Thursday, February 28, 2013

Why He Left Goldman

It was the culture, he contends
Recall about a year ago. It was the op-ed piece heard all around the business world, when Goldman Sachs vice president Greg Smith dared to announce his resignation on the pages of the New York Times. After an 11-year stint in its institutional sales unit, Smith announced he had had enough and it was time to depart. He decided to share publicly why his disappointments in the business culture led to his decision to leave a fairly lucrative position.

(See  CFN: Goldman Sachs and the Letter, Mar-2012)

At the time of his departure, Smith was head of U.S. Equity Derivatives in Goldman's London office. (In London, he was an "executive director," which at Goldman was equivalent to a U.S. "vice president.") He had progressed swiftly through the ranks and was highly regarded for his expertise in markets, clients and derivatives in his special perch. By most accounts, he was not a difficult employee and colleague. He had made meaningful contributions in many ways--building a new business in Europe, preparing  market insight in the form of frequent, written commentary to Goldman salesmen around the world, and agreeing to transfer to the London office, when he didn't want to.

The revered culture of clients coming first had evolved, he said, at Goldman in ways he felt uncomfortable. The crisis was partly at fault.  Every partner, managing director, vice president, and associate, he observed, was out for him- or herself. Survival was the mission of the day.

It boiled down to this, he observed:  The trading culture had evolved into a massive mission of accumulating "GCs"--gross credits, sometimes at the expense of doing the right thing for the client.  The value of the employee to the firm was determined by the total amount of GCs he or she accumulated during the year.

Mindful of this, the employee overlooks teamwork, partnership, and support for other colleagues and focuses singularly on maximizing GCs and, therefore, the year-end bonus, even if it means swiping GCs rudely and unfairly from colleagues or being willing to unload "toxic waste" securities onto unsuspecting or unknowing clients. 

So after he had his apocalyptic moment (on a business trip to Southeast Asia while Goldman executives had been summoned to a Congressional hearing), he decided to quit. As many expected, after the  op-ed blast in the Times, Smith went into hiding. He emerged from a  self-imposed rest when he published a book last fall to recount his experiences at Goldman and explain his well-publicized departure more thoroughly.  The book, Why I Left Goldman, received lukewarm reviews.  Reviewers and industry-insiders, and perhaps Government regulators, were looking for something more, perhaps a hint of scandal, a more detailed account of mishaps and fraudulent business practice. He presented none of that.

The book is similar to other detailed accounts of a young banker or trader's venture onto Wall Street. They are views from the ground up, from the trenches, from entry-level positions as the novice tries to adapt to the ways of a zoo-like trading room.  Smith's book reminds us Michael Lewis' Liar's Poker."

Smith is fresh out of Stanford and thrust onto a derivatives-sales desk.  Lewis had just graduated from Princeton and encountered the bowels of Salomon Brothers' legendary trading floor and lived to write one of the most spectacular, humorous accounts of Wall Street ever.  Smith's book is also similar to a lesser known, recent book, A Colossal Failure of Common Sense, by Lawrence McDonald of Lehman, an up-and-coming fixed-income trader, who viewed his last days at Lehman, not with sarcasm and humor, but with anger and humiliation.

Notwithstanding the so-so response to a book we knew he would write, for the newly minted MBAs, those who contemplate career paths in sales & trading at major banks, those who are considering institutional sales, the book has its strengths. It is an invaluable introduction to the trading floor, describing the environment, work pace, client groups, and specific roles.  Institutional sales will have an important role at big banks, as regulation prohibits much of proprietary trading.

Reform and new rules, whenever they are finally implemented in full, will permit the big banks (from Goldman Sachs to Bank of America and Citigroup) to engage in trading on behalf of clients, not necessarily on behalf of themselves.  Proprietary trading is being eased out of existence. Trading for clients will be permissible.  (Trying to distinguish between the two will sometimes be a nightmare for banks and regulators.)

Some will argue that as technology advances and clients get more comfortable with it, electronic trading and execution will replace sales professionals.  But as the book shows, sales professionals will be necessary to bring clients on board, help them with best execution, guide them through rough markets, and present new trading ideas.

Thus, the book provides a day-to-day overview of institutional sales and explains a conventional career path from analyst to managing director.  It describes the structure of a sales & trading organization, the management, and the relationship among sales professionals, traders, researchers, and floor brokers. It shows how the firm generates revenues from trades, the more difficult or exotic trades generating the largest commissions or mark-ups.

The book is a reflection on firm culture from the vantage point of the trading floor. Firm culture is important, but what is more critical is how the culture penetrates all activity, roles, relationships and transactions in the firm. Smith, in the book, contemplates firm-wide goals vs. personal goals, how the two intersect, but how they sometimes collide. And he shows how bad, selfish personal goals can be inferred from vague firm-wide goals.

Especially in the wake of the financial crisis, he highlights how personal goals sometimes became a higher priority than firm goals. In a vivid, poignant scene in the days after the collapse of Lehman Brothers as markets nose-dived, Smith watches a senior managing director on the trading floor glued in a silent trance to the computer screen, studying his personal portfolio of assets, having no care in the world with what was going on elsewhere with his clients or with Goldman.

Thirdly, Smith demonstrates the impact of corporate politics on a personal's career success. He had learned quickly, perhaps in his first few weeks, that success at Goldman or at any large financial institution would not be a result of effort, hard work, and time commitment. To get promoted to vice president or managing director, to have the opportunity to work abroad (in London, in his case), or to transition into a different role all required special networking skills. He would either have to learn those skills or rely on buddies, mentors or managers to guide him.

In his case, Smith wasn't a schmoozer. He was, however, fortunate to have advocates nearby on the trading floor, champions on his behalf, people who liked him and were willing to grant a favor or speak up on his behalf.  Generating "GCs" (or client-related revenues) could lead to a big bonus, but finding someone to spread the word about him could lead to a promotion. Over time, he learned to win favors in bars, accompany managers on business trips and bachelor parties, attend social functions and farewell receptions, and even allow clients to look good in parlor ping-pong games.

Diversity. Smith's book hardly touches the subject.  He had the opportunity to address it, because he describes himself as an outsider trying to find his way within a powerhouse firm. (He is a foreigner who grew up in South Africa before coming to the U.S. to go to college.)  He might have been so consumed by his frustration with how he perceived Goldman had evolved that there was much he couldn't get to. (For example, he barely discusses other parts of Goldman, including its investment-banking machine or its sectors in asset management, private equity or private banking.)

It appears, nonetheless, that women in sales & trading have had scattered chances to reach the highest rungs.  A handful of his bosses or senior colleagues, over the decade, are women. And he observes how they have had to evolve to survive or change to battle the machismo ways of trading-room trenches.

The fanfare around the op-ed piece book will likely fade into memory and become a mere, colorful chapter in the history of Goldman. Smith will likely move on beyond Wall Street. He learned a lot about global markets, clients, derivatives, financial products, exchanges, and business management. You can bet he has another book in mind. He highlights the foibles of certain banking cultures in this one. In the next, he'll probably present solutions.

Tracy Williams

See also:

CFN: How Does Goldman Do It? 2010
CFN:  Goldman Tweaks the Ladder, 2012
CFN:  The Role Goldman's Board, 2010
CFN:  Morgan Stanley Tries to Please Analysts, 2012
CFN:  The Volcker Rules, 2011

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