The ballad of Greg Smith

March 14, 2012
Greg Smith quit now.

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It’s that time of year — think February to March — when bonus checks have cleared and voluntary departures from investment banks spike. So it’s obvious why Greg Smith quit now. The question is, why decide to quit in as public and destructive a manner as possible?

When Smith joined, Goldman was transitioning from a partnership model to being publicly-traded. And I suppose it’s possible that Smith has such deep nostalgia for the partnership he never really knew that he’s willing to hurt his entire current team — everybody who helped him make his millions — in an attempt to goad Goldman into returning to those halcyon days.

But it certainly doesn’t seem that way. Smith says that Goldman is currently “toxic and destructive”. He goes on to say that “It makes me ill how callously people talk about ripping their clients off,” and that “the morally bankrupt people” need to be weeded out — how, he doesn’t say — by the board of directors. It’s much easier to see the disgruntled ex-employee here, quitting in a huff, than it is to see someone genuinely trying to do his part to reconstitute the Goldman Sachs of Gus Levy and John Whitehead.

To a certain extent, time will tell. If Smith ends up founding or joining a rival company, his decision to harm Goldman as deeply as possible will end up looking rather self-serving. On the other hand, if he goes to, say, join his former colleague Gary Gensler at the CFTC, working to regulate all investment banks from the outside and to try to level the playing field between the buy-side and the sell-side as much as possible, then we might start taking him a bit more seriously. Smith has declared a serious moral purpose today; that’s not something you can wear for just one news cycle before moving on to the next thing, and so I hope and trust that he’s going to spend the proceeds of his ill-gotten final bonus check in the service of that moral purpose. After all, it was the work of those morally bankrupt traders in the ripping-eyeballs-out business which got him all that money in the first place.

Which is not to say that Smith doesn’t make important points. He’s in the equity-derivatives business, which is also where Andrew Clavell came from. Clavell’s blog is down, now, but these words are immortal:

If you claim you do know where the fees are, banks want you as a customer. You don’t know. Really, you don’t. Hang on, I hear you shouting that you’re actually smarter than that, so you do know. Read carefully: Listen. Buster. You. Don’t. Know.

Smith’s clients thought they knew where Goldman was making its money when it sold them equity derivatives. Nine times out of ten, they were wrong. I can guarantee you that every single one of the clients referred to as “muppets” within Goldman considers themselves to be a sophisticated investor. Mainly because they have Goldman employees phoning them up on a regular basis and flattering them with tales of how sophisticated they are.

Clients know in principle that every time they do a trade with Goldman, Goldman makes money. But they don’t know how much money Goldman makes on those trades. And Goldman is extremely good at structuring deals which can’t easily be replicated by combining various liquid derivatives. In turn, that gives Goldman pricing power — so much power, indeed, that in some instances the bank will go so far as to insist that if the client attempts to get independent pricing for the contract in question, then the whole deal is off.

Smith has been in this business for 12 years, and he’s done extremely well by it. And to a certain extent, if the people who work for him are constantly asking how good a deal is for Goldman, rather than how good the deal is for Goldman’s clients, then that’s because of the example he set. What’s missing in his op-ed is any sense of mea culpa, any sense that he was at all part of the problem.

There’s a strong smell of faux-naive coming from Smith’s op-ed. “Leadership used to be about ideas, setting an example and doing the right thing,” he writes. “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.” Here’s a question for him: back when he made videos for Goldman urging candidates to join the company, were the people who got promoted those who had ideas and did the right thing? Or were they the ones who made lots of money for the firm? To ask the question is to answer it.

So let’s not pretend to be shocked that the most successful bankers are the ones who make the most money off their clients. And let’s not try to imply that the solution to this problem lies at the Goldman Sachs board level. It doesn’t. The real muppets, in this story, are Goldman’s board members, who have never had any real control over how the company is run. And, frankly, never will. The most remunerative skill, at Goldman, is the ability to flatter someone into believing that they’re incredibly important and clever and sophisticated, even as you’re getting that person to do exactly what’s in your own best interest. No one rises to lead Goldman Sachs who doesn’t have that skill. And you can be sure that Lloyd Blankfein uses it on the board every time he meets with them.


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