For someone unfamiliar with the way Wall Street works – the nitty gritty of what it’s like to work on a trading desk – Greg Smith’s memoir, “Why I Left Goldman Sachs,” may prove deeply educational. Those of us who were hoping for greater insight into the ways in which the evolution of Wall Street had not only produced a flawed and dysfunctional culture within white shoe firms but produced more deals like the infamous Abacus transaction are likely to be treated merely to anecdotes of trading hijinks and the propensity to bet on anything, including which raindrop will roll down a windowpane faster, and Smith's attempts to work his way higher in the Goldman Sachs empire.
By the time I turned the last page, it was becoming clear that this tell-all of life within Goldman Sachs doesn’t tell us all that much that we didn’t already know. Indeed, it seems that Greg Smith simply was slower to wake up to what many of already knew, perhaps because he dwelt so comfortably within the belly of the beast.
There are interesting vignettes, to be sure (although some of them, like Lloyd Blankfein “air drying” by ambling through the Goldman locker rooms naked after a shower, I will try to banish from my mind as rapidly as possible). But while Smith may have set out to describe the breakdown of the client service culture on the Street and within Goldman Sachs, he very rarely departs from ground that has already been very well trodden.
Goldman Sachs as hedge fund? Check. That view of Goldman was well entrenched on Wall Street and written about by financial journalists nearly a decade before Smith had his epiphany on the subject.
The willingness not only to profit from those who Smith describes as “the Simple Client” and “the Client Who Doesn’t Know How to Ask Questions” but to actively work against them is unpleasant. I had been talking to various financial market participants about what is more widely referred to as “dumb money” and the way investment banks abused those relationships long before Smith says he knew what an investment bank was.
A Wall Street institution becoming its own best client? Again, the writing was on the wall by 2006. Smith reminds me of the character played by Claude Rains in the iconic 1942 film Casablanca, when he declaims that he is “shocked, shocked to find that gambling is going on” at the casino operated by Humphrey Bogart.
In many ways, this book reads like the collapse of a marriage -- what happens when one partner realizes that his spouse isn’t who he thought she was. He now has to reevaluate every detail of her character and their relationship and in doing so, recognizes that the entire marriage was built on shaky ground. That is what happened to Smith after he left New York for London, where the dysfunctional elements of today’s Wall Street were more on display, just like the broad pinstripes and garishly colored ties that denizens of the City of London sport in place of the subdued Brooks Brothers attire that is the mode on Wall Street.
Smith has his side of the narrative – a prism through which he sees Wall Street. Goldman Sachs, the spurned former object of his affection now spinning for all it’s worth has a version that is, unsurprisingly, rather different.
The truth probably lies somewhere in between. Goldman’s comments that Smith was unhappy with the size of his compensation package have the ring of truth – there are repeated small references scattered throughout the book that reflect that – and it’s likely that played a role in his growing discontent with the firm. It’s also likely that he heard some of the comments about clients as “muppets” that he reports in the book, comments that Goldman insists were never made.
Overall, the comments made by both sides sound eerily like those of a divorced couple busily rewriting history and convincing themselves and trying to convince others of the truth of their particular version.
Does Smith’s version offer valuable insights for those trying to understand or trying to regulate Wall Street? Some of Wall Street’s critics will argue that there is no such thing as too many people pointing out “that Goldman Sachs and Wall Street had lost sight of their mission: servicing clients.” Certainly, it’s worth hearing from an insider who specialized in working with the kinds of clients that increasingly get short shrift from the financial system, yet that are at the heart of the economy.
To me, the problem lies less in what Smith says than what he was either unwilling or unable to reveal. (Unwilling because had he done so, he may well have violated the rules governing client confidentiality and exposed himself to legal penalties.) But for anyone who followed the debate surrounding the Abacus transaction that was at the heart of the lawsuit filed by the SEC against Goldman Sachs (later settled with a record fine but no admission of culpability) there is little that is surprising or new.
In the final pages, Smith describes a handful of transactions that, in his eyes, had become a pattern of behavior. In one, a trader describes how he took advantage of a client’s trust to earn an extra $1.5 million. “The client was trusting and hadn’t checked the price with any other brokers,” Smith writes. “This wasn’t some rogue associate who’d gone off the reservation. His boss was sitting right next to him, smiling and nodding” as he crowed about his coup.
He gives other small examples: a mistake by a client that reflected a misunderstanding of options where a Goldman salesperson promptly took advantage, profiting from the fact that a client didn’t have a terminal displaying live stock quotes on his desk and executing a trade at an old price that gave Goldman a bigger profit. Unethical, to be sure… like a taxi driver who keeps an extra $20 when he makes change on a $100 bill when dealing with a tourist unfamiliar with the local currency.
Ultimately, the part of the book that could prove to be most valuable isn’t Smith’s all-too-familiar comments about Wall Street’s problems. These have all been highlighted previously, most publicly at the April 2010 Congressional hearings into Goldman Sachs and the Abacus trade (which, at the time, Smith says in the book he viewed as a show trial). Smith wasn’t a part of those transactions, nor does he appear to have been close enough to others that he characterizes as corrupt to really give us an insight into not just the fact that the culture had changed but into why and how it had changed.
He is even less able to provide useful prescriptions for how to effect a reversal of that cultural change in an era in which investment banks are under tremendous pressure to generate a return on equity that is greater than their cost of capital. (That’s a conundrum that Smith never even mentions, a big flaw in his analysis.)
What Smith does do, however, is to shine a light, however obliquely, on the problems with the “buy side,” and on the ever-widening gap between the Wise Clients and the Wicked Clients, on the one hand, and the Simple Clients and the Clients Who Don’t Know How to Ask Questions on the other. The problems on Wall Street exist because of the latter two groups – pension fund trustees who are woefully unprepared to analyze or critique the products that Wall Street is peddling and thus to understand whether they are useful to them or whether they will simply help Goldman or other firms boost their profits and ROE and earn the salesperson a big fat bonus.
Smith describes himself as horrified when an overseas client, in the wake of the Abacus revelations, states in a matter of fact manner of Goldman Sachs that “we know you have exclusively your own interests at heart.”
So what if the client distrusts Goldman? That’s healthy in today’s financial system; it’s harder for anyone to take advantage of you if you’re smart and skeptical.
The problem lies with those money managers who retain their trust. If Smith’s book prompts more of them to wake up and smell the bullsh*t, or prompts those running these funds to ensure they have the skills to beat Wall Street at its own game, it will – for all its flaws – have performed a very valuable service. Smith’s stated objective may be changing the culture on Wall Street, but this would be a far easier goal to accomplish.