‘Why I left Goldman Sachs’ by Greg Smith
Précis by Pete Laburn
Landing a job at Goldman Sachs
Greg Smith is a pharmacist’s son from Johannesburg, South Africa, who won a scholarship to Stanford University in America. He grew up in Edenvale, as the eldest of three siblings in a Jewish middle class family, and earned a place among the 32 people, out of the 3000 international students, who applied for a full scholarship to Stanford. Three years later, in 2000, Greg was awarded a summer internship at Goldman Sachs.
Of the intern class in any year, only 40% of students would be offered a full time job at Goldman Sachs after the summer. The internship programme was very strenuous and difficult, but showed that the firm took its culture seriously and taught all potential employees about giving clients good service. The internship programme gave students an opportunity to show their merit over a 10 week period as opposed to relying on a 30 minute interview. The firm stressed the importance of giving clients the correct information, not making things up or exaggerating, but being upfront and honest, even when you make a mistake. Teamwork was also highly valued at Goldman Sachs.
From Goldman’s first days until 1999 (130 years) it had prided itself on serving as an adviser to its clients, with fiduciary responsibility. A fiduciary stood in a special position of trust and obligation where the client was concerned. This role was applicable when the firm was advising the client about how they should best invest money versus pushing the client into investments that generated the largest fees. It was also true in investment banking, when the firm was advising a client whether it should merge with another company. This ideal of doing what is right for the client and not just what is right for the firm was prescribed in the 1970s by former senior partner John Whitehead in his set of 14 principles. These principles were drummed into the heads of Goldman interns. The principles that referred to fiduciary responsibility were:
• Our clients’ interests always come first
Our experience shows that if we serve our clients well, our own success will follow.
• We regularly receive confidential information as part of our normal client relationships.
To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.
• Integrity and honesty are at the heart of our business.
We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.
Greg was offered a full time position at Goldman Sachs in August of 2000, just before his senior year in university. It was a sales position in the New Markets Sales division selling stocks from the developing world to US institutional investors. It was great to know so early what he would be doing after graduation and the internship had given him a chance to taste whether he actually liked Wall Street and the firm.
When Greg joined Goldman Sachs late in August 2001, the firm was quite different from the one he had left in late 2000 after his internship, due to the impact of the technology bubble that had popped earlier that year, entering the US economy into its first recession of the 21st century. The firm had cut down on spending and its staff compliment had been cut dramatically.
Goldman Sachs at its best
On September 11, 2001 the World Trade Centre was struck by terrorist attacks and crumbled to the ground in an event that New York and the world had never experienced before. The next day Greg received a call from an HR person in the Goldman Sachs London office. Goldman Sachs had found out that his apartment was a few blocks from the World Trade Centre, and that he would not be able to access it for the next few weeks. They had put a full system in place to help him, and others like him, get back on their feet again. They gave him $2000 to buy clothes and anything else he needed, they booked him into a hotel in the city, and they would be in touch to let him know when the markets were opening. The call was a huge relief because Greg couldn’t get back into his apartment and was running low on cash. He was amazed that within hours of the attacks, the London office had taken over the reins, found out where he was living, tracked him down and extended a hand. This was Goldman Sachs at its best. When it came to efficiency, execution and generally having its act together, Goldman Sachs was the gold standard. It had the smartest, most resourceful people, and no other bank on Wall Street came close.
The markets opened a week later on Monday September 17, 2001. People at work were shocked about what had happened but everybody pulled together and supported one another, and their clients. The overriding message was “Now is the time we differentiate ourselves. This is where Goldman Sachs becomes Goldman Sachs. Let’s be ultra‐attentive to our clients and help them get back on their feet, even if it doesn’t benefit us immediately. Because that’s what the clients are going to remember.” The message was classic Goldman Sachs, and the reason it could be proclaimed so strongly was because the old guard was still there. Goldman Sachs CEO’s letter to shareholders in the 2001 Annual Report, released soon after 9/11, reemphasized the firm’s core values of integrity and commitment to clients. The company also established a relief fund for people and organisations affected by the attacks. Goldman employees contributed $5,5‐million, which the firm matched.
The year 2002 was tough due to the markets contracting post 9/11, resulting in many people being let go from the firm. There was a worry that Goldman Sachs was just not big enough to compete with banks such as JPMorgan Chase, Citigroup and Bank of America. Morale in the office was low, and tensions ran high as people feared for their jobs. Even the partners of the organisation were not immune. It was at this point in 2002 that the firm started flushing out a number of the old guard – the pre‐initial‐public‐offering partners who were with the firm before it went public in 1999, some of whom had been with the firm for decades. They needed to make way for the new breed of partners and MDs who carried themselves with a swagger. It was sad to be losing people with such long institutional memory. Also in early 2002, Goldman hired a very senior person from another firm to run sales. Pre‐1999, a high level lateral hire would have been considered sacrilege because the firm had always believed in building its talent from within.
Over the years Greg learnt how to put the client first, advising them on the best way to go about a deal, for their benefit. The Goldman Sachs team worked longer and harder to prove to clients that they were there for them when they needed them, and because it was the right thing to do.
High tide on Wall Street
By this time Greg had survived the brutal rounds of firing that had rocked Goldman from 2002 through 2004 and had been promoted from analyst to associate, which meant that he was now a full‐time employee, and not just on a 2‐3 year contract.
In 2005 two new concepts became prominent on the Goldman Sachs trading floor. The first was the concept of ‘elephant trades.’ These were trades that netted the firm over $1‐million in revenue. Sales people were encouraged to go out and find some elephants. While some people found this kind of talk encouraging, others thought that it went too far.
The other new concept was that of gross credits or GCs. For many years at Goldman, managers would judge an employee’s performance by several measures – some objective and some subjective. Most important was whether the person was bringing in the business which made up 50% of the equation and was crucial to the organisations primary purpose of making profits. But the other half of the equation, and what made Goldman Sachs different from other banks for a long time, was more subjective. Was the person a leader who set a good example for junior employees? Was he or she a culture carrier who promoted collaboration and teamwork and the values of the company?
Were they someone who had the long‐term interests of the organisation at heart? Did they have the foresight to turn away bad business, knowing it would be detrimental to the firm’s reputation in the long run? Instead the culture began to change making the monetary evaluation of what you brought in far more scientific and specific – it was your GC. Your cumulative annual GC became known as your attribution for the year. Over the years, GCs became things that people started worrying about, talking about and fighting about. If you are being measured by a number, you are going to do what you can to make sure that your number is as big as possible. It was this change that later proved to be highly detrimental to Goldman Sachs culture and morale.
Conflict of interest
2006 was a big year for Goldman Sachs. By 2006 the deep recession that had struck the markets after 9/11 had faded and been replaced by a new bubble, thanks to easy mortgages and the Federal Reserve Bank pumping cheap money into the financial system – this was high tide on Wall Street. The markets kept booming and derivatives sales continued to rack up revenues. Clients were confident, they were trading and taking risk – the cash register was ringing. But change was in the air. At the end of May, Goldman’s CEO Hank Paulson was appointed US secretary of the treasury and Lloyd Blankfein became CEO and chairman of Goldman Sachs. Paulson had been an old‐school investment banker, but as the firms trading divisions started bringing in larger profits, trading, not banking, had become Goldman Sachs core focus. The banking world had become a trading world, and Lloyd Blankfein was a trader.
In 2006 it seemed that every business magazine ran a cover story about how Goldman Sachs was the summit of Wall Street, doing double and triple business of the other investment banks. How was Goldman achieving these astounding profits? Not through investment banking, not through the traditional methods of raising capital for companies, but by taking its own positions with its own money: trading for itself. This is called proprietary trading. Some people started saying that Goldman Sachs was becoming a hedge fund and was getting into new conflicts of interest. This direction was a significant departure from what Goldman had become known for in the past.
As the power base at Goldman shifted from investment banking to trading, the client increasingly came to be regarded as a counterparty, merely the other side of a transaction, rather than an advisee. A counterparty was on its own. Its goals might, or might not, match up with those of the firm.
Goldman Sachs was now investing its own money into transactions and often changed its mind, or masked its intentions, and made a bet in the other direction from the clients. The leadership of the firm, in the 2005 annual letter to shareholders addressed the subject of conflict of interest in the brave new world of investment banking. The letter marked a sea change in Goldman’s attitude toward its clients. Conflicts between bank and client were inevitable, they argued. Moreover, such conflicts were to be embraced. If a firm wasn’t experiencing conflict, it wasn’t pursuing business aggressively enough. “It is naïve to think we can operate without conflicts. They are embedded in our role as a valued intermediary between providers and users of capital and those who want to shed risk versus those who are willing to assume it,” the letter wrote. Greg’s opinion at the time was that the firm was charting new territory.
The Bubble Bursts
While the world started seeing a financial crisis only in 2008, Wall Street clients started experiencing a crisis in 2007 when a number of financial computer models built by very intelligent statistics, physics, maths, engineering or economics geniuses stopped working. The problem with computer models for trading securities is that they don’t take into account the outside world. In the summer of 2007, fear had started to creep into the markets and the computer models couldn’t pick it up. Too many investment companies were working off of similar financial computer models which were all saying the same thing at the same time. All at once in August 2007, the hedge funds computer models began imploding. Everyone was trying to unload the same securities at the same time, pushing the prices lower and lower, causing the funds to haemorrhage money. As investors saw this happening, they panicked and demanded to be cashed out.
The summer of 2007 was highly unnerving as the markets movements made no sense. Wall Street likes predictability and all at once predictability had gone out the window. Investor confidence evaporated and clients stopped trading. The business environment at Goldman Sachs after the summer of 2007 was tough. One solution, according to management, was to go hunting for large elephant trades that netted the firm $1‐million or more in profit.
In good times, transparent, flat‐fee commission business was steady and paid the bills, but during tough times, new types of business had to be found. What could make up the fastest for lost revenue? Products that were quick hits that had a very high margin embedded in them. As a general rule, the less transparent a product, the more money is in it for the firm. Goldman Sachs and Wall Street started getting really smart at playing on clients fear and greed. The sales pitch for these new less transparent products went something like this: “The world is falling apart. You need a magic fix to protect yourself and help you outperform your peers. You should trade this structured derivatives product that we have specially tailored for you.” The problem was there was no magic fix. Clients were not educated enough to understand them and the risks and rewards were not presented objectively to them.
When the sub‐prime mortgage crisis hit in 2008, the events that followed were astonishing. Bear Stearns vaporized early in 2008. Later Merrill Lynch was acquired by Bank of America, and Lehman Brothers filed for bankruptcy. With three investment banks gone, the Morgan Stanley and Goldman Sachs stock that remained got pummelled. In an attempt to stay in business, Morgan Stanley and Goldman Sachs applied to the Federal Reserve Board to become bank holding companies – an application that was approved. Just like that, the institution of the investment bank vanished forever. Goldman Sachs was cleverly converted into an institution that could borrow money from the government at zero interest and then invest it at government bond rates – in essence making free money. Goldman Sachs and Morgan Stanley were now being paid by the government just to stay in business.
Later that year, the US treasury put together a proposal for the Troubled Asset Relief Program (TARP), a $700‐billion program to save the banks. Once it was passed in October 2008, all of the top 9 banks in America were told that, whether they liked it or not, the government was going to give them a lot of money. In order to prevent the TARP funds from being seen as a stigma for those banks who were so desperate that they needed to accepts the bailout, Treasury made all the banks accept the money to level the playing fields. Most of these banks would also pay their executives substantial bonuses that December out of tax payers’ money, rewarding them for the bad investments they had made.
Looking out for ourselves
As the markets continued to crater that autumn and winter, it continued to feel as though the whole financial system might collapse. The Goldman Sachs top management were proactive in trying to rally the troops during the crisis, and were frequently present on the trading floor, showing strong leadership. While leadership was coming from the firm’s top partners, employees immediate leaders seemed to be holed up in their bunkers, showing no leadership at all. While some leaders did what they could to boost morale, the incidents were so isolated that they just proved to highlight the lack of leadership overall which was very disappointing. With trading slowed to a crawl, Goldman began another of its periodic rounds of firings.
While Goldman didn’t go down, the storm kept raging. Those who wanted to survive had to reinvent themselves. One way to do it was to go into overdrive and do more business than anyone else. This was tough since clients were unwilling to take risks. Another way was to try and convince your clients to buy structured derivative products that might temporarily give them some hope. Since these products were created by the bank selling them, they came with a large mark‐up. Throughout the 2000s Wall Street structured complex derivatives to help European governments such as Greece and Italy mask their debt and make their budgets look healthier than they were. This ultimately contributed to the European sovereign debt crisis that world is dealing with today.
Somewhere along the way, Goldman Sachs stopped being the market maker that stood up and took risk in order to help clients. The firm became pickier about what business it did. It was willing to take reputational hits, as long as it kept its profit and loss intact. This was a long way from the days and months post 9/11 when the firm’s main priority was to facilitate client positions and get the markets up and running again. Back then it was not the time to exploit client’s weaknesses, as was happening now. Now the firm was not willing to help clients. The firm had pulled up the drawbridge, leaving clients to fend for themselves.
Goldman had become more like a hedge fund, concerned only with helping itself, and doing only the business that it thought would make it a lot of money and ensure its survival. Company culture and morale seemed to be bygone values. If you were the trader in the right place, at the right time, and knew how to capitalise on a situation, then you were promoted by the firm and paid well. This was the new model of Goldman Sachs managing directorship from 2008 onward.
By 2009 a significant change had occurred in how the firm dealt with its clients. On Wall Street there are 4 types of clients: the wise client, the wicked client, the simple client and the client who doesn’t know how to ask questions. The wise clients are large hedge funds and institutions that have access to resources including research; communication with the management teams of the companies they are looking to invest in; first looks on deals coming to markets; unbiased derivatives pricing models and human capital. For a client to be wise, its managers must fully understand the conflicts of interest that are rife on Wall Street. Goldman would never try to push some high margin financial product on a wise client as the people who work at these firms are too smart.
The wicked client is often a very smart client who pushes the envelope, engaging in rumour mongering to drive down prices. At worst some clients will trade on inside information and be criminally charged for it.
The simple client is a badly run large asset management or pension fund scheme. The bad ones are big and bureaucratic, with outdated systems that move very slowly. These are perfect prey for Wall Street’s schemes.
The fourth type of client doesn’t know how to ask questions. This is the sorriest of the lot because not only are they simple, but they are also trusting. They often are the investment managers who are meant to look after the pensions of policemen, firemen and teachers or a charity portfolio. In the brave new Wall Street that was developing during the time of market turbulence, these would be the target clients for elephant trades. What these types of clients failed to grasp in 2009 was that Goldman Sachs sense of fiduciary responsibility was eroding.
By mid‐2009 Goldman Sachs, and other banks on Wall Street, started investing thier own money to buy stock before it was obvious that the markets were going to start recovering. This trade made banks and clients all over Wall Street hundreds of millions of dollars between mid‐2009 and mid 2010 as the markets rallied and volatility compressed. The hundreds of billions of dollars that investors had cashed out during the crisis slowly started to come back into the market in search of returns. Every day there were little signs of improvement and soon it became clear that the change was for real and that investors were returning to the market.
In late 2009, Goldman Sacks finished erecting a magnificent, gleaming, $2‐billion, 43 story glass and steel headquarters at 200 West Street, just a stone’s throw from the World Trade Centre site. Construction had begun in 2005 when the recession was ending and times were flush. Previous to this Goldman Sachs had never built or owned a building, but only leased buildings and rental space. The very fact of the new headquarters, not to mention it’s sheer in‐your‐face spender, ran directly counter to the understated ethos of the old Goldman Sachs. The sheer size of the building suggested the mighty wealth of Goldman Sachs.
At the end of 2009 Goldman Sachs also paid out $16‐billion in compensation, 47% above the previous year total. A disproportionately large share went to the 1% of partners at the top of the organisation, despite the global financial crisis which they had had a hand in developing.
A loss of trust
In April 2010 the US Securities Exchange (SEC) charged Goldman Sachs with fraud in structuring and marketing of collateralized debt obligation (CDO) tied to subprime mortgages. The SEC alleged that Goldman Sachs had failed to disclose to investor’s vital information about the CDO, in particular that the hedge fund had taken a short position against the CDO. The CDO was called Abacus 2007‐AC1 and was basically a sausage stuffed with sub‐prime mortgages.
During the live televised hearing dealing with the charges, Goldman Sachs leadership argued that in a sales and trading business, it has no fiduciary responsibility, that the firm is not obliged to do what is in the client’s best interest, that it is not advising the client but rather just there to facilitate trades between large institutional investors. These statements were contrary to what Greg had believed the Goldman Sachs heritage to be up to this point. As a sales person he was advising clients every day telling them what he thought was the right thing for them. Also, how could the markets be a level playing field, as was implied by Goldman leadership, when Goldman was able to know the most in any situation because it could see what both buyers and sellers were doing.
In the days that followed, it became clear that while some clients still wanted to do business with Goldman Sachs, it was only because they wanted to be involved in trades with the hedge fund, and not because they trusted the firm. The worst part was that sales people and Goldman Sachs management seemed to be relieved that clients were going to continue to do business with them, but not phased by the fact that Goldman Sachs reputation had been forever tarnished.
What had become of the 14 principles? Especially principle 2 “Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore.” Goldman Sachs employees could no longer by trusted by their clients, and Greg expected the leadership of the firm to try hard to fix this.
In July 2010 Goldman Sachs agreed to a settlement of $550‐million in the SEC suit. Goldman neither admitted nor denied any wrongdoing, although many felt that a settlement was an implicit admission of wrongdoing. Goldman Sachs had got away unscathed having to pay only a mere $550‐ million.
After the settlement many people felt relieved, but business did not get any better. The firm’s reputation had been damaged and many clients were no longer comfortable taking counterparty risk with Goldman Sachs and were only willing to trade listed, transparent products. As the pressure for revenues increased, so did bad behaviour of various kinds inside Goldman Sachs. There was pressure to steal a colleague’s client or to try and persuade an unsuspecting client to do things that were not in their best interest. Right and wrong had become a thing of the past and the new watch words were GC.
Then the firm commenced its Business Practices Study. Goldman took it upon itself to say we have done some things wrong, let’s start investigating. It was a board level study that the firm had conducted to take a long hard look at the causes of all the reputational damage that it had suffered since the crisis. It was designed to suggest remedies in areas such as conflict of interest, treatment of clients, structured products and transparency. All the top people at the firm were put on the Business Practices Committee. Greg was hopeful that the study might help Goldman start to repair the trust deficit it had with clients. But as the study proceeded he wondered if it was all just for show. In January 2011 the results of the study were released. All the staff was called into a room and the leadership read out a list of proposed reforms in flat monotone. It was just a checklist of items that was read out more as a PR stunt than to bring about any real change within the organisation.
Goldman Sachs London office
At the end of 2010 Greg was transferred to the Goldman Sachs London office to start a US equity derivatives business in Europe. As he settled into London and started looking for business, he was shocked at the lack of enthusiasm from the Goldman Sachs team to go after bread‐and‐butter business. The basic streams of revenue Greg was going after required a little work in the beginning, but once he could persuade clients to use Goldman for options, swaps and other derivatives, they could provide an on‐going steam of profit. However, Goldman management felt that this business was not profitable enough and to rather focus on elephant trades only. He couldn’t believe how many times people told him that something was not worth their time. If clients were asking to do business, what kind of message was it sending out by refusing to do it. Instead, in London, the main question seemed to be how can we convince clients to do what will make our traders the maximum profit?
Within days of arriving in London, Greg was also stunned at how many times he heard employees refer to their clients as muppets. What was meant was that the client was trusting and hadn’t checked the price with any other brokers, and so the salesperson had overcharged him. Times had changed. In the past you would have been called into a partner’s office and severely reprimanded for this type of callousness. You could even have been fired. It would have been seen as counter to the firms long held principle that if you don’t have the clients long term interests at heart, they won’t do business with you for very long. Greg was disturbed at how out in the open this attitude was. As he travelled around Europe visiting clients he heard the same message again and again. “Goldman Sachs is not customer friendly. In good times you will compete for profitable business, but in a crisis, when you are needed, you won’t be there for us. And now when we want to do flow business you make it very hard for us to do it because it isn’t profitable enough.” Greg continued to try and convince his colleges to change their mind‐sets and conduct transparent, exchange‐listed business that would pay bills, but more importantly, that would service clients.
Bad business culture corrupts good character
The culture in the London office was focused first and foremost on making money for the firm. The difference between the New Yolk and London offices was mainly in tone. The callous way people bragged about elephant trades in London was more corrosive and more corrupting of young people at the firm, but in New York, elephant trades were every bit as prized.
Jack Welch, the iconic former CEO of General Electric wrote that once an organization starts rewarding bad people for generating profits, the good people become demoralized, the culture gets ruined and some of the in‐between people get lured into thinking they have to act like the bad people. The more this happens, the more it continues to happen until it becomes the norm. This moral erosion was swiftly becoming the norm at Goldman Sachs.
There was a time at Goldman Sachs when if people crossed an ethical line in trying to advance, they would be fired, demoted or reprimanded. The way it worked now is that you could push as hard as you wanted, as long as you brought the firm profits. But there is a certain point where the manoeuvring becomes so unethical that it undermines morale at large, and sets a bad example for junior people. It shows the new associates and analysts that bad behaviour gets rewarded.
During the history of Goldman Sachs, bonuses were assessed based on what you brought in to the firm, but also on how good you were for the organisation. From 2005, the system became largely mathematical and you were paid a percentage of the amount of revenue next to your name. The problem with the new system was that people would now do anything to pump up the number next to their name. Traders and salespeople, even very young ones, were learning from the bad example set by leadership. First year associates were seeing their bosses fighting over GCs. Over time this corrosive behaviour had filtered down through the system and associates started believing they should be doing the same thing because that was what their leaders were doing. GCs was seen as the absolute yardstick for the size of your year‐end bonus. Goldman Sachs teamwork had gone out of the window.
All these factors finally convinced Greg that he needed to leave the firm. He started writing in order to put down what he felt was wrong and understand how he was feeling. Then gradually he started thinking that perhaps if the firms culture could not be changed from within, maybe it could be changed from without. He decided to craft an editorial piece of writing that would alert people to what was going on in the financial world and might change some minds. The essence of what he wanted to convey was that Goldman Sachs and Wall Street had lost sight of their mission, which was to serve clients. That the culture was rotting and that clients no longer trusted the bank. The leadership of the firm had put the pursuit of short‐term profits ahead of a reputation that had taken decades to build, but could be destroyed in an instant.
Greg’s editorial was finally published on Wednesday March 14, 2012 in the New York Times. Over the three years since the crash of 2008, Greg had seen the banks fiduciary responsibility erode so far that it was now actively trying to take advantage of clients. By 2012 the firm had completely lost sight of a long run mentality in favour of a profit‐at‐all‐costs model and no lessons had been learned from the crisis. By the end he had spoken to 9 partners about the culture and ethics at the firm and, while behind closed doors half of them agreed there were problems, none of them would do anything about it – they were simply making too much money. This was his way of trying to bring about change to a situation that he knew had gone too far.