Greg Smith and Goldman Sachs: An over-cautious whistle-blower
Greg Smith’s memoir about his career at Goldman Sachs could have been subtitled ‘The curious incident of the dog that didn’t bark’.
Smith’s failure to detail allegations of sharp practices at the London office is particularly odd, given that he clearly detested his treatment by European managers once he had transferred from New York. So where are the anecdotes about interest rate trades by Ed Eisler that moved markets and trampled clients underfoot, or details of co-ordination with hedge funds to transform trading axes from customer flow into meaningful profit?
Smith notes that he was appalled by the frequency of the changes in trading recommendations for options on European banks during their funding crisis in 2011, but does not give details of the crucial factor in turning these pivots into prop-flow P&L, which is the creation of momentum for trades when markets are in panic mode. The lack of granular detail is surprising, given his seat on the trading floor, despite his personal focus on providing access trades to US equity derivatives for European clients.
Even when Smith addresses trading mishaps at Goldman he is strangely unwilling to pin the blame on senior individuals at the firm. He observes that the bank made a big blunder by running huge short equity volatility positions for too long during 2010, resulting in massive losses on trades such as 10-year S&P variance swaps when the flash crash caused a spike in volatility. But David Heller, the top equity manager at Goldman at the time, is given a pass on the mistake, apparently because he was reasonably pleasant to Smith on the couple of occasions when their paths crossed (once in a Vegas hot tub). Smith said that Heller was "always right" when it came to putting on proprietary equity trading positions, which appears to have been the case right up until it wasn’t.
Heller and Eisler, two relatively young global securities co-heads who made their names by taking an aggressive approach to converting client flows to trading profits, both left Goldman at the beginning of this year in unexplained circumstances. Smith does not shed any light on their departures.
Smith does discuss the equivocation deployed in public statements about tricky issues for the bank by longstanding CFO David Viniar, without managing to make the step to outright condemnation. Smith quotes Viniar’s statement on Goldman’s second-quarter earnings call in 2010 describing the firm’s short equity volatility position as "a result of meeting franchise client and broader market needs". Smith’s observations about the firm’s variance swap trades appear to confirm that the "broader market needs" were a proprietary equity-dealing push by Goldman designed to replace the bets on falling interest rates that had paid off so spectacularly the year before, but he does not quite come out and say it.
Smith was simply dazzled by Viniar’s deft dismissal of criticisms of conflicts of interest – to adapt a remark by London mayor Boris Johnson, Viniar was pro both having and eating his cake – and never admitted inconsistency in his positions.
This admiring view of Viniar is common among Goldman employees and with a surprising number of stock analysts who cover the firm, judging by the eulogies that accompanied Viniar’s recent announcement that he is retiring at the end of the year. But it does not square with Smith’s thesis that cultural values at Goldman Sachs suffered a serious erosion while Viniar was the third member of the triumvirate running the firm, alongside CEO Lloyd Blankfein and president Gary Cohn.
Smith does take some jabs at Cohn. He notes Cohn’s unappealing habit of hiking his foot on to the desks of employees on Goldman’s trading floors as a prelude to posing questions that staff have to answer while their faces are in uncomfortable proximity to his "thigh". Stories of Cohn’s boorish behaviour are common on Wall Street, however, and Smith takes statements by the Goldman president about the importance of cultural values at the firm at face value.
Indeed Smith’s frequent references to himself as a ‘culture carrier’ during his time at the firm demonstrate the extent to which he is still suffering the after-effects of drinking the Goldman Sachs Kool-Aid.
‘Culture carrier’ is a phrase that is so obviously disconnected with current perceptions of investment banking practices that it is surprising that it remains in circulation. Morgan Stanley CEO James Gorman still refers to culture carriers, admittedly, but he is a former management consultant, so an attachment to redundant buzzwords is understandable.
Smith clings to the phrase while charting his own growing disaffection with the practical outcomes of the culture at Goldman. This gives his memoir a schizophrenic tone.
The naive persona he displays much of the time makes Smith seem like Candide in Voltaire’s novella – an implausibly innocent character that is deployed for satirical effect.
There are many moments of inadvertent humour in the memoir, and not just in the now-famous anecdotes about table tennis. When Smith is about to be transferred from New York to London and worries about his compensation, a higher-flying colleague charitably takes him aside and advises him to secure a competing job offer in order to improve his terms for the internal move at Goldman. But even though Smith received an unsolicited direct job offer from JPMorgan at one point, and indirect offers from other firms via headhunters, he did not even interview at another bank, such was his devotion to Goldman.
This helps to explain Smith’s eventual disaffection when he felt scorned by Goldman and his decision to go public with his complaints about the firm. But it also might explain why there are so few telling details about Goldman in his memoir. Perhaps Smith had such a boy-scout air about him that his colleagues did not feel they could share tales of sharp practices, or possibly concern about legal fallout kept Smith from publishing allegations that were not already in the public domain. Certainly the semi-fictionalized approach he takes to some events, such as changing the names of the co-workers who are portrayed in the worst light, does nothing to inspire confidence in the overall message of the book.
Smith was able to land blows in some areas that remain sensitive for Goldman, but these successes come chiefly when he sticks to broad-brush criticism of the bank. Either through a lack of evidence or an abundance of caution, Smith has divulged less information than his former employer had feared he would.