On the bustling second floor of Goldman Sachs’s River Court building, just off Fleet Street in central London, few people took notice of the single empty desk.
The trading floor at the Wall Street banking giant’s European headquarters is a buzzy place, home to a collection of the ultra-competitive, avaricious and occasionally brilliant. Traders put in long hours at desks laden with computer screens and telephones. If they are good, they make millions. Those that don’t cut it, don’t last long.
Last Tuesday was another hectic day, with American markets surging and British traders caught up in speculation about the budget. Yet Greg Smith, a 33-year-old South African who had moved from New York a year ago to sell derivatives of American stocks to European buyers, didn’t turn up for work. His colleagues soon found out why.
Smith had quit, and he didn’t do it quietly. He wrote an open letter in The New York Times bashing his former employer, calling its culture “toxic and destructive”.
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The firm, famous for the allegiance it inspires in its employees, had lost its client-first focus, he said. It had turned into a rapacious organisation where the “morally bankrupt” excelled. Executives described clients as “muppets”. Traders revelled in “ripping the eyeballs” out of anyone they could dupe into buying what they were selling.
“I truly believe,” he wrote, “that this decline in the firm’s moral fibre represents the single most serious threat to its long-term survival.”
Goldman raced to limit the damage. It rushed out a statement painting Smith as a middling executive whose voice was only one of more than 30,000. “We disagree with the views expressed, which we don’t think reflect the way we run our business,” it said. “We will only be successful if our clients are successful.”
Some senior sources at the bank, however, said this was more than a one-off rant from a disgruntled employee. Internal discontent has been stirring about the bank’s reputation since Lloyd Blankfein, the chief executive, made seemingly flippant comments to a series of hearings in America into sub-prime mortgage deals.
He landed in hot water for telling The Sunday Times that Goldman was doing “God’s work”. Rolling Stone magazine branded the bank a “vampire squid”, a name that stuck. Fabrice Tourre, a Goldman trader, admitted pushing “shitty” deals to clients, and it emerged that the firm had orchestrated a deal that helped Greece conceal the state of its finances from European regulators.
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Blankfein has been unable, or unwilling, to stem the flow of questionable deals and bad press. According to senior sources, there is a growing cadre in the bank who believe its tarnished image is beginning to affect business, and it would be best if Blankfein stepped aside. On Friday, Goldman said it was reviewing its system for controlling and disclosing potential conflicts of interest.
It is unclear what made Smith turn against the company. Sources close to Goldman said that when annual bonuses were paid in January, Smith didn’t get “zeroed” but his payout was, at best, modest.
The storm he unleashed may soon pass. But the question remains: did he have a point? Is there something rotten at the heart of Goldman, the 143-year-old bank that has cultivated a reputation as the home of the sharpest operators on Wall Street and in the City?
Has its relentless pursuit of profit gone too far? Will the largest companies and investors continue to pay millions for Goldman’s advice when there are growing suspicions that the bank always plays both sides of the trade?
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Smith went to ground last week. His former colleagues felt betrayed. Others hailed him. Everyone was surprised. “Dude, what the hell happened?” wrote a friend on Smith’s Facebook page. “I was eating breakfast and saw this on freaking CNN.”
THE FLOAT of Goldman Sachs on May 4, 1999, was a monumental event. The firm, founded in 1869 by Marcus Goldman, a Jewish immigrant from Germany, had a mystique.
It was the last of the big banks to convert from partnership to a public company. Investors were desperate to own a piece of the world’s greatest money machine.
The firm had a reputation for employing the smartest people. When it listed, the 221 partners who owned it reaped the rewards; their combined stake was converted into a pot of shares worth $16 billion, an average of $72m each. Once they served statutory periods required to cash in the shares, none would have to work again. The countdown to the exodus of rainmakers had begun. Sources in the firm, and current and former clients, regard the float as a turning point.
In 1999, the lion’s share of Goldman revenues, 43%, came from investment banking — advising, raising money, leading stock exchange floats.
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Today, only 15% of turnover comes from what was once its bread and butter. It is not that investment banking has shrunk — the $4.3 billion (£2.7 billion) it generated last year was the same as in 1999. It’s that the trading business has exploded — it provides 60% of the firm’s revenue.
Clients say the shift in its centre of gravity has been palpable. Hank Greenberg, who turned AIG into the world’s largest insurer before being ousted, was long a Goldman client. Last week he said: “When they went public, partners’ capital came out, so they had to meet earnings per share expectations; that was a change in culture. You didn’t have investment bankers running the firm, you had traders running the firm, and traders have a short-term memory.”
What is certain is that in a post-recession world, investment banks have earned a special disdain in the public mind. The firm has done itself no favours. It paid $550m to settle a fraud suit brought by American regulators for selling mortgage-backed securities while betting on their collapse. The eurozone crisis has refocused attention on Goldman’s role in hiding Greek debt.
The investment banking model is itself under fire. America’s Dodd-Frank act introduced a raft of rules designed to stamp out the systemic risks that helped cause the financial crisis. Principally, it placed restrictions on the ability of deposit-taking banks to bet their own capital.
New capital rules in Europe have ramped up the amount of cash that banks must keep in reserve. The welter of regulation, combined with moribund post-recession markets, has created a business-killing cocktail.
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Last year alone more than 60,000 senior bankers lost their jobs in the City and on Wall Street, an astonishingly high figure in such a specialised, high-paying industry.
Goldman has not been immune. Its 2011 profit of $4.4 billion represented a two-thirds drop from 2009, when it banked $13.9 billion.
Bonuses have been slashed. A former Goldman managing director said: “The whole model is under stress. The pressure to find any type of short-term gain has increased massively.”
Which brings us back to Smith. What were his true motivations? His letter has a whiff of the nearly man. The achievements he highlights are telling. He won a bronze medal, not the gold, in table tennis at the Maccabiah Games, the “Jewish Olympics”. He was a finalist for a Rhodes scholarship, but wasn’t selected. At Goldman, he was passed over for managing director, remaining one of the 12,000 vice-presidents.
There are obvious counters to his accusations. Goldman last year was the world’s top mergers and acquisitions adviser, according to Thomson Reuters. It was also No1 in helping companies float on the stock markets. In The Sunday Times Best Companies to Work For awards, it came fourth this year among large firms.
“Look, none of what Smith said was a mystery,” said a senior banker at a rival firm. “Their clients are consenting adults and they know what they are getting when they hire Goldman. They may be sharks but they are very effective.”
THE $21 billion takeover of El Paso Energy last May was a throwback to the boom days. The highly leveraged private equity purchase of one of America’s biggest natural gas producers would mean millions in fees for advisers.
Few were surprised that Goldman Sachs won the mandate, but investors were furious when it was revealed that Goldman was also a big shareholder in the buyer, Kinder Morgan.
Judge Leo Strine, America’s top arbiter of business cases, waved the deal through this month. But in a 34-page judgment he excoriated Goldman for playing both sides. “I am unwilling to view Goldman as exemplifying an Emersonian non-foolishly inconsistent approach to greed, one that involves seeking lucre in a conflicted situation while simultaneously putting the chance for greater lucre out of its ‘collective’ mind,” he wrote.
The bank has form in flying close to the ethical wind. In the 2006 takeover of BAA, the owner of Heathrow, Goldman started out as the company’s chief adviser. As bidding heated up, it bowed out and launched its own bid.
It lost, but the feeling lingers that Goldman’s loyalty is, above all, to itself. Dispelling the image of a firm that is inherently conflicted — a ravenous trading operation feeding off intelligence from other parts of the business, including its own clients — is Blankfein’s task.
Not everyone is convinced he is the man for the job.
Built on caution
Marcus Goldman fled the German revolutions in Frankfurt in 1848 and settled in Philadelphia, where he was a salesman before opening a shop. In 1869 he moved to New York with his wife and five children.
The same year, he opened Marcus Goldman & Co as a broker of IOUs. He did well but the firm was modest next to established rivals. In 1882, he invited his son-in-law Samuel Sachs to join the business. As the population of New York exploded, so did the city’s businesses — and their need to raise money. Goldman Sachs expanded rapidly.
The patriarch brought in other family members. By the turn of the century the firm was gaining ever bigger clients. It floated Sears Roebuck, the department store group, and signed the likes of Heinz, Goodrich and Woolworth.
Not all its moves worked. In 1928, it set up its first investment fund, Goldman Sachs Trading Corp. It collapsed a year later in the stock market crash.
In response to the crash and the Great Depression, Congress created a regulator, the Securities and Exchange Commission. Goldman tailored its advice to the new regime. It steered clear of other crises. The 1987 market crash wiped out rivals that had bet big on junk bonds. Goldman largely stayed out of such deals; it deemed them too risky.