Since Greg Smith’s resignation letter was published in The New York Times last week, commentators have rushed to agree with his complaint about the sad decline of the culture at Goldman Sachs. Smith’s previous employer has, during the past few years, apparently abandoned its client-supportive business model for the false god of short-term profits.
It’s alleged that clients are denigrated behind their backs and fooled into making poor investments; ones that Goldman has probably betted against anyway.
This solemn lament for a corrupted Eden is absurd, if not disingenuous.
I worked as a bond salesman on Goldman’s London trading floor in the early 1990s. Smith’s description of activities, attitudes and behaviour seems pretty familiar. Unwanted trading positions were dumped on institutional investors, new bond issues were as relentlessly sold as in any boiler room. It was the nature of the game, accepted by players on all sides, unless they were timid, naive or suffering from delusions that their jobs had a higher purpose.
The most dominant characters were the head of debt syndication and the leading eurobond trader. Both possessed enormous stamina, a tireless attention to detail, utter dedication, a shameless ability to promote their products, loud voices and an eye for vulnerability.
They were bullies, but perfect for their tasks: to make money from positions they had gained in the primary or secondary markets, constantly churning, berating colleagues and, because they succeeded, they bossed the playground.
Salespeople were in a precarious position. They had to balance their role of making traders money with ensuring that the client would speak to them tomorrow. In practice, that meant offloading the traders’ unwanted positions or shifting their profitable axes, while keeping clients up-to-date with market gossip, the views of the firm’s analysts and economists, and coming up with trade ideas. The skill was to discover or, more often, manufacture a reason for buying or selling securities that suited the traders’ positions, without the client later thinking he had been shafted.
In return, traders paid virtual commissions for transactions that earned them the biggest margins, and salespeople were also rewarded for selling structured products with high embedded fees. These commissions were reflected in real year-end bonuses.
The salesperson was merely a conduit, vulnerable to complaints on all sides. More often than not, theirs was also a reactive role.
A client calls asking for a bid or offer, the salesperson shouts the request to the trader, who is immediately suspicious that the client is hawking his business around the market, not revealing the full size of his order. The salesman tries to convince him that his client is well-behaved. The trader might be persuaded and show a competitive price — and if it turns out that the market subsequently moves against him because he was wrong to be so trusting, he will later rage against the salesperson and, of course, the sneaky, dishonest client. That client is not a muppet. Instead, he’s a shark.
But if a client already has a bad reputation, the trader might then quote an uncompetitive price; and the client will moan that the firm is running away and threaten the salesperson that he’ll take his business elsewhere in future. Bang goes the salesperson’s livelihood.
There are two obvious conclusions. Day-to-day, the relationship between client and investment bank was adversarial, but there were constraints imposed by the recognition that the two needed each other. The other is that the job of securities salesman wasn’t very impressive. Big salaries and bonuses could bolster egos in a self-delusionary way, but in the end, self-respect and dignity were corroded.
I suspect that hasn’t changed much — except that the growth of sales-traders has further highlighted the artificiality of the distinction between the two positions, the switch to more electronic dealing has made the salesperson’s job even less relevant and the emergence of hedge funds has shaped a selectively collusive model. Perhaps, Greg Smith saw that too.
However, the problem for Goldman is that it has nurtured a conceit over time that it behaves differently from any other investment bank that deals in equities, bonds and derivative securities. It is now suffering for its pretension, and its hubris.
Instead, the bank has just often been better than its competitors — more aggressive, more cut-throat and totally uncompromising in its clear-headed recognition of the nature of the businesses in which it operates. It’s also worth noting that two of its co-CEOs in the 1990s, Robert Rubin and John Corzine, had both been traders.
That conceit has an internal purpose. It has fostered allegiance to the Goldman cult among its employees, encouraging them to work longer hours and make personal-life sacrifices for the bank’s greater good — for the firm’s partners, in effect, before it went public in 1999. In the bank’s public form, most will never become partner managing directors or earn the really big money. Clearly, there are plenty of muppets working at Goldman Sachs, as well as among its institutional clients.
The illusion also has an added function. “Smoke and mirrors” is an essential strategy in the investment banking game, and Goldman has been a master of the techniques for a long time. Apart from nominated speakers — such as the bank’s well-known economists — low profiles are maintained, and secrecy is tight. Yet, rumours circulate about the smartness and work ethic of its rainmakers, and the nerveless punts taken by its alpha traders.
Meanwhile, the firm’s “business principles” are paraded, combining the triteness of those self-help management books with the earnestness of a smug religious convert. The message is that the firm really wants to be a partner in the growth of individual companies and economies as a whole, rather than simply a money-making machine. Staff and senior executives can spin this feel-good job motivation to family, friends and to the jealous hordes, and even kid themselves.
But, mostly the idea is nonsense. Public service, and a different type of power, can be enjoyed in later careers — and, as evinced by the prominence of Goldman alumni in governmental positions, is quite likely.
It shouldn’t be a surprise — and isn’t to the thousands of people employed in the financial industry — that Goldman simply wants to maximise profits, and its employees want to become rich. Seriously, has it ever been otherwise? And if the firm is competing in a game where the other players — which obviously should exclude retail clients — aspire to do the same then it is hard to understand what is wrong with its behaviour, as long as it is within the law. They are simply better at it.
Whether the game itself is a healthy one is another matter entirely.