Goldman Sachs sacrifices its own clients to drive up its profits

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

This is interesting:

I was an esoteric derivatives trader at an investment bank making money off clueless clients. We actualy prided ourselves, as a prop desk, on not being client facing. I went in expecting to parse global markets for inefficiency while pioneering the frontiers of 21st century finance. As time went on I found that the firm was content with mediocrity (as it could survive by simply existing in its role) and had no time for risky business like thinking.
You delude yourself into thinking you’re inherently superior, a “Master of the Universe”, even as you have never been able to explain to your mother what you do. Sooner or later you realise your colleagues are smart but terrifically insecure human beings, valuing their roles for who association with the firm’s name makes them rather than what they actually do. Thus hierarchy is strictly enforced and innovation rages furiously in quaint, safe areas, e.g. introducing “new” leveraged/inverse hedged swaps, while ignoring fundamental assumptions, e.g. the trading floor should be siloed by product.
The bureaucracy and technical debt, combined with constant turnover in the under-paid operations and IT staff, mean that gaining understanding of the firm’s as a whole as of no less than a quarter ago is a Herculean undertaking. And it’s worse when you talk about the sales traders – none of them understand their product (they don’t need to – the client’s the one taking the risk), it’s a miracle if they know a few shortcuts in Excel, and every one of them has an opinion on how xyz company (or country) should re-structure without having read a single term sheet or prospectus.
Luckily, there are start-ups that are raging equally furiously but with un-paralleled agility towards the financial sector. Alas, we’ll have to find a new slot-in role a la consulting, investment banking, and sales & trading for insecure college graduates without hard skill sets to plump.
Note on recruiting
I’ve seen some comments tacitly saying Messr Smith should have known what he was getting into when he signed up for the job.
I was recruited by a very charismatic and values-driven MD when I was 19. Our desk merged with the rest of the firm’s shitty culture when he was fired for being too ambitious. I didn’t join for the six-figure salary – I turned down other offers that paid more at the time. There are lots of other people I know, brighter than I am, who were similarly drawn to the thought of a dynamic work-day filled with brilliant, ambitious people all working to solve difficult problems (that could be a tech company’s recruiting ad…). Maybe I should have been more clairvoyant, but in the end what drives people to finance and what drives people to tech isn’t all that dissimilar – the unique cultures change like to unlike from there.

And this sums up a lot of the decline in the USA over the last 30 years. The financialization of the economy, since 1980, has lead to a focus on short term profits, rather than long term development.

At meetings at Goldman, on the other hand, “not one single minute is spent asking questions about how we can help clients,” Mr. Smith wrote. “It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”

“People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer,” warned Mr. Smith, whose biography page traces his time with the firm in New York and Europe.

A Goldman Sachs spokesman responded to the piece early Wednesday: “We disagree with the views expressed, which we don’t think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”

Mr. Smith’s criticism, much more than stories about bonuses or brickbats from the likes of Occupy Wall Street, could be especially painful for Wall Street now. Memories are still fresh of the Securities and Exchange Commission lawsuit filed in April 2010 accusing Goldman of fraud, after it sold clients complicated mortgage backed securities that later soured, and never mentioned that it had bet against them.

The parade of senior Goldman executives who testified before Congress after the case arose seemed to put a public face on what had been a broader sense of distrust of Wall Street in the aftermath of the financial crisis, focusing ever more attention on a firm whose patriarchs had been adamant about having high standards.

Wall Street, of course, has always sought profits — but if greed were to be countenanced, it should be long-term greed, not short-term greed, in the words of Gus Levy, who led Goldman Sachs in the 1960s and ’70s. With long-term greed, money was made with clients, not from them.

Veterans of Goldman and other top-tier firms say there was a time when long-term greed was the order of the day, at least publicly, and it benefited firms and their partners if not enormously, then certainly generously. But over the last 25 years, as that incentive structure metamorphosed, longtime bankers and scholars say, Wall Street has been remade in ways that Mr. Levy would hardly recognize.

The shift in incentives has followed the evolution of the business itself, industry insiders and other experts said. Partnerships, where the leaders of the firm had their own fortunes on the line, became publicly-traded giants. Proprietary trading evolved into a Midas-like source of money, challenging investment banking and client relationships. And with a free hand thanks to Washington, investment banks could take on ever more risk, amplified by debt.

“When these firms changed from partnerships to public companies, the ethos changed dramatically,” said Charles M. Elson, a professor of corporate governance at the University of Delaware. “The notion of client loyalty went out with the old structure. And as these became public companies, clients looked for the cheapest deal, and the firms looked for as many clients as possible.”

With the rapid growth of proprietary trading beginning the 1980s, as firms used their own capital to make bets, a short-term mentality came to dominate firms, according to Mr. Elson. “You make a much bigger buck on a transaction than on the long-term relationship,” he said. “You have profiteers as opposed to advisers.”

Compensation followed. Before 1990, pay for the chief executives of financial firms were on par with those of chief executives of the largest traded companies, or even slightly lower.

By 2005 the pay was roughly 250 percent bigger on average, said Ariell Reshef, a professor of economics at the University of Virginia. Broadly speaking, between 1980 and 2005, bonuses and salaries in finance increased 70 percent more than average pay elsewhere.

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