Greg Smith worked for Goldman Sachs for twelve years and left the organization yesterday, March 14, 2012. He was an executive director and head of the firm’s U.S. derivatives business for Europe, Africa and Asia. In departing, he wrote an op-ed piece for the New York Times explaining his decision.
His motive for leaving was that the investment bank did not put the interests of the client first in this modern world of derivatives and exotic financial instruments. A tradition of working for the maximum benefit of the client has eroded to a quaint story about the past.
Involved in Goldman’s personnel selection process and interviews, he saw the emphasis move to the aggressiveness of the candidates rather than their sense of ethics and moral fiber. With clients having an asset base of over one trillion dollars, Smith found it hard to continue with the organization.
Smith’s view is that the Goldman Sachs definition of leadership changed. It used to be about ideas, setting an example and proper actions. But now it is all about making enough money for the firm – by selling the
clients assets Goldman wants to get rid of, by trading to clients whatever makes the most money for
Goldman, and by getting involved with derivatives, which is a high-profit instrument.
Smith writes, "If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are."
http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=1
Comments on Smith’s article are available at:
http://www.nytimes.com/2012/03/15/opinion/the-firestorm-over-goldman-sachs.html
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Blog Author’s Comments
There are a couple of things the comments missed – important things – excluded from both the positive and negative comments.
Derivatives are an entirely synthetic type of instrument, designed from the inception to bilk clients for high banking fees to cover legal contracts involving highly unlikely future events. The bible for this story remains Richard Bookstaber’s A Demon of our Own Design (Wiley, 2007). Through derivatives and other high-risk (and high profit) shenanigans, Goldman Sachs mismanaged and bankrupted Montana Power, back in the days before the 2008 crisis. Greg Smith should have known about these capers and mediated upon them.
Derivatives offer quasi-insurance, without an actual insurance policy, without any requirement for reserves, and without any guarantee other than that offered by the financial entity (like Goldman Sachs) which is not a reinsurer but a "counterparty." In Europe, Smith’s territory, banks have reserves of only 1:61 or lower, a big factor in why every headline out of Athens, Greece, causes worldwide financial upset.
Derivatives mutate and are offered in new forms as frequently as possible – this dazzles the clients and avoids regulation. But it also makes it hard for even the offerer to establish the odds of default falling upon the counterparty. This happened in 2008 and the investment banks ran for federal government protection. Greg Smith needs to know that this irresponsibility is the chief ethical issue for Goldman Sachs, not simply the ripping off of clients.
His motive for leaving was that the investment bank did not put the interests of the client first in this modern world of derivatives and exotic financial instruments. A tradition of working for the maximum benefit of the client has eroded to a quaint story about the past.
Involved in Goldman’s personnel selection process and interviews, he saw the emphasis move to the aggressiveness of the candidates rather than their sense of ethics and moral fiber. With clients having an asset base of over one trillion dollars, Smith found it hard to continue with the organization.
Smith’s view is that the Goldman Sachs definition of leadership changed. It used to be about ideas, setting an example and proper actions. But now it is all about making enough money for the firm – by selling the
clients assets Goldman wants to get rid of, by trading to clients whatever makes the most money for
Goldman, and by getting involved with derivatives, which is a high-profit instrument.
Smith writes, "If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are."
http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=1
Comments on Smith’s article are available at:
http://www.nytimes.com/2012/03/15/opinion/the-firestorm-over-goldman-sachs.html
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
Blog Author’s Comments
There are a couple of things the comments missed – important things – excluded from both the positive and negative comments.
Derivatives are an entirely synthetic type of instrument, designed from the inception to bilk clients for high banking fees to cover legal contracts involving highly unlikely future events. The bible for this story remains Richard Bookstaber’s A Demon of our Own Design (Wiley, 2007). Through derivatives and other high-risk (and high profit) shenanigans, Goldman Sachs mismanaged and bankrupted Montana Power, back in the days before the 2008 crisis. Greg Smith should have known about these capers and mediated upon them.
Derivatives offer quasi-insurance, without an actual insurance policy, without any requirement for reserves, and without any guarantee other than that offered by the financial entity (like Goldman Sachs) which is not a reinsurer but a "counterparty." In Europe, Smith’s territory, banks have reserves of only 1:61 or lower, a big factor in why every headline out of Athens, Greece, causes worldwide financial upset.
Derivatives mutate and are offered in new forms as frequently as possible – this dazzles the clients and avoids regulation. But it also makes it hard for even the offerer to establish the odds of default falling upon the counterparty. This happened in 2008 and the investment banks ran for federal government protection. Greg Smith needs to know that this irresponsibility is the chief ethical issue for Goldman Sachs, not simply the ripping off of clients.
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