Wednesday, March 14, 2012

More Goldman Sachs Drama

Goldman Sachs continues to be dogged by accusations and charges that besmirch the venerable investment bank's once sparkling reputation. The latest is a resignation letter published by the New York Times wherein a mid-level company Vice-President (Greg Smith) claims that Goldman has lost its way, that the culture at has become "toxic and destructive," and now the "morally bankrupt" firm cares much more about firm and individual profit than it does about its clients. In response to this resignation swipe, Goldman Sachs executive leadership including CEO Blankfein and President Cohn have scrambled over the past few days to respond. The most explosive of Smith's claims follow (from the NY Times):

"When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival. . . .

. . . 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.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God's work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people 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? Absolutely. Every day, in fact."

Pretty serious allegations.

In response, Blankfein, Cohn and others have responded (from the Goldman Sachs website):

"By now, many of you have read the submission in today’s New York Times by a former employee of the firm. Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.

In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people. Everyone is entitled to his or her opinion. But, it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.

While we expect you find the words you read today foreign from your own day-to-day experiences, we wanted to remind you what we, as a firm – individually and collectively – think about Goldman Sachs and our client-driven culture. . . .

And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high."


  1. Mr. Smith's comments seem to have had an effect on GS stock: on the day of his comments the stock plummeted a total of $4.00. This would be a considerable loss for most companies but GS sits at $123.06 at the time of this comment and the temporary drop did not put much of a dent in the stock value. In addition, the loss has almost been completely recovered already. It is interesting to extrapolate from the stock's movement how the shareholders may feel about Mr. Smith's insight on the company's culture .

  2. Perhaps the reason the numbers recovered so quickly is the damage control that Goldman Sachs has done (see link above in blog post) and the support that other companies such as Morgan Stanley have shown (see, e.g., James Gorman, Morgan Stanley CEO, said he doesn't think that picking one employee to write such a letter as Mr. Smith did is unfair. Goldman Sachs did a fairly good job of painting Greg Smith as a disgruntled employee. In a situation like this, it's hard to know who to believe.

  3. Although it seems unclear whether the culture of GS is adequately portrayed by Smith or GS executives, I think that GS may not have taken the best approach in its damage control following the NYT piece. After reading the NYT piece, it seems to me that Smith was in a particularly good position to assess the culture of GS. I think that the GS response was a little under-thought. The focus of the response was labeling Smith as a disgruntled employee and mentioning the "exceptional service" feedback from clients (who I would argue would likely base such an assessment on the fact that GS made them the money they wanted). I think this only shows that GS does not think there is any problem whatsoever, which I do not find too reassuring. It may have been in GS's best interest to note these possibilities and then go one step more by acknowledging that some people may not appropriately represent the values of GS (at least the values as perceived by those at the top). GS could have then reassured the public that it would better seek to ensure that the entirety of GS comforted with the culture it wanted to have and that it would remedy any shortcomings, as charged by Smith, if present. I think such a response would have went a lot farther than ignoring what may be a legitimate problem and attacking a "disgruntled" employee.

  4. By acknowledging some of Goldman's policies were in fact wrong, they would have given Smith's words credibility. However, the Goldman cover-up should not be the issue of this debate. What should be at issue is the fact this is not the first time Goldman employees have been caught purposely deceiving clients and their inability to correct the problem from previous accusations. The Senate Governmental Affairs hearing on April 27, 2011 was a very public display of how Goldman sells their clients "shitty deals" to make their quarterly reports seem more profitable. (see here: A public defection of a top executive citing designed deception of clients will probably send shockwaves across the institution for a while but will not effect them in the long run (again, this is not something new). This just reinforces how much power institutions like Goldman have over our economy and the inability or unwillingness of the political world to push back.

  5. Having worked in the securities industry in 2008-2010, I experienced first hand the fall out of what I think was a perfect storm of corruption that came to an ugly head at the expense of innocent shareholders. It is so disgusting to me that to this day, Goldman Sachs wants to pretend like they did nothing wrong. When reality, the substantial profits they made in 2007 from betting on the fall out of sub-prime market helped lead to the entire crash of the market in 2008. I am not saying that they are the totality of the problem, of course, but their conduct was not ok then and it is not ok now. When profits come before the good of the shareholder, companies should be held accountable. Instead of blaming a "disgruntled" employee, provide the public for some explanation of why year after year, the shareholder is last in line. I think that this action by Goldman Sachs is just another indication that they haven't learned anything since 2008. And unless they are willing to step up to the plate and show the changes they have made in the company rather than throwing some stupid approval ratings at the papers, the problems will continue to mount.