A Wall Street Insider's Response To Greg Smith

Tyler Durden's picture

Submitted by ZH reader Sleestak, who sports a 15 year career in the bulge bracket, including GS and the less fortunate Lehman Brothers, as a fixed income trader.

Greg Smith, the Jerry Maguire of Goldman Sachs, has struck a nerve with his New York Times OpEd admonition of the culture at his former firm, the symbol of all that is successful – and wrong – on Wall Street.  What he did was gutsy, if ill-advised.  But his disillusionment at a once-admired business culture gone bad is also almost adorably naïve and, worse, diverts from the real cancer that has metastasized in our banking “culture” during his years in it.

I’ll say it again: Greg Smith has nerve.  He took great risk putting his name to that letter.  He will be getting calls, emails and all else, straight to his person.  He might well face litigation, this from a foe few dare challenge.  And the men at the at the top, CEO Lloyd Blankfein and COO Gary Cohn, are powerful indeed, and Greg Smith has just publicly done them far more damage as individuals than any testimony in front of Congress did.

Still, what did Greg Smith really think he was getting into when he signed up to work on Wall Street?  Perhaps when contemplating his career he saw the ads we all see on television for Morgan or Merrill: “We’ll help you build your future with sound financial knowhow…”  And that does sound nice.  Finance is complicated and “lay” people surely can use a hand from a thoughtful ally in the trenches.  It is charming to think Greg Smith was taken in by such a mission.

But away from the advertising sets, Wall Street always has been a kill-or-be-killed pit of near-violent wills set against each other.  Perhaps a bit less so in the retail businesses that sell to Moms and Pops (though “broker production” is a hotly competitive racket, to be sure), but certainly in the institutional businesses where Greg Smith operated.   In these businesses, in which the banks trade with professional, accredited investors, the customers are often as bloodthirsty as the banks.  Yes, many could use a good salesman’s hand in furthering their interests, but as many – so many – seek the desk that’s sleeping that day and exact a predatory price. Many I’ve traded against gleefully relished it.

And frankly, that is how it should be.  Or at least, always has been.  One is expected to understand that when before sitting down to trade on Wall Street.  You leave money hanging in the air and somebody will come take it.  Such is the honor among thieves. This is not something that happened on Blankfein’s and Cohn’s watch.  Read Liar’s Poker.  Look up Jim Vranos.  Gordon Gekko.  Wall Street is an arena where people go to find who’s sleeping and relieve them of their money.

The thing is, left to its own, this isn’t so bad.  If a bunch of companies want to enter a figurative casino and see which one leaves with the most chips, who’s really hurt?  JP Morgan makes a killing, Citibank gets slaughtered, and at the end of the day there’s still a cold one at Killean’s Corner for $2 for Joe Sixpack.

But what Greg Smith’s letter does for pundits and politicians is help them dumb down the case against the banks and what they’ve become.  The great buzzword “muppet” - a term his Goldman colleagues use for “customer” - is easy to rally around as evidence of hardwired condescension.  (“Muppet” is a rather mild insult compared to ones I’ve heard and used, but it is far from a cultural crime to be arch when taking the other side of a professional’s well-considered trade.)  Unfortunately, focusing his suddenly large audience on sound bites and the “meanies” at his firm distracts from the far more destructive shift that has happened on or about Blankfein’s and Cohn’s watch.

It’s hard to pin down where began the banks’ road to their dangerous present position, though you could argue that it was at the downfall of Long Term Capital Management in the late 1990s.  No muppet he, former Salomon Brothers trader John Meriwether and a team of touted geniuses succeeded in getting the banks to lend that firm extreme amounts of money against positions thought to be low risk.  When discovered otherwise, these banks, particularly Lehman Brothers and Bankers Trust (where I then worked), found themselves muppetized.

Then-Federal Reserve Chairman Alan Greenspan, historically an outspoken prophet of free-market practices, found footing in a contrarian impulse in this case.  Here, capitalism’s consequences for poor business decisions would not be rendered.  Instead, he engineered a multi-billion deal in which all the solvent players at the table would ante up for the weak, and the team could resume the regular Friday night game.

Since that time, which importantly coincided with the repeal of Glass-Steagal, an historic policy error that enabled banks to gamble with depositors’ federally insured money, we have spiraled from crisis to escalating crisis, each time prescribing still more of the same medicine and ensuring the  banks’ prospects (though obviously not their managerial expertise).  The Internet Bubble pops?  The Fed slams short end interest rates into the dirt to cheapen banks’ financing.  Massive fraud at Enron, Worldcom, Tyco and others?  Same meds.

Then came the mother of all crises (so far), culminating with the failures of Bear Stearns, Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers and AIG.  And still, Fed and Government policy was unchanged.  Except for Lehman, the banks were held unaccountable, pumped full of cash and urged to get on with business as it was.

What did the banks do to deserve this incredible largesse?  Their rise to this position of official favoritedom is a feat of influence peddling that will be the subject of a history far more compelling than the one examining Goldman’s cultural waywardness under Blankfein and Cohn.  The methods are myriad: campaign contributions, lobbying, populating public office with former employees whose loyalties, are at the very least, questionable.  When this isn’t enough, the entire too-big-to-fail meme comes in handy, a form of extortion held over policy makers that promises extinguishment of life as we know it lest they get their way.

They have held themselves above capitalism’s consequences in a society which once prided itself on the concept of creative destruction.  Remember when Japan refused to liquidate its bad debts after its real estate debacle in the 1980s?  We mocked them and touted our own efficiency in punishing bad investments, liquidating debt and inventory, finding the clearing prices and pressing forward with new opportunity.  To boot, we tried thousands of bankers for fraud.

Well, as time and consequences progressed, we have come to take a large page out of Japan’s book.  In the years since 2008, the US Government – like Japan’s since the 1880s -- has allowed the banks accounting flexibility to mask bad loans.  The Fed has lent them money at rates they could not attract in the free market.  It has bought their bad assets onto its own (our central bank's!) balance sheet.  It has bought hundreds of billions in government bonds to make interest rates appear low enough to encourage people into the stock market and revive the banks’ prospects. 

To do this the Fed has printed trillions of the same money you store your savings in so it is worth less every day in terms of the things you need to survive.  That bank account you have is paying, what, one-tenth of one percent?  That’s the Fed’s super, bank-regenerating interest rate policy at work.  Think of that deposit as a loan to your bank (which it is) that they get at “great low rate!” with which they can, what, reinvest in our economy?  More likely your money will be speculating on Greek debt or oil futures.  Meantime, you’re embarrassed to give something so small as your annual interest to the paper boy for a tip.

Not one banking official of note has been tried for fraud.

This cannot be the right course for us to take in the wake of such a widely recognized crisis.  The lack of purposeful outrage is deafening.  We cannot restore lasting stability to our economy and society unless we are willing to face up to what we did wrong, right it, and throw out the bums who put us there.  Without that, the pattern of ever escalating crisis and interventionist, market-distorting solutions will surely lead to a bigger crisis still ahead.

Perhaps the most important symbol of our failure to address reform are the pictures accompanying much of the coverage of Greg Smith’s letter, those of a power-posing Blankfein and Cohn, who without the Government’s accommodation might be striking a very different pose, indeed.  You want to sign on to Mr. Smith’s army in joint distaste for Goldman’s lost culture?   Please, be my guest.  But more deserving of your enmity is the insidious co-option of the core premise of capitalism by a handful of people to ensure the banks’ undeserved survival, and their managers’ really nice lifestyle.