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Friday, March 16, 2012

An honest man

Two days ago, the following op-ed appeared in The New York Times. You may well have seen it, but in case you haven't, I'm reproducing it for non-commercial use.

Why I Am Leaving Goldman Sachs

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

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.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. 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.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

The author, Greg Smith, is evidently originally from South Africa and is in his early 30s. (We will return to this in a moment.) I was extremely moved by this piece, because so few people in any walk of life seem capable of writing this kind any more. (One who did was Peter Van Buren, the Foreign Service Officer whose book on Iraq I reviewed some weeks ago. He is now being reviewed for termination from the State Department, partly because of the blog he started to publish his book and partly for linking wikileaks, which I assume that he, like me, a fellow federal employee with a security clearance, was ordered not to visit.) I was not surprised that one very high-achieving young man who could have done just about anything with his life had become disgusted enough to do this, and I thought it was something everyone needed to hear. So I brought it to the attention of three different groups of people. (I won't be specific.)

I was in for something of a shock. Most of the Gen Xers who read it took an instinctive dislike to the author. They branded him as a hypocrite, and many speculated that he was already in trouble with the company, or was angry about his bonus, or hadn't gotten a promotion that he wanted. They simply couldn't even imagine--literally--that he was simply disgusted by the ethos of the institution he worked for. I had no trouble imagining that at all; I have felt that way about the universities I have worked for too, and I'm sorry that I was never more forthright about it when I could have made an impact. But I suppose I was afraid of sounding like a malcontent myself. (I don't feel that way about my current employer, the Naval War College. My department is supposed to teach officers to think strategically, and we work very hard to do just that.)

This is, I'm afraid, a portent of things to come. Gen X--now aged 31 to 51--is rapidly taking over much of the world, and I hear essentially the same thing about their management style from just about every walk of life. Most of them have no feeling for their institution as such at all, but only for what it can do for them. This is for instance how Gen X parents treat the schools their children go to: they want the best for their kids, and that's it. In the last ten years we desperately needed Boomers, who can think big, to set some goals for our institutions--not least the federal government--and enlist younger generations behind them. This we failed to do, and it will be a long time before anyone else will do it on a large scale again. I'm afraid that will make for a pretty cruel and unforgiving world. (Xers are sure that that is all it ever is anyway.)

So what made Mr. Smith so different? Generations may provide the answer. He was born, apparently, in about 1980 in South Africa--which was on the verge of the great crisis that destroyed apartheid and turned the country into a democracy. Since he is English-speaking and Jewish, he and his family were presumably very proud of what had happened. That would make him a member of an Artist generation, parallel to American Silents (born 1925-42) who as children lived through the Depression and/or the war. That generation produced a great many idealists and whistleblowers in the United States, including the original civil rights workers in the South, soldiers like David Hackworth and John Paul Vann who had the courage to tell us the Vietnam War was going badly, and CIA man Sam Adams who insisted on trying to estimate the Viet Cong accurately. They had been taught to revere American institutions and they could not remain silent when those institutions did not live up to their image.

I doubt Mr. Smith will have much of an impact upon Goldman Sachs. Their stock has fallen, but a good earnings report or two will take care of that. Next year, perhaps, I'll resurrect the column and try it on the Millennials I'll be teaching for one year again at Williams College. It will be a long time before they can change the world, but I hope it will help them think about their own lives. And if anyone else has a similar story to tell about the institution they work in, please let me know. Perhaps we can get ahold of Mr. Smith and put together a reader on the state of the modern world.


Anonymous said...

One caveat about Gen X: They only care about what an institution can do for them AND their people... their family, their friends, their employees.

Everyone else's family, friends, and employees are not their problem...unless they challenge their feudal realm. Their entire mindset is feudal (not in the negative sense but in the original sense). They are each like little kings who rule their own little dominion. They earn the loyalty of their subjects and in turn do everything in their power to protect those subjects.

If the little king next door has his factory burn down and all his employees are out of work, they concede that it sucks for the other guy, but "oh well!" However, if their own factory burns down, they will do everything in their power to get their people out, rebuild quickly to get them back to work, and make sure they are all well fed and housed in the meantime.

Ted said...

"I was in for something of a shock. Most of the Gen Xers who read it took an instinctive dislike to the author. They branded him as a hypocrite, and many speculated that he was already in trouble with the company, or was angry about his bonus, or hadn't gotten a promotion that he wanted."

This is true.

"They simply couldn't even imagine--literally--that he was simply disgusted by the ethos of the institution he worked for."

This isn't why.

There's just something about his tone that sounds off, insincere.

What I thought, but didn't take the time to post, was: "He sounds insincere. However, he's right."

Xers understand being disgusted with the ethos of an organization, but Smith's is not the Xer response. Partly this may be because we have a strong "don't tattle" value, and only violate it for the sake of personal vengeance.

An Xer with Smith's feelings would simply quit. If disgusted enough, he might also write a book (or write and direct a movie) about the type of thing that went on in the organization, simply describing the situation without any moralizing or any attacks on specific individuals.

John of Generational Dynamics complained about this in an Xer-written book he read. He wanted to see moral condemnation of specific individuals, dern it! But *Xers believe in letting the reader/viewer come to their OWN moral conclusions*. It's disrespectful of the reader/viewer to preach; proper respect for their human dignity and good moral judgement requires the writer/director to just provide the facts. Don't tell me how you hate Company A because it's evil. Tell me what goes on at Company A and I'll decide for myself.

"They had been taught to revere American institutions and they could not remain silent when those institutions did not live up to their image."

Yes, maybe that's the difference. Still...you don't need to start out naive (I realize that term is an oversimplification, but bear with me) to end up wanting something better.

Xers lack vision. (So did my 1899 grandpa. That was my mom's main complaint about him and as I recall, it was true.) But we are capable of wanting better...right now the hope we have left is for our children / today's children. Provide us with a positive vision of improvement that strikes us as remotely possible, and we will put in the time and effort required to make it truly workable.

Steven Winsor said...

I'll admit it...I thought the same thing as your Gen-Xers (and I was born in 1949). I wondered what sour grapes were being sold here by this Greg Smith. Then, after reading your comments, David, and then re-reading his letter, I lost my cynicism (quite reflexive these days unfortunately), and think you hit the nail on the head.

James50 said...

David - You bemoan the boomer tendency of tearing down institutions then adulate someone who is attempting to do just that. Neither you nor I knows the true substance of Mr. Smith's complaints, but its tearing down an institution we dislike so, boomers that we are, we assume it is a righteous and justified undertaking. Multiply by many fold and you create the woeful boomer legacy we have built brick by brick for 40 years.

Someday, this template will pass into history, but it seems it will be long after you and I are gone.

Anonymous said...

“By tossing a verbal hand grenade on his way out the
door, he sullied the reputations of the vast majority of
the people at the firm who work and live by the
highest possible professional standards every single
day,” wrote Hanson, who was the first woman at
Goldman Sachs to be promoted into sales

“He is just a quitter who never gave management an
opportunity to respond before he verbally strafed
the entire firm in print.” - Janet Tiebout Hanson


James50 said...

Rather than more stories about someone trashing an institution (certainly no shortage of those), how about a story of a hero who has rescued an institution, built one up, or used unusual skills in mediation to put disparate groups into a situation where they could work together to solve a large problem?

Ed said...

I was born in 1970 and my take on this is the same as Ted's. An Xer would simply quit. Its probably the fact of the OpEd in the Times that got the negative response, not the content.

One thing I caught my attention is the explanation that 30-something Smith didn't behave like a typical Xer, but then again he isn't an American so that's not surprising. So the generations theory really can only be used to explain Americans?

Anonymous said...

Yes, Mr. Smith, Goldman Sachs Is All About Making
Money: View

Apparently, when Greg Smith arrived at Goldman
Sachs Group Inc. (GS) almost 12 years ago, the
legendary investment firm was something like the
Make-A-Wish Foundation -- existing only to bring
light and peace and happiness to the world.

It must have been a terrible shock when Smith
concluded that Goldman actually was primarily
about making money. He spares us the sordid
details, but apparently it took more than a decade
for the scales to finally fall from his eyes.

We have some advice for Smith, as well as the
thousands of college students who apply to work at
Goldman Sachs each year: If you want to dedicate
your life to serving humanity, do not go to work for
Goldman Sachs. That’s not its function, and it never
will be. Go to work for Goldman Sachs if you wish to
work hard and get paid more than you deserve
even so. (Or if you want to make your living selling
derivatives but don’t know what a derivative is, as
Smith concedes in passing that he didn’t at first.)

Goldman and other investment banks do perform
an important role in our economy, and Goldman
bankers -- most of them, at least -- can hold their
heads up high. But it is not charity work. Goldman’s
clients are mostly very well-off. Smith’s lament that
the bank no longer serves their needs above and
beyond its own does not tug at our heartstrings.


Anonymous said...

Ed , each culture goes through its own crisis cycle. So USA, Russia, China, AOuth Africa, Mexico are all on different timelines and an Artist, etc. would be at a different point in time in each country.

Good article by the way. I say hang GS up by the balls. Criminal institution.

Bozon said...


Many thanks for this gloss on the Goldman Smith situation.

It is all so predictable, having read Michael Lewis, Liar's Poker, etc, since the mid 80s,

and seen, earlier, what was on the cards, going forward.

All the best,

David Kaiser said...

James, it is very nice to hear from you again and you are missed on TFT. The only heroic story I could tell along the lines you indicated is that of my Millennial son and his Brooklyn charter school, but I don't like to brag about my kids in public. I am sure there are others and I hope they will come to light.

David Kaiser said...

To anonymous, above:

I passed your comment because it was not abusive, but I think it was wildly off base. Smith did not argue that GS was, or should be, philanthropic. He argued that it should be looking out for its clients instead of taking advantage of them in any way they could. Is that too idealistic for you? How do you expect the doctors, lawyers, accountants and brokers you deal with to treat you?