The Exchange

Greg Smith’s ‘Why I Left Goldman Sachs’: A Coming of Age Tale, Not a Goldman Exposé

The Exchange

By Bernice Napach

Days before "Why I Left Goldman Sachs: A Wall Street Story" was published October 22, chapters of the book were leaked and criticism of its author, Greg Smith, commenced.

The Thursday before publication, former investment banker William Cohan called Smith "nothing more than a sweet-talking con man" who wasn't honest about his criticism of Goldman (GS). In a Bloomberg column Cohan, author of  "Money and Power: How Goldman Sachs Came to Rule the World," said Smith was just a  "disgruntled and ambitious former employee who wanted a bigger bonus and a bigger title and got, and merited, neither."

A day later, New York Times Columnist James Stewart wrote that the book "was curiously short on facts" and gave "no examples of a toxic culture" at Goldman.

Too Much Protest?

Do these critics protest too much?  No, "Why I left Goldman Sachs" is not a book loaded with facts about Goldman. But it is effective as a coming-of-age story written by the former derivatives VP who became a household name after writing the now infamous New York Times op-ed, "Why I am Leaving Goldman Sachs." And this book expands on that op-ed, giving a much fuller and more personal explanation of that decision.

"This ideal of doing what is right for the client, and not just what is right for the firm, was there, prescribed in the 1970s by former senior partner John Whitehead in his set of 14 Principles," writes Smith. "These principles were drummed into our heads when we were summer interns, and I felt idealistic about them."

But less than five years after Smith came to Goldman as a summer intern, he noticed a seismic shift in the firm's primary business, from investment banking to trading, and he noted the conflicts that created.  He cites the 2005 annual letter to shareholders from then-CEO Hank Paulson and his number two — current CEO Lloyd Blankfein — which acknowledged potential conflicts of interest:

"It is naive to think we can operate without conflicts. They are embedded in our role as a valued intermediary — between providers and users of capital and those who want to shed risk versus those who are willing to assume it."

A Major Merger

A short time later, Smith writes, Goldman brokered a $9 billion merger between its client, the NYSE, and an electronic exchange called Archipelago, in which Goldman was the second largest shareholder, making money on both sides of the deal. It's not clear that any party in that deal assumed any risk.

Smith was an institutional salesman at the firm, who started in New York as a junior analyst in emerging market stocks and ended up in London as a VP setting up, then running Goldman's  U.S. equity derivatives sales in Europe, the Middle East and Africa.  He hoped to sell enough  "plain vanilla derivatives," such as options, futures and swaps, every day in order to bring in $20 million annually. But he found instead that the sales leaders there preferred higher margin "elephant trades" that could earn Goldman $1 million or more, as well as sales of risky positions — called axes — that Goldman wanted off its books. The buyers of those undesirables also had a name — "the muppets" — a description that's gotten much play in the press.

The name calling "was so counter to what I thought the firm once stood for," writes Smith. "It was also problematic because, in order for me to build my book of business, I needed to build relationships with clients, not muppets." Smith says he refused to sell some derivative products he believed were not in the best interests of his clients.

Smith was also troubled by sales of products that took positions its strategist was warning against. "It was all too much."

In many ways the book is much more about Greg Smith than it is about Goldman Sachs. It tells the story of an earnest young South African man who attended Stanford on a scholarship, majoring in economics, then recruited by Goldman to be a summer intern. He was among the few chosen interns to be hired by the firm, and then started moving up the ladder gradually, eventually earning more than $500,000. The talk in newsrooms and on Wall Street is that he never made it to managing director after working 12 years at Goldman because he probably wasn't that good at his job.

After reading "Why I Left Goldman Sachs" it seems clear he couldn't in good conscience do what Goldman wanted him to do to get that promotion.

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