The media is filled with reports and reviews of a book by former Goldman Sachs employee Greg Smith, which disparages his former employer. Smith alleges that traders on his London equity derivatives desk treated their clients harshly and would glibly refer to them as “muppets.” They secretly despised their clients as they ripped them off, according to Smith, especially the “muppet” clients that were mainly pension funds and non-profits. The Guardian reports (emphasis mine):
“Getting an unsophisticated client was the golden prize,” he told the [60 Minutes] programme. “The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.
“What Wall Street will do is they will approach one of these philanthropies or endowments or teachers’ retirement pension funds in Alabama or Virginia or Oregon and they’ll say to them: ‘We have this great product that is going to serve your needs’. And it looks very alluring to these investors, but what they don’t realise is that upfront they are immediately paying the bank $2m (£1.2m) or $3m because of their lack of sophistication.”
How fast can you say “muniland muppet”? There happens to be a big derivatives controversy brewing in in the “City of Brotherly Love,” right now. Some background from the Philadelphia Inquirer:
Urged on by private-sector financial advisers, approved by bond lawyers, the city took advantage of a 2003 state law approved by then-Democratic Gov. Ed Rendell and Republican legislative leaders to “swap” interest-rate risk on the next several years’ borrowings with clients of JPMorgan, Goldman Sachs, Wells Fargo, and other big Wall Street banks…