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Are Goldman’s Clients Really ‘Muppets’? Henry Blodget Says ‘Yes’

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Wall Street is still reeling from the scathing resignation letter written by former Goldman Sachs (GS) employee Greg Smith, which was published in the op-ed pages of the New York Times Wednesday. Smith chided his employer of nearly 12 years for its "toxic" environment and practice of "ripping clients off" while calling them "muppets." (See: Greg Smith Slams Goldman: The Street Responds)

Most people had never heard of Greg Smith before his spectacular departure from the firm famously referred to as the "vampire squid" by Rolling Stone's Matt Taibbi. A little more than 24 hours after the letter was published, we still do not know much about Smith and why he publicly chastised the firm.

"We don't know if this is sour grapes or if he has decided, 'I can't take it anymore' and ripped off his ear piece and said, 'That's it, I'm outta here,'" says former Wall Street insider William Cohan. "We don't know if he is a saint or a frustrated banker like 99% of the rest of the people who work on Wall Street."

Cohan worked on Wall Street for 17 years and has written three books on the investment industry, including the most recent "Power and Money: How Goldman Sachs Came to Rule the World." He joined The Daily Ticker's Henry Blodget to discuss what impact this black mark will have on Wall Street's most secretive firm.

How long will Goldman be the talk of Wall Street? "If the media continues to pound on this day after day that could be one thing," says Cohan. "But I suspect that this will blow over by next week and we won't be talking about Greg Smith anymore."

Cohan may be right. But there is one thing about this story that will never die. Just how Taibbi's "vampire squid" remark is now ingrained in our Goldman Sachs lexicon forever, Smith's "muppets" comment is not going anywhere either.

While many people are appalled by the "muppets" reference, Henry believes there is some validity to it as he writes in the Business Insider column below. Henry defines "muppets" as idiots.

Cohan disagrees with his assertion. "I don't think clients are muppets," he says. "[And] no, clients are not idiots." Cohan goes on to explain that the tough talk probably goes both ways anyway. It's hard not to believe frustrated clients do not sometimes refer to their bankers in a less than positive fashion.

Tell us what you think in the comments below.

Read on for Henry's article as it originally appeared on Business Insider.

Let's Be Honest -- A Lot Of Goldman's Clients ARE 'Muppets'

Of all the colorful quotes in Greg Smith's remarkable "Take this firm and shove it" letter, the one that reverberated the most was the fact that senior Goldman bankers routinely refer to their clients as "muppets."

And the umbrage is understandable.

No one paying Goldman for advice likes to think that Goldman's bankers are running around ridiculing them.

But the sad truth is that many of Goldman's clients ARE muppets.

And so are many of the clients of other huge and massively profitable Wall Street investment banks, money-management firms, hedge funds, and other financial services firms--which is to say, a significant percentage of the consumers of financial-services products.

Why are they "muppets"?

Well, the definition of "muppet," say those who live on the other side of the pond (where "muppet" is apparently a common term on trading floors to describe the guy on the other side of the trade) is "idiot."

And you don't have to look too deeply into the reality of the financial services business to realize that many of the folks who buy products and services from these businesses are idiots.

Let's focus on a simple example that most individuals are familiar with: An "actively managed" mutual fund.

"Actively managed" mutual funds are funds managed by a fund manager who tries to select securities (e.g., stocks or bonds) that will outperform the market as a whole.

"Actively managed" mutual funds cost much more than "passively managed" funds (like index funds) that are designed to track the performance of a market index rather than beat it.

For the past half-century, dozens and dozens of academics, money-managers, independent financial advisors, and journalists have explained in dozens and dozens of different ways why buying expensive actively managed mutual funds instead of index funds is, in a word, stupid.

To wit:

  • The vast majority of actively managed funds underperform good passive funds
  • There is no reliable way to identify in advance the handful of actively managed funds that will outperform passive funds (everyone can do it in hindsight, but you can't invest in hindsight)
  • Most of the outperformance of the handful of outperforming active funds is attributable to luck, not skill
  • Past performance does not predict future results

That low-cost tax-efficient passive funds outperform expensive active funds is not a theory: It is a fact. And it is a fact that even a complete novice investor can learn by reading a couple of good articles on the topic or buying a single book by John Bogle.

And yet...

TRILLIONS OF DOLLARS are still invested in actively managed mutual funds.

And BILLIONS OF DOLLARS are still paid to active mutual fund managers and financial advisors in fees.

And some of these financial advisors and fund managers work at Goldman Sachs.

Any Goldman Sachs client who pays Goldman big fees to be invested in an actively managed mutual fund or a hedge fund is, therefore, in all likelihood, a muppet.

And the same can be said for the clients who buy dozens of other more-complicated products that Goldman Sachs sells, including some corporate advisory services, derivative products, trading services, restructuring services, and so forth. Many of these products either don't add the value the clients think they do, or cost way too much relative to the value they add.

So it should not come as a huge surprise that Goldman's bankers see clients who buy these products for what they are: