“These days, the most common question I get from junior analysts about derivatives is, ‘How much money did we make off the client?’”
– Greg Smith, former Goldman Sachs VP
Seven and a half months ago, Greg Smith resigned from Goldman Sachs with a bang, or more specifically, an op-ed piece in the New York Times citing a “toxic and destructive” environment. Once a recruiting video poster-child for Goldman Sachs, Smith had become alarmed at how the culture increasingly ignored what was right for the clients in favor of milking them for maximum short-term profits.
Over nearly 12 years at the firm, Smith observed as the company culture had gone from one of integrity and “doing right by our clients” to one of preying on clients, particularly less sophisticated clients, who were commonly referred to as “muppets” by managing directors.
“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. 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.”
Lamenting about the future of Goldman Sachs, Smith asserts that “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” He goes on to say,
“You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.”
Then in a not-so thinly veiled warning, he asserts, “It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you.”
A seemingly soft-spoken, earnest young man, Smith has been praised by many for finding the courage to walk away from a high salary (estimated between $500k and $750K) and burn his bridges in the hopes of giving the company he used to love a “wake-up call.”
Not surprisingly, Smith has also come under scrutiny and even attack. Was he a disgruntled employee? Why did he wait so long to leave? Did he ask for a raise before quitting?
Early reviews of his book are mixed, with a clear disappointment expressed that there is not enough tell-all dirt, and too much about the author. Some of his recollections are also questioned as less than precise.
But perhaps we’re missing the point. Smith didn’t set out to expose tell-all secrets about executives with prostitutes and drugs (detailed in the Academy-award winning documentary about the economic crash, Inside Job), or even reveal illegal behavior.
No, Smith’s concerns are with ethics, not crimes. His essay blatantly stated that he did not witness illegal behavior, but expressed concern that the firm’s employees “…push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals… Every day, in fact.”
Proving his point, Goldman Sachs settled a Securities and Exchange Commission fraud suit for over half a billion dollars, the largest SEC penalty paid by a Wall Street firm. (The SEC accused the bank of selling investments to clients when the bank believed the investments were going to fail. Without admitting or denying guilt, Goldman paid $550 million to settle the case.)
Asked why we should care about what happens on Wall Street in an interview with the Associated Press, Smith replied,
You see a lot of commentary that Wall Street is just rich people gambling with other rich people’s money. I want people to know that it ultimately affects everyone. In 2008, banks had to be bailed out and that hits taxpayers. If you’re a teacher or a fireman or a charity, and you have an investment fund that is trading with Wall Street, and Wall Street is not being held accountable and behaving ethically, then that directly impacts everyone.
Looking to shield yourself from Wall Street shenanigans?
Read our recent posts about Mutual Insurance Companies: The Tortoise vs. the Hare, The Banker’s Secret (do what the banks do, not what they tell YOU to do!), and The Problem with Risk-Assessment Profiles .
Then get a copy of Busting the Financial Planning Lies to get the details about how to use Prosperity Economics to create sustainable wealth, while isolating yourself from the risks of Wall Street.