Why I Left Goldman Sachs: A Wall Street Story (15 page)

Trading, not banking, had become Goldman Sachs’s present. In 2006 it seemed that every business magazine ran a cover story about how Goldman was at the summit of Wall Street, doing double and triple the business of the other investment banks. I kept an April 27, 2006, copy of the
Economist
that proclaimed in a cover story that Goldman Sachs was “On Top of the World.” The cover even had a picture of a mountain climber so high up that it looked as if he were in the clouds. I was proud to see this. This was a far cry from the dark days of 2001, when people were saying that maybe Goldman had lost its luster and that the bigger banks, with bigger balance sheets, were going to eat us alive.

How was Goldman Sachs achieving these astounding profits? Not through investment banking, not through the traditional methods of raising capital for companies, some of the articles pointed out, but by taking its own positions with its own money: trading for itself. This is called proprietary trading. What these magazines (and some investors) were saying was that Goldman Sachs was becoming a hedge fund, and as part of the evolution, the bank was getting into new conflicts of interest. This new direction was a significant departure from what Goldman Sachs had become known for.

From Goldman’s first days until its 1999 IPO (130 years), it had prided itself on serving as an adviser to its clients, with fiduciary responsibility. A fiduciary stood in a special position of trust and obligation where the client was concerned. This role was applicable when the firm was advising the client about how the client should best invest its money versus pushing the client into investments that generated the largest fees. It was also true in investment banking, when the firm was telling a client whether it should merge with another company. This ideal of doing what is right for the client, and not just what is right for the firm, was there, prescribed in the 1970s by former senior partner John Whitehead in his set of 14 Principles. These principles were drummed into our heads when we were summer interns, and I felt idealistic about them. At one point, I pinned up a copy of them next to my desk. The principles that referred to fiduciary responsibility were:

There it was, all written down: clients’ interests coming first; our constantly striving to find better solutions to a client’s problems; not using clients’ confidential information improperly; maintaining the highest ethical standards in everything we do. So how on earth did proprietary trading fit in with these ideals?

As the power base at Goldman shifted from investment banking to trading—a shift embodied by Lloyd Blankfein’s rise in the firm, which coincided with a huge rise in trading revenue relative to banking revenue—the client increasingly came to be regarded as a counterparty, merely the other side of a transaction, rather than an advisee. A counterparty was on its own; its goals might or might not match up with those of the investment bank (the other counterparty) facilitating its transactions. Advisees are more like children: you have a responsibility to look out for them and defend them from their own worst instincts. Counterparties, however, are adults, and in full-frontal capitalism, anything goes between consenting adults.

There was another new nebulous role for Goldman: that of co-investor. In the old days, the firm would advise a client to invest in something; in the new universe, the firm could now invest its own money in the same thing. Where this practice of proprietary trading (or “prop trading”) turned morally ambiguous was when the firm changed its mind (or masked its intentions) and made a bet in the other direction from the client’s.

In early 2005, when Lloyd Blankfein was still Hank Paulson’s number two, the two of them, in their annual letter to shareholders, addressed the subject of conflict of interest in the brave new world of investment banking. The letter marked a sea change in Goldman’s attitude toward its clients. Conflicts between bank and client were inevitable, they argued. Moreover, such conflicts were to be embraced. If a firm wasn’t generating conflict, it wasn’t pursuing business aggressively enough.

“It is naïve to think we can operate without conflicts. They are embedded in our role as a valued intermediary—between providers and users of capital and those who want to shed risk versus those who are willing to assume it,” Hank and Lloyd wrote.

Not long afterward, Goldman brokered a $9 billion merger between a client, the then–privately held New York Stock Exchange, and a much smaller, publicly traded electronic exchange called Archipelago. The problem with the merger, in the eyes of the outside world, was that Goldman, which was the second-largest stockholder in Archipelago, was on both sides of the deal, which netted the firm some $100 million, all told. Also, the chief executive of the NYSE at the time was John Thain, formerly Goldman’s president and COO. Goldman’s spin on the transaction—presented with a completely straight face—was that it was promoting stability in the financial markets by managing conflict. To questions about these conflicts, then–Goldman spokesman Lucas van Praag responded, “Life is filled with conflicts, some real, some imagined.”

At the time, I bought into the spin. When I and many other people at Goldman read Lloyd Blankfein’s very convincing arguments about embracing conflict, we even felt a certain sense of pride: The firm was charting new territory. We’d figured out inventive ways of walking the line and helping clients. My instinct, for a long time, was:
Let’s give the firm the benefit of the doubt
.

The summer of 2006 was an exciting time for me: business was cranking, the markets were strong, and I was doing well in my job. I was loving life in New York City. And sometimes it’s when you are happy that you meet a girl. Nadine and I had been set up on a blind date the week before I left for Connors’s bachelor party that spring, and I’d been very eager to get back to New York to see her again. I’d even told Bill-Jo about her in my drunken state by the blackjack table. She was a dietitian, smart and attractive, and we had a similar Jewish upbringing. We shared a love for wine and restaurants, sushi in particular. On some of our first dates, we went to Sushi of Gari on the Upper West Side; Cube 63, on the Lower East Side; and the new Asian-fusion hot spot Buddakan, in the Meatpacking District.

Also that summer, Goldman had asked me to comanage the summer intern program. This was a particular point of pride for me. The firm saw me as a culture carrier, someone who embraced and championed all that was excellent about Goldman Sachs. I felt honored to represent the firm in this capacity. I happily mentored new analysts; I captained Stanford recruiting. Twice a year, I’d fly out to Palo Alto with a team of five or six people, speak at the Stanford Career Fair, and interview the kids who were interested in Goldman Sachs.

In interviews, I always looked for the same few things. I was not so interested in how much someone knew about finance, or what students’ GPAs were. I was more interested in their judgment and enthusiasm for the business. On Wall Street, it’s very easy to teach someone the theoretical aspects of finance. It’s almost impossible, though, to teach someone good judgment and awareness. Will he know when to ask for help? Will she admit when she’s made a trading error? Will he be willing to work his butt off even if the job isn’t always intellectually challenging, but still needs to be done? Will she be able to juggle several tasks at the same time? Is he interested in the markets, with a desire to learn more?

I always felt that just chatting with someone for five minutes would give me a much better sense for all this than asking hard questions about finance. Most important, though: Was the person pleasant? Did we like him? Would he get along with people? Arrogant budding finance gurus did not often make it through the Goldman interview process.

Once we had picked our kids on campus, I always did everything I could to help them get in the door. Admittedly this was biased, but I felt that Stanford kids were better rounded and more easygoing than the Ivy League kids, who could be more serious and cutthroat. I’d seen this contrast between East Coast and West Coast very clearly when I was a summer intern.

I felt proud, at the end of the summer of 2006, that of the internship managers, I had the highest percentage of kids—more than half of my group of twenty-five—who were asked to join the firm full time.

Also that summer, Goldman chose me as one of ten Goldman employees to appear in a documentary-style recruitment video that was made that summer. The firm brought in a production company that filmed me on the trading floor interacting with other employees, then interviewed me on-camera.

The cherry on the sundae for my summer was an offer that came out of left field. Laura Mehta, the managing director of our desk, had a house on the North Fork of Long Island—it was only a two-bedroom, but it could have come straight out of the pages of
Architectural Digest
. Pristine white, perched on the edge of the bluff overlooking the water, the place was fitted out with all the goodies: full chef’s kitchen, Sub-Zero fridge, surround sound. Laura e-mailed Connors and me, saying that either of us could stay there on the weekends she wouldn’t be there. “You guys have worked very hard,” she said. “You’re welcome to use it.” Nadine and I had just started dating, and nothing could have been more romantic—or, frankly, more impressive—than taking my new girlfriend to a managing director’s house overlooking the Long Island Sound. Laura went out of her way to recommend all the best places in town—we went to the Frisky Oyster in Greenport for dinner, got the egg-and-cheese croissants that she recommended from the farmers’ market down the street. I was twenty-seven years old, and it felt as though a lot was going my way.

Going my way in a big way. At the end of November, Laura called me into her office, smiling, and said, “Well done, Greg.”

I was smiling, too. I knew what was coming.

“We’re promoting you to vice president,” she told me.

I was extremely proud; at the same time, I have to put this promotion in perspective. A little later that day, Lloyd Blankfein sent out an e-mail to the whole firm saying, “These are the new vice presidents; we’d like to congratulate everyone.” There were more than a thousand people on the list.

To sharpen the picture further: in a given year, depending on market conditions, Goldman Sachs could fire roughly that same number of employees—one to two thousand people. So being promoted to vice president is as much a tribute to your survival skills as anything else. Many in my analyst class had fallen by the wayside; many more were still to fall.

A Goldman Sachs vice presidency does not mean a bump in total compensation. In theory, if the firm has a bad year, it’s possible for a newly minted VP to earn less than he or she earned as an associate. Nor are Goldman vice presidents an elite minority: out of thirty thousand people in the firm, some twelve thousand are VPs. They are in the trenches. They are the people who do most of the work and, in my mind, who understand better what the culture really is than someone stuck in a corner office with glass walls.

Still, I was very proud. Everyone started congratulating me. I must have gotten seventy-five or eighty e-mails—from people above me and below me, from clients, even from friends outside finance altogether who had somehow heard the news—saying, “Well deserved,” “May you go from strength to strength,” and the like.

As 2006, that Year of Wonders, wound down, did I also feel uneasy about some of the things that were going on at Goldman Sachs? Things such as the Archipelago deal and proprietary trading, not to mention some of the new structured products I had started seeing—derivatives so complex that only the firm’s smartest quants and strats (and perhaps not even they) truly understood them?

Maybe. But some of those things were happening on another side of a wall as tall and as strong as the Great Wall itself, in an area whose doings I was not even privy to. And from a compliance standpoint, Goldman was the most legally rigorous of all investment banks. We were constantly being reminded about how careful we should be; how thoroughly we should check things; how, if we weren’t sure about something, we should speak to the lawyers. We were trained in securities law and precedent every few weeks.
Surely
, I (and many others) thought,
we must be doing everything right
.

The year ended strangely. In early December the Securities division (the name for the new entity that combined Equities and FICC) held its holiday party in a massive hall near Chelsea Piers. It was an unbelievably ostentatious affair. There must have been three thousand people in attendance, and nearly as many ice sculptures. The cavernous space was packed with crowds milling around and visiting food stands catered by some of the city’s best restaurants, such as Blue Smoke and Landmarc. Rock music exploding from giant speaker banks ensured that conversation would be impossible—basically, all you could do was eat, get hammered, and gape at the sheer spectacle of the thing.

The most gape-worthy sight of all was the entrance of Gary Cohn. Our new president had earned something like $50 million that year, and his stratospheric new status had clearly pushed him into bizarro world, for he walked into the hall surrounded by beefy guys wearing earpieces. This was an internal party, and here was friendly Gary Cohn—who was as big and as beefy as any of the beefy guys—ringed by bodyguards. Who, exactly, were they protecting him from? If a lowly associate or VP attempted to walk up and make party chat, would the presumptuous underling have been tackled and tased? Fortunately, this didn’t happen. Gary, surrounded by his Praetorian Guard, made his way from food stand to food stand smiling and sampling the goodies.