About a month ago, Greg Smith, a former Goldman Sachs executive, came out with his heavily anticipated book, Why I Left Goldman Sachs. It was a follow-up to his raucous New York Times Op-ed of the same title, in which he described the corrosive corporate culture of Goldman. He described the company as a place where bankers neglected their clients, and condescendingly dismissed them as “muppets.” On the heels of the financial crisis, this was perfect fodder for increasingly popular banker-bashing. But now that the book is out, and with a fairly successful PR initiative by Goldman to squash the book in its tracks, Smith is being viewed less as a 21st century Upton Sinclair and more like just another bitter dweeb trying to cash in on Goldman’s unpopularity. Considering his fairly low standing in the company hierarchy, the most fascinating parts of the book are his colleague’s parties with Vegas strippers and the time he caught CEO Lloyd Blankfein air-drying in the Goldman gym.
However, one doesn’t need an insider tell-all to understand why it’s not in any Goldman analyst’s interest to have his client’s welfare in mind. Back in July, The New York Times (“Goldman Sachs and the $580 Million Black Hole”) reported that Goldman had misled a couple, the Bakers, on a sale gone completely awry. Janet and Jim Baker had spent much of their lives pioneering voice recognition technology, which enables us to use Siri on our phones today. Goldman was supposed to be the mediator on the $580 million sale of Dragon Systems, the Bakers’ brainchild, to a company called Lernout & Hauspie. Due to recklessness and sheer laziness, the Goldman guys urged Dragon to go through with the deal, which turned out to be a huge fraud. The Bakers, who now had $580 million of stock in L&H, lost it all within a few weeks when L&H was revealed to have cooked the books and gone bankrupt. Yet Goldman came away with $5 million in fees. When somebody on the Goldman side was asked what had happened, he replied that the Goldman team did a “great job… we guided them to a completed transaction.” Even though the Bakers lost everything, Goldman was happy because they got away with what they could legally.
On the private equity front—of Bain Capital fame—there are similar head-scratchers. For example, in 2007, several PE firms, including the private equity arm of Goldman, bought out TXU, a Texas-based energy company, for $45 billion. Then the recession hit, and TXU went bankrupt. One would think that the PE firms would lose tons of money. But while the may have first lost on TXU itself, they came away extracting $528 million in advisory, management, and consulting fees, even as the company was going down into bankruptcy. Finance had never looked so cushy.
All of this came on the heels of the global financial crisis of 2008, in which banks made money on mortgage derivatives at the expense of people’s home foreclosures—investments which, under normal thinking, were a bad idea. But due to financial engineering, analysts and bankers could turn anything profitable. It should therefore come as no surprise that Greg Smith’s colleagues didn’t have their clients’ best interests in mind. If the free market doesn’t really work in the financial sector and bad investments can pay off, there is absolutely no incentive for prudence on behalf of clients. A book to explain this is completely unnecessary.
There are many college students like myself deciding on a career path now. Without proper regulation of the financial sector, what’s to stop any of them from thinking they can make money without accountability? If I were devoid of ethics, I myself would say, “I can charge exorbitant fees for shoddy work? Count me in!”
written by Joseph Stern