A Public Exit From Goldman Sachs Hits at a Wounded Wall Street# Stock
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http://www.nytimes.com/2012/03/15/business/a-public-exit-from-g
March 14, 2012
A Public Exit From Goldman Sachs Hits at a Wounded Wall StreetBy NELSON D.
SCHWARTZ
Wall Street traders come and go all the time, but few have quit with the
flair of Greg Smith. The way he resigned from Goldman Sachs, and what he had
to say, could reignite a debate over how much Wall Street has changed in
the wake of the financial crisis.
Very little, he said in an Op-Ed column in The New York Times on Wednesday.
Mr. Smith, a London-based executive director for Goldman Sachs overseeing
equity derivatives, decried a drastic change in culture at the firm since he
joined it 12 years ago, with profits now coming before the interest of
clients who, he wrote, are often derided as “muppets” by people at Goldman
.
Mr. Smith is saying publicly what others whisper privately, which is why his
cri de coeur may be so provocative. Even on Wall Street — where making
money is good, and making more money is better — a few shibboleths still
command respect, including the one that the customer should come first, or
at least second, not dead last. Since the financial crisis, in fact, nearly
all the big banks have claimed to be client-centric as they seek to rebuild
public trust.
At meetings at Goldman, on the other hand, “not one single minute is spent
asking questions about how we can help clients,” Mr. Smith wrote. “It’s
purely about how we can make the most possible money off of them. If you
were an alien from Mars and sat in on one of these meetings, you would
believe that a client’s success or progress was not part of the thought
process at all.”
“People who care only about making money will not sustain this firm — or
the trust of its clients — for very much longer,” warned Mr. Smith, whose
biography page traces his time with the firm in New York and Europe.
A Goldman Sachs spokesman responded to the piece early Wednesday: “We
disagree with the views expressed, which we don’t think reflect the way we
run our business. In our view, we will only be successful if our clients are
successful. This fundamental truth lies at the heart of how we conduct
ourselves.”
Mr. Smith’s criticism, much more than stories about bonuses or brickbats
from the likes of Occupy Wall Street, could be especially painful for Wall
Street now. Memories are still fresh of the Securities and Exchange
Commission lawsuit filed in April 2010 accusing Goldman of fraud, after it
sold clients complicated mortgage backed securities that later soured, and
never mentioned that it had bet against them.
The parade of senior Goldman executives who testified before Congress after
the case arose seemed to put a public face on what had been a broader sense
of distrust of Wall Street in the aftermath of the financial crisis,
focusing ever more attention on a firm whose patriarchs had been adamant
about having high standards.
Wall Street, of course, has always sought profits — but if greed were to be
countenanced, it should be long-term greed, not short-term greed, in the
words of Gus Levy, who led Goldman Sachs in the 1960s and ’70s. With long-
term greed, money was made with clients, not from them.
Veterans of Goldman and other top-tier firms say there was a time when long-
term greed was the order of the day, at least publicly, and it benefited
firms and their partners if not enormously, then certainly generously. But
over the last 25 years, as that incentive structure metamorphosed, longtime
bankers and scholars say, Wall Street has been remade in ways that Mr. Levy
would hardly recognize.
The shift in incentives has followed the evolution of the business itself,
industry insiders and other experts said. Partnerships, where the leaders of
the firm had their own fortunes on the line, became publicly-traded giants.
Proprietary trading evolved into a Midas-like source of money, challenging
investment banking and client relationships. And with a free hand thanks to
Washington, investment banks could take on ever more risk, amplified by debt
.
“When these firms changed from partnerships to public companies, the ethos
changed dramatically,” said Charles M. Elson, a professor of corporate
governance at the University of Delaware. “The notion of client loyalty
went out with the old structure. And as these became public companies,
clients looked for the cheapest deal, and the firms looked for as many
clients as possible.”
With the rapid growth of proprietary trading beginning the 1980s, as firms
used their own capital to make bets, a short-term mentality came to dominate
firms, according to Mr. Elson. “You make a much bigger buck on a
transaction than on the long-term relationship,” he said. “You have
profiteers as opposed to advisers.”
Compensation followed. Before 1990, pay for the chief executives of
financial firms were on par with those of chief executives of the largest
traded companies, or even slightly lower.
By 2005 the pay was roughly 250 percent bigger on average, said Ariell
Reshef, a professor of economics at the University of Virginia. Broadly
speaking, between 1980 and 2005, bonuses and salaries in finance increased
70 percent more than average pay elsewhere.
To be sure, longtime bankers say it is not like short-term greed was absent
in the past. It has been around since traders gathered under a buttonwood
tree and founded the New York Stock Exchange in 1792. But the astounding
size of Wall Street’s biggest firms — and the fortunes to be made — have
altered the calculus.
“I think there was plenty of skullduggery going on,” said Jerome Kohlberg
Jr., who worked at Bear Stearns for 21 years before leaving to found
Kohlberg Kravis Roberts in 1976 with Henry R. Kravis and George R. Roberts.
Still, the trend has accelerated in recent years, according to Mr. Kohlberg.
“When I first started on Wall Street, it was a small group and everyone
knew everyone else,” he said. “If you stepped out of line, people would
not do business with you.”
Not everyone agrees with Mr. Kohlberg’s view. Anticipating arguments that
are likely to be made in the coming days, one billionaire hedge fund manager
who insisted on anonymity argued that conflicts have always come with the
territory, and that clients should be sophisticated enough to know that. “
These aren’t dumb people,” he said.
The key, he said, is to anticipate the conflicts, and if need be, use them
to your advantage. “Find the one that has the biggest conflict and get him
on your side,” he said. “You want somebody who understands both sides.”
“The guy on both sides of the equation will find a deal to get the deal
done,” he added. “Is he getting his bread buttered on both sides? Who
cares. Just get the deal done.”
Wall Street could now pay a steep price for short-term thinking, experts
said, even if salaries and behavior have not caught up with public
disillusionment. Hemmed in by new regulations, the big banks are being
forced to give up proprietary trading. Fewer graduates of elite Ivy League
schools are flocking to careers in finance. And the anger is spreading, seen
not only in the Occupy Wall Street protests but also in the increasing
distrust among the most affluent consumers.
Over all, the percentage of people who have little or no faith in the
fairness of investment companies rose to 41 percent in 2011 from 26 percent
in 2008, according to Yankelovich Monitor 2011. Only credit card companies,
corporate chief executives, the federal government and lawyers fared worse.
Even banks and insurance companies did better.
Nor is the outrage a matter of populist revolt. The feelings were identical
in households whether they earned $100,000 or $50,000.
While Mr. Smith’s career at Goldman is over, he insisted it was not too
late for his former firm and the rest of Wall Street.
“Make the client the focal point of your business again,” he wrote. “
Without clients you will not make money. In fact, you will not exist. Weed
out the morally bankrupt people, no matter how much money they make for the
firm. And get the culture right again, so people want to work here for the
right reasons.”
March 14, 2012
A Public Exit From Goldman Sachs Hits at a Wounded Wall StreetBy NELSON D.
SCHWARTZ
Wall Street traders come and go all the time, but few have quit with the
flair of Greg Smith. The way he resigned from Goldman Sachs, and what he had
to say, could reignite a debate over how much Wall Street has changed in
the wake of the financial crisis.
Very little, he said in an Op-Ed column in The New York Times on Wednesday.
Mr. Smith, a London-based executive director for Goldman Sachs overseeing
equity derivatives, decried a drastic change in culture at the firm since he
joined it 12 years ago, with profits now coming before the interest of
clients who, he wrote, are often derided as “muppets” by people at Goldman
.
Mr. Smith is saying publicly what others whisper privately, which is why his
cri de coeur may be so provocative. Even on Wall Street — where making
money is good, and making more money is better — a few shibboleths still
command respect, including the one that the customer should come first, or
at least second, not dead last. Since the financial crisis, in fact, nearly
all the big banks have claimed to be client-centric as they seek to rebuild
public trust.
At meetings at Goldman, on the other hand, “not one single minute is spent
asking questions about how we can help clients,” Mr. Smith wrote. “It’s
purely about how we can make the most possible money off of them. If you
were an alien from Mars and sat in on one of these meetings, you would
believe that a client’s success or progress was not part of the thought
process at all.”
“People who care only about making money will not sustain this firm — or
the trust of its clients — for very much longer,” warned Mr. Smith, whose
biography page traces his time with the firm in New York and Europe.
A Goldman Sachs spokesman responded to the piece early Wednesday: “We
disagree with the views expressed, which we don’t think reflect the way we
run our business. In our view, we will only be successful if our clients are
successful. This fundamental truth lies at the heart of how we conduct
ourselves.”
Mr. Smith’s criticism, much more than stories about bonuses or brickbats
from the likes of Occupy Wall Street, could be especially painful for Wall
Street now. Memories are still fresh of the Securities and Exchange
Commission lawsuit filed in April 2010 accusing Goldman of fraud, after it
sold clients complicated mortgage backed securities that later soured, and
never mentioned that it had bet against them.
The parade of senior Goldman executives who testified before Congress after
the case arose seemed to put a public face on what had been a broader sense
of distrust of Wall Street in the aftermath of the financial crisis,
focusing ever more attention on a firm whose patriarchs had been adamant
about having high standards.
Wall Street, of course, has always sought profits — but if greed were to be
countenanced, it should be long-term greed, not short-term greed, in the
words of Gus Levy, who led Goldman Sachs in the 1960s and ’70s. With long-
term greed, money was made with clients, not from them.
Veterans of Goldman and other top-tier firms say there was a time when long-
term greed was the order of the day, at least publicly, and it benefited
firms and their partners if not enormously, then certainly generously. But
over the last 25 years, as that incentive structure metamorphosed, longtime
bankers and scholars say, Wall Street has been remade in ways that Mr. Levy
would hardly recognize.
The shift in incentives has followed the evolution of the business itself,
industry insiders and other experts said. Partnerships, where the leaders of
the firm had their own fortunes on the line, became publicly-traded giants.
Proprietary trading evolved into a Midas-like source of money, challenging
investment banking and client relationships. And with a free hand thanks to
Washington, investment banks could take on ever more risk, amplified by debt
.
“When these firms changed from partnerships to public companies, the ethos
changed dramatically,” said Charles M. Elson, a professor of corporate
governance at the University of Delaware. “The notion of client loyalty
went out with the old structure. And as these became public companies,
clients looked for the cheapest deal, and the firms looked for as many
clients as possible.”
With the rapid growth of proprietary trading beginning the 1980s, as firms
used their own capital to make bets, a short-term mentality came to dominate
firms, according to Mr. Elson. “You make a much bigger buck on a
transaction than on the long-term relationship,” he said. “You have
profiteers as opposed to advisers.”
Compensation followed. Before 1990, pay for the chief executives of
financial firms were on par with those of chief executives of the largest
traded companies, or even slightly lower.
By 2005 the pay was roughly 250 percent bigger on average, said Ariell
Reshef, a professor of economics at the University of Virginia. Broadly
speaking, between 1980 and 2005, bonuses and salaries in finance increased
70 percent more than average pay elsewhere.
To be sure, longtime bankers say it is not like short-term greed was absent
in the past. It has been around since traders gathered under a buttonwood
tree and founded the New York Stock Exchange in 1792. But the astounding
size of Wall Street’s biggest firms — and the fortunes to be made — have
altered the calculus.
“I think there was plenty of skullduggery going on,” said Jerome Kohlberg
Jr., who worked at Bear Stearns for 21 years before leaving to found
Kohlberg Kravis Roberts in 1976 with Henry R. Kravis and George R. Roberts.
Still, the trend has accelerated in recent years, according to Mr. Kohlberg.
“When I first started on Wall Street, it was a small group and everyone
knew everyone else,” he said. “If you stepped out of line, people would
not do business with you.”
Not everyone agrees with Mr. Kohlberg’s view. Anticipating arguments that
are likely to be made in the coming days, one billionaire hedge fund manager
who insisted on anonymity argued that conflicts have always come with the
territory, and that clients should be sophisticated enough to know that. “
These aren’t dumb people,” he said.
The key, he said, is to anticipate the conflicts, and if need be, use them
to your advantage. “Find the one that has the biggest conflict and get him
on your side,” he said. “You want somebody who understands both sides.”
“The guy on both sides of the equation will find a deal to get the deal
done,” he added. “Is he getting his bread buttered on both sides? Who
cares. Just get the deal done.”
Wall Street could now pay a steep price for short-term thinking, experts
said, even if salaries and behavior have not caught up with public
disillusionment. Hemmed in by new regulations, the big banks are being
forced to give up proprietary trading. Fewer graduates of elite Ivy League
schools are flocking to careers in finance. And the anger is spreading, seen
not only in the Occupy Wall Street protests but also in the increasing
distrust among the most affluent consumers.
Over all, the percentage of people who have little or no faith in the
fairness of investment companies rose to 41 percent in 2011 from 26 percent
in 2008, according to Yankelovich Monitor 2011. Only credit card companies,
corporate chief executives, the federal government and lawyers fared worse.
Even banks and insurance companies did better.
Nor is the outrage a matter of populist revolt. The feelings were identical
in households whether they earned $100,000 or $50,000.
While Mr. Smith’s career at Goldman is over, he insisted it was not too
late for his former firm and the rest of Wall Street.
“Make the client the focal point of your business again,” he wrote. “
Without clients you will not make money. In fact, you will not exist. Weed
out the morally bankrupt people, no matter how much money they make for the
firm. And get the culture right again, so people want to work here for the
right reasons.”