This page has been archived and commenting is disabled.

Greg Smith vs Goldman Sachs

MacroAndCheese's picture




 

macroandcheese.org

 

When I read Greg Smith's op ed in the New York Times my very strong impression was, "Nothing new here, so what, not worth reading." That's certainly true as far as I was concerned, but when a friend not in finance told me the contents of the editorial was a surprise, I thought I had better weigh in. I even feel somewhat duty-bound to do so, because I spent many years on the "sell side," that is, at firms like Goldman Sachs.

In fact I started my career at Salomon Brothers, the setting of Michael Lewis' "Liar's Poker." Lewis was three years ahead of me, and spoke to my training class, as mentioned in his book, around the time of the great crash of '87. Anyone who thought Smith's litany of complaints about Goldman Sachs were new or surprising has either not read Lewis' book, or has forgotten the contents--which is fair enough, since the book was published more than twenty years ago.

For those of us who were working at Salomon Brothers when Liar's Poker was published in 1989, the contents of the book came as no surprise. In fact, we all thought he nailed it. Salomon in the day was a rough and tumble place where foul language, sports analogies, and ruthless internal competition ruled every day. This was not a place for brainy professors to come to share their knowledge and help client CFOs benefit society. This was a place to out-sell the guy sitting next to you so you would get a bigger piece of the bonus pool at the end of the each year.

How you did that was your problem. The idea at Salomon then and at Goldman now is that you as a salesman have to make as many sales as you possibly can. That means you have to get your customer to like you so that he will want to trade with you. But for most of the products that Salomon sold (and Goldman Sachs sells), the products were OTC--over the counter. There is no commission per se, there is just the bid and offer price. So it's not only a volume game, it's also a price mark-up game. If you think your customer will pay 101 rather than 100 for bonds, you can offer them at 101 and see if he bites.

This is all in Michael Lewis' book. Here's an excerpt from page 35:


In any market, as in any poker game, there is a fool. The astute investor Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market. Salomon bond traders knew about the fools because that was their job. Knowing about markets is knowing about other people's weaknesses. And a fool, they would say, was a person who was willing to sell a bond for less or buy a bond for more than it was worth.

 

Or let's hear from Larry Fink, now the head of Blackrock, as quoted in Liar's Poker, talking about the savings and loan customers who traded with the big investment banks like Salomon:

"October 1981 was the most irresponsible period in the history of the capital markets. The thrifts that did the best did nothing. The ones that did the big trades got raped."

So now, 23 years later, for Greg Smith to raise eyebrows by "exposing" some of the less palatable aspects of Goldman's business practices seems a bit much. For one thing, Liar's Poker was a #1 bestseller. Everyone has read it. For another, anyone who pays the least bit of attention to the news knows that Goldman got into some very hot water three years ago for helping a hedge fund manager "short" subprime mortgage securities to a Goldman client. But if you're truly worried about Goldman now, you certainly should have been concerned in 2000, when Roger Lowenstein published his book on the collapse of mega-hedge fund Long-Term Capital Management (LTCM), "When Genius Failed."

In that book, Lowenstein describes the scene when employees of Goldman Sachs were at LTCM's office in Greenwich, Connecticut, as LTCM tried to avert collapse from a concentration of too many trading positions all going bad at once. Goldman was there to do "due diligence," that is, to conduct an inspection of LTCM's books so that they could represent LTCM's condition to investors to help LTCM secure financing. It's like a large-scale credit check. As Lowenstein portrays it:

A key member of the Goldman team was Jacob Goldfield, a lanky and brilliant but abrasive trader. According to witnesses, the headstrong Goldfield appeared to be downloading Long-Term's positions, which the fund had so zealously guarded, from Long-Term's own computers directly into an oversized laptop (a detail that Goldman later denied.) Meanwhile, Goldman's traders in New York sold some of the very same positions. At the end of one day, when the fund's positions were worth a good deal less, some Goldman traders at Long-Term's offices sauntered up to the trading desk and offered to buy them. Brazenly playing both sides of the street, Goldman represented mercenary banking at its ugliest. To JM (head of LTCM) and his partners, Goldman was raping Long-Term in front of their very eyes.

In other words, Goldman was exploiting its priviledged position of trust and confidentiality to identify exactly what LTCM would need to dump in a massive fire sale, and beat them to the punch, profiting from the deluge of liquidation that surely would follow. Lowenstein's book is in its sixth print as of 2008, and was a Business Week "Best Book of the Year" in the year it was published. This is not "new news."

It's not that Goldman's comportment is unusually bad. Nor, obviously, is it particularly good. But scolding Goldman because some salespeople referred to clients as "muppets," to paraphrase Martin Sheen in "Apocalypse Now," is like handing out speeding tickets at the Indy 500. It's the nature of the beast.

As a fresh college graduate years before working for Salomon Brothers, I spent a year treading water in the town of my university before embarking on a short stint as a teacher. Job pickings were slim, so I decided to try my hand at being a waiter at the best restaurant in town. It was no lay-up. To be merely considered for a waiter slot, I first had to be a busboy. To be a busboy, I had to work for free, for some undetermined period of time, in a sort of busboy audition. After one day I threw in the towel.

I didn't make any money, but I got a good glimpse behind the scenes. In the confines of the tables, all was well, and elegant. In the kitchen, it was a swearfest. "Where is the f*cking side of potatoes," and "That SOB at Table 14 is gonna be wearing his soup" is all you could hear, all night long, on the other side of the metal doors leading to the kitchen.

Greg Smith was a waiter at the restaurant that is Goldman Sachs. He was a salesman, and worse than that, he peddled equity derivatives. To say the least, equity derivatives are not the flavor of the month. Volumes have dried up, and the money that banks are making is coming from fixed income, not equities. Smith was a Vice President among thousands of vice presidents at Goldman Sachs. The interesting question is not who is right in the "he said, she said" duel between Smith and Goldman Sachs, but rather, why did the New York Times give Smith prime time status?

If you're in the market for a home, you seek out the services of a real estate agent. You develop a relationship with that person. You talk about your kids, you talk about where you went for vacation. Do you expect that the realtor, knowing all too well the seller is paying the full fee, is going to work tirelessly to reduce the sale price for you? Do you think the realtor is going to tell you, hang tight, I think they will come down by 5 percent? Of course you don't.

Greg Smith seems to have mistaken his employer for the Red Cross, even though he managed to sell quite a few Goldman products over the years. His efforts will be seen for what they are: Sour grapes, and small, petty ones at that. It's a shame, because the world of finance is sorely in need of a higher ethical standard. But for now it's business as usual, and anyone who thinks otherwise is a muppet, not an muppeteer.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 03/18/2012 - 00:22 | 2266531 GMadScientist
GMadScientist's picture

...fiscal malfeasance, fiduciary duty, and otherwise not being a lying theiveing douchebag in a suit.

Sat, 03/17/2012 - 23:03 | 2266419 disabledvet
disabledvet's picture

actually i think the correct terms are due diligence and "matching the risk with the client." now i will agree "they weren't selling MBS's to Grandma." Still...rated triple A no less? hahahaha. sure...Goldman can do it's usual "uncommonly cowardly thing"--the problem of course is that "this time was different." the collapse was so huge not even Goldman could weasel it's way out of this one. That is why the "normal people" really ARE concerned with REPUTATIONAL RISK:
http://www.youtube.com/watch?v=wCtSa0exAH0&feature=player_detailpage
Needless to say this article contains no such reference. More "rip your face off" bullshit. TIME TO DIE PHUCKER!

Sat, 03/17/2012 - 21:05 | 2266139 bank guy in Brussels
bank guy in Brussels's picture

There's two versions of how those terms are dealt with in US courts.

There's the Hollywood movie and TV version, or the way these terms are used against vulnerable people who are not poltical insiders ...

And there's the real version, where the US judges come from law firms that funnel bribery cash from the Wall Street banks and the US oligarchs ... Where after you have spent several years trying to sue Goldman Sachs, or JPM etc. ... wasting tens or hundreds of thousands on your own lawyers who are laughing at you behind your back ... the smirking US judge will dismiss your case on various 'technical grounds' ... and then the judge will go play golf with his buddies at the Goldman Sachs or JPM law firm.

Sun, 03/18/2012 - 13:26 | 2267295 mess nonster
mess nonster's picture

So the REAL question buried in the article is:

The interesting question is not who is right in the "he said, she said" duel between Smith and Goldman Sachs, but rather, why did the New York Times give Smith prime time status?

Who benefits from the creation of a narrative where the "whistleblower" takes on the behemoth? As the author of this article rightly points out, nothing has really changed. Why is this NOW a news story? Who is manipulating us, and to what end?

What's really going on????

Sat, 03/17/2012 - 22:16 | 2266297 ItsDanger
ItsDanger's picture

Thats why you cant have lawyers, career politicians, usual suspects elected ever.  Your counter argument is easily corrected via streamlined judicial process especially in cases with a wall street firm.  Judges arent really qualified to determine that process naturally but have all the influence to maintain status quo, ie. easy job.

Sat, 03/17/2012 - 20:59 | 2266116 bank guy in Brussels
bank guy in Brussels's picture

A good question is why Greg Smith and so many other people, imagine that what they have to say is 'new'.

People don't read books anymore, by and large ... so Greg Smith, and many people reacting to him, think it is 'new' because the past stories of that type were not blared out recently in CNN headlines, or any other place in their media-dominated reference framework. The past history that even us middle-aged folks know firsthand, is down the memory hole, forgotten.

Too many people think they are in some kind of 'new situation' because the corporate media never told them about anyone else's experience.

It's like how all those people robbed at MF Global were shocked - 'totally surprised' - by having their money stolen. They thought there was 'justice' in America ... because they never heard on CNN, about all the millions of other people robbed in America, unfairly foreclosed by other banks, cheated by other businesses, assets stolen by crooked courts and lawyers, and so on.

The victims never believed what they thought were 'internet conspiracy' stories, until they themselves got hit in the face ... and found that the US courts and government just told them to go fly a kite, too. When millions of other victims could say, Hey, welcome to the club, of endless victims whom no one is helping, and the media is ignoring.

In this 'modern' era, most people are controlled in their mental framework, by what they have seen recently in corporate media news, or on garbage internet sites like the CIA's propaganda department, Wikipedia.

Quite true that this Wall Street corruption is an old story ... I remember reading Liar's Poker not long after it was released, ages ago indeed. In the periods when I stayed in the United States, it did seem a characteristic of the businesses tied to the ruling US oligarchy, that absolute criminal ruthlessness, with that foul-mouthed, in-your-face aggressiveness, as described above.

But the whistleblowers are thinking they are 'original' because CNN has not been covering the stories of the other whistleblowers.

Sun, 03/18/2012 - 12:23 | 2267166 Kayman
Kayman's picture

Uhh...

You're breathing too much of that rarified cobblestone air in the old country. Nobody watches CNN.

Sun, 03/18/2012 - 03:08 | 2266710 nastybrutishandshort
nastybrutishandshort's picture

"Too many people think they are in some kind of 'new situation' because the corporate media never told them about anyone else's experience."

You've articulated a notion that's occurred to me as well, but I've resisted because I just couldn't accept the idea that many people are no longer taking responsibility for their own education. which is what it really boils down to.

Sun, 03/18/2012 - 10:59 | 2267026 illyia
illyia's picture

I've resisted because I just couldn't accept the idea...

Kids have to believe there's good out there somewhere. That its not all cooked fools being eaten by cannibals. Otherwise they would just kill their parents and stay out raging all night until they died. There's no reason to strive against an inevitable torture and death without hope of something better, moral, ethical.

So we all hope those we "entrust" are trustworthy. We hope what people assure us of is true. That the broker really will give us the deal he claims. We have to. We can't check the cred and history on every transaction ad naus.

Thus, when sheeple are muppets - called out by everyman for being the greater fool - with no response by the sheared, on MSM, on Zero Hedge, the civilization must collapse. Because faith is dead there can be only limited trade (due to time-consuming sheeple investigation formerly entrusted to your broker). In business, in government, in your fellows - faith and honor are dead. That leaves immediate family and "trusted" friends. We shall see about cannibalism...

 

Sat, 03/17/2012 - 20:46 | 2266085 reddweb
reddweb's picture

greg smith became a muppet.

He was a muppeteer, like all the financial industry employees, in the world of "human labor pyramid". Now he will have to play to the tunes of them. They will decide what his $ is valued at, his inflation, his retirement/pension/savings etc. How did he miss this ? Didn't he know the financial industry is the new priestly class of the modern world ? How can he live like a peasant after living like a priest for so long.

Sun, 03/18/2012 - 06:08 | 2266789 Peter Pan
Peter Pan's picture

The real muppets are the public who simply react by saying "this has happened before elsewhere". The fact that we write off this episode as just another episode bodes ill for our society which has become catatonic and accepting of anything and everything that Wall Street does to them and their savings.

Sun, 03/18/2012 - 17:18 | 2267779 Chuck Walla
Chuck Walla's picture

When the Government actively protects Goldman, who is left to hold them to account? I mean anyone of substance. It sure ain't me, i'm just meat in the grinder.

 

“When you see that trading is done, not by consent, but by compulsion—when you see that in order to produce, you need to obtain permission from men who produce nothing—when you see money flowing to those who deal, not in goods, but in favors—when you see that men get richer by graft and pull than by work, and your laws don’t protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is doomed.” 

 

 – Ayn Rand

Sun, 03/18/2012 - 08:55 | 2266879 Richard Chesler
Richard Chesler's picture

The fact the whole industry is crooked doesn't make the Goldman thieves any better.

 

Sun, 03/18/2012 - 18:45 | 2267930 CompassionateFascist
CompassionateFascist's picture

Debt and speculation on debt have replaced hard work and real wealth creation. Via: Kosher Mafia. Solution: undo Western Civilization's biggest mistake. Put the Tribe back in the Ghetto, let them fleece each other and no one else.

Sun, 03/18/2012 - 13:52 | 2267142 Kayman
Kayman's picture

Kraft Dinner

Thanks for the clarity.  The objective at Wall Street is to rape and brutalize the customer.  There are lots of books written on how this is done.  So, if you get raped and one of the rapists repents, too fucking bad.  Ya was warned. So go fuck yourself.

 This short term profit mentality is a long term cancer. Without the coerced backing of Wall Street, through the Fed, and ultimately the dying public, all the crooked cocksuckers in so-called investment banking would be back to peeling potatos.

 All the malinvestment in the world is coming home to roost.

Sat, 03/17/2012 - 23:47 | 2266468 YC2
YC2's picture

a muppet of a man

 

or a very manly muppet

 

http://www.youtube.com/watch?v=-WWWTW1P8rQ

 

that song has new context and is even richer in meaning than it was before!

Sat, 03/17/2012 - 21:14 | 2266155 shuckster
shuckster's picture

He's the loser who never got a bid during Rush Week

Do NOT follow this link or you will be banned from the site!