Man vs Machine

As a blogger, sometimes there is a dearth of topics to write about, and sometimes Christmas comes early. My benefactor for today is Greg Smith, a former executive director at Goldman Sachs who tendered his resignation as an op-ed in the New York Times. If you have not read it, please do so immediately, especially if you are a Goldman client.

According to Smith, his primary reason for quitting Goldman is the devolution of its culture into a “toxic and destructive” environment where clients (or “muppets”) are viewed purely as a source of profit  – and the extraction of said profits is expressed in high poetic diction like “ripping their eyeballs out.” Naturally, Smith asks the proverbial question, “How did we get here?”

His answer centers on the three ways that Goldman “services” its clients: a) persuading them to buy stocks or other securities that Goldman is trying to clear from its inventory. It reminds us of Robert Soros’s admonition, “You are just a buyer of Wall Street’s dreck.” b) getting clients to trade the products that provide the highest commissions to Goldman, or “elephant hunting.” c) If all else fails, selling them illiquid opaque products with 3-letter acronyms like CDO’s. One cannot help but be reminded of William Bernstein’s quip about stockbrokers servicing clients in the same way that Bonnie and Clyde serviced banks.

While we might be tempted to think that as long as we are not Goldman clients, none of this should concern us. Unfortunately, however, many of us are unwitting Goldman clients via the public pension funds entrusted to Goldman and its deep involvement in the debt-based financing of public projects.

While we certainly applaud and congratulate Smith for his courageous public stance, the one point we would contest is Smith’s assertion that the Goldman Sachs of twelve years ago was a place of high corporate culture where the notion of putting the client first prevailed. Twelve years ago was the very top of the Internet bubble where Goldman made billions at their clients’ expense from underwriting IPO’s for dot com companies that are now either defunct or trade as penny stocks. Further details may be found in Matt Taibbi’s article, “The Great American Bubble Machine” where he famously described Goldman as a “great vampire squid wrapped around the face of humanity.”

Since Mr. Smith has essentially transformed himself into a toxic asset as far as Wall Street is concerned, we suggest that he find a career where he is actually providing valuable goods and services to society. If, however, he intends to stay in the financial services industry, then he should try sitting on the same side of the table as his clients for a change by becoming a fee-only registered investment advisor. As for Goldman’s clients, we suggest that they follow Smith’s example and sever their ties immediately, unless of course, they enjoy being viewed as muppets with pockets ripe for the picking.

 

10-23-2012 Follow-up:
In an interview that was broadcast on 60 Minutes on 10/21/2012, Mr. Smith had the following delightful exchange with Anderson Cooper while they were discussing Goldman’s pitching of complex and hazardous financial products to pension funds in states like Alabama.

Anderson Cooper: So, did the people you work with [at Goldman Sachs] want unsophisticated clients?

Greg Smith: Getting an unsophisticated client was the golden prize. The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.