment of very low interest rates cause pension funds, educational institutions to call up banks and ask for riskier products to make better returns, so that they're vulnerable to the predations of banks. So there's another reason why prolonged low interest rates are a bad idea - Ben Bernanke, Mervyn King please take note.
It will be interesting to see the balance in the book between criticism of Goldman Sachs' external actions (client dealings) and internal (promoting psychopaths). I await my copy with eagerness...