My light reading for this week was Greg Smith's Why I Left Goldman Sachs, the book by a 34-year old South African of Jewish ancestry (he discusses that frequently) who, two years ago, announced in a New York Times op-ed that he was leaving the firm, where he had been a rising star, because he could no longer stand its toxic values. It's a troubling book in dozens of different ways, and I will try to do it justice.
Smith came to the United States in 1996 or so to go to college and Stanford, and he clearly has been a high achiever all his life. He had been a summer intern in another financial firm, and he felt very fortunate to be a Goldman new hire. I couldn't help thinking about my older son, Smith's exact contemporary, as I read the book: he too had landed a prime consulting job when he graduated in 2001, but by the time of his graduation the recession had struck, and that weekend his firm informed all their new hires that they would have to wait a while. Eventually the firm bought them all out rather cheaply, and his life took a very different turn. Smith threw himself enthusiastically into life at Goldman Sachs. He was taking his Series 7 professional exam on September 11, 2001, but he remained at the firm despite the subsequent crash, and eventually, he became involved heavily in derivatives.
For unrelated reasons, I had recently been going through some of my old books about professional football, and I was astonished at the similarities between Goldman Sachs and a pro football training camp. Indeed, Wall Street loves jocks for their competitiveness and their ability to summon up adrenalin, and many of Smith's colleagues had been varsity athletes of one kind or another. He himself had competed in the Maccabee Games in Israel as a ping pong player. (He describes how he threw a much-ballyhooed match to a client in order not to antagonize him, which for me was one of the more painful moments of the book.) As traders--the entry-level job--the new employees live a life quite similar to on-line poker players playing at least five games at a time. They are constantly given trades to execute, all in shorthand, and they have to remember them, close the deals, and properly record them. A young trader who sticks an extra zero on a trade is likely to be screamed at like one of Vince Lombardi's Green Bay Packers missing a block. This is the job so many of our best and brightest undergraduates aspire to, and I couldn't help thinking that it involves a shockingly small amount of real thought. Later on, if they are good, they begin dealing directly with clients, which is another matter altogether. The clients of Goldman Sachs are other players in the financial community--hedge funds, mutual funds, pension funds, private equity firms, etc., etc, etc. None of them seem to spend too much time thinking about the long-term economic health of firms or national economies; they are relentlessly focused upon squeezing the last penny from each of an endless, constant series of trades.
We still call the industry Smith worked in the financial services industry, but the whole point of his book is that it isn't much about servicing at all any more. Let me lead with his conclusion, which is by far the most important part of the book: proprietary trading, which since the repeal of the Glass-Steagall Act has allowed investment banks to trade on their own while executing huge trades for clients, has turned our financial markets into rigged casinos. Goldman can make trades of its own based on what its clients are thinking and doing. It's like a card game in which the dealer--Goldman Sachs, or one of its competitors--is not only a player, but can see most of the other players' cards. Wall Street since at least the early 1980s hasn't run on the analysis of long-term economic trends or of the performance of corporations, it runs on information. The new rules give the big banks an unbeatable information edge and a license to drain money out of the economy. Smith doesn't say so in so many words, but he evidently doesn't think the Dodd-Frank Bill did nearly enough to stop this.
That wasn't all. In the old days, Smith at least was led to believe, Goldman dedicated itself to the best interest of their clients. They had to, because, without proprietary trading, they depended on their commissions to live, and the only way to increase their profits was to get more clients by building up their reputation. Those days are gone. Clients are now prey, and Goldman preys on them in many ways, as Smith describes. Goldman was caught, spectacularly, when it worked with hedge fund manager John Paulsen to construct a derivative composed of particularly toxic subprimes and marketed it to unwitting customers. For that they paid a fine which amounts to cab fare for them. Only one person went to jail, and Lloyd Blankfein of Goldman defended the whole deal in front of a Congressional committee as part of being an investment bank.
Smith comes across as a very charming innocent, which may be why he rose pretty far pretty fast. He is extremely discreet in his discussion of the Wall Street culture, acknowledging drinking, downplaying drug use, and ignoring sexual behavior entirely. He generally looked up to his bosses and there are hints that they used him in ways he didn't fully understand. But Smith is painfully honest and he quit because he couldn't bear lying to his clients. For that I salute him. I was depressed, though, that he doesn't even seem to be able to imagine a world in which investment bankers were really looking out for the long-term health of the economy.
Smith's colleagues cared only about money, money and more money. Some of them, and some of his bosses, were women, and I must say they tended to undermine the expectations of the feminists of 40 years ago who expected women to transform institutions once they got the chance. The values of the women of Goldman Sachs were identical to those of the men, and I can't say I'm surprised. Nor can anyone be surprised that the Obama team essentially left the Wall Street system intact. Smith obviously feels more market disasters lie ahead, and I'm afraid he's right. I am not confident, however, that even another one will lead to fundamental change.