Streetwise Professor

March 14, 2012

Pit Bull Bites Man

Filed under: Derivatives,Economics,Financial crisis,Financial Crisis II — The Professor @ 8:36 am

In a cri du coeur published in the New York Times, resigning Goldman executive director Greg Smith claims that the firm “sidelines” the interests of its clients “in the way it operates and thinks about making money“:

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.

Smith also claims that this wasn’t the case when he joined the firm 12 years ago, when apparently Goldman was all about helping little old ladies cross the street and rescuing kittens stuck in trees.  The firm’s dastardly turn is all the doing of Lloyd Blankfein and Gary Cohn.

Please. Goldman is, for the most part, what Goldman was. If you want a look at the firm’s “moral fiber” pre-2000, pre-Blankfein & Cohn, review the history of LTCM’s collapse.  The teetering hedge fund came to Goldman for help.  Goldman said it had to review LTCM’s books first, which LTCM in its desperation  permitted-only to have Goldman trade against every position in that book.

When dealing with any investment bank, and Goldman in particular, caveat emptor is the only rule to follow.  And it always has been.

My surmise is that Smith’s perception that things have changed is a very solipsistic one.  As he’s progressed up the organization-rapidly, to a very high position-he’s privy to things now that he wasn’t as a doe-eyed intern. What he’s seen has changed not because what is to be seen has changed: just that he wasn’t in a position to see it before.

What’s amazing is that an obviously very smart guy wouldn’t consider that possibility.  What’s even more amazing is the credulousness of the financial press in its reaction to Smith’s piece.  It’s obvious they haven’t thought of that possibility either.

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  1. Goldman claims this guy is in fact only a VP… not that high on the ladder.

    Comment by Surya — March 14, 2012 @ 8:55 am

  2. Yes, Surya, I hope this guy is prepared for incoming, because it’s on its way. He came off as a solipsistic, self-absorbed, preening twit, IMO. Not that I have any love for Goldman, but what a self-serving Just So Story this guy is trying to put over on the world. And unfortunately, a lot of people are eating it up.

    I don’t disagree with the notion that Goldman is hardly a paragon of virtue. That’s why clients have to be on their guard, and why the best defense is a competitive market rather than some moral revival movement at GS. What I do disagree with is the laughable notion that this is something that happened yesterday, or less than 12 years before yesterday. You had to have fallen off the cabbage truck quite recently to believe tha.

    The ProfessorComment by The Professor — March 14, 2012 @ 9:12 am

  3. You might also have mentioned GS’ part in Barings’ downfall.

    Leeson was long the Nikkei; GS was short to him. When Barings blew up, whom did the BoE appoint to wind up their positions? Why, GS, of course!

    I have heard – but cannot source it now – that Leeson lost £350 million and GS turned it into $850 million withe the extra £500 milion going to themselves as they bought Barings’ position to flatten their own.

    Your wider point is surely robust though. GS are not nice people; right. Who knew?

    Comment by Green as Grass — March 14, 2012 @ 2:54 pm

  4. If he didn’t see it before, one can only think that he suffered from willful blindness. As regards any possibility of a moral revival (or “vival” as I am not sure there would be any re about it), I never got so nervous as when someone would start a meeting talking about what was “fair”, always a sign that the lubricant was going to be applied.

    GS was always like this – I remember a couple of bond salesmen who covered me during the 1985-7 refi boom – lots of business but GS was stingy about the bonuses, saying that when things went south, they would stand by them. Well they did, or at least the security officers did, in order to better help them out the door in 1990.

    This guy sounds like he is subject to Yannopoulos’ third law – the person we most often lie to is ourself.

    Comment by sotos — March 14, 2012 @ 6:22 pm

  5. Smith is a tool. You don’t work at GS for 12 years and then all of the sudden become enlightened to their “ways” which you may or may not agree with.

    He is going off on his own to do something else with the small fortune he earned while working at GS, and decided to cash-in on his 15 minutes of fame.

    Stand-by for a book or new a company announcement in the coming months.

    Comment by gman — March 15, 2012 @ 6:41 am

  6. Don’t hate the player, hate the game.

    Wow I actually agree with SWP.

    Comment by Sublime Oblivion — March 15, 2012 @ 7:51 am

  7. I give credit to the Goldman management for developing guys like Greg Smith. As an excellent naive lieutenant, Greg Smith honestly believed the bs he was instructed to provide clients was “in their best interest”. Management was able to keep Mr. Smith doing his sales job for 12 years, and hardly a peep or brain neuron alerted him to the fact that he was a pawn in the machine. There are many more lieutenants at GS, and his letter only proves how well the franchise is working.

    Comment by scott — March 26, 2012 @ 2:53 pm

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