Why I Left Goldman Sachs: A Wall Street Story (24 page)

The hearings hadn’t started yet, but C-SPAN was turned on, on the flat-screen. One of the servants started bringing in snacks: a plate of fresh fruit, a platter of exotic hors d’oeuvres. The food kept coming. Everything tasted delicious, but sometimes that’s what jet lag and hundred-degree weather does to you. Then Taku’s mother came in; she was a quiet lady with exquisite manners, and was dressed that day in traditional attire. I shook her hand politely. Everything suddenly felt more than slightly surreal: it was as though I were visiting a friend instead of one of my most important clients. And we were about to watch Goldman Sachs being grilled by the subcommittee chairman, Senator Carl Levin. I felt comfortable and uncomfortable at the same time: pleased to be watching in comfort and luxury in an exotic destination—at my client’s mother’s house, of all places!—but wary and defensive on behalf of my firm.

The next couple of hours proved to be every bit as weird as the circumstances promised. As Taku and I watched intently, his mom kept popping in, chatting distractingly. I had to try to be polite to her and focus on the screen at the same time.

Levin was ready to rumble. Among the other senators who took the microphone, some were challenging and well informed about finance, while others were angry, volatile—and almost unbelievably uninformed. The Goldman witnesses—David Viniar; former Mortgage department head Dan Sparks; and three of Sparks’s former subordinates, including the Fabulous Fab himself—looked about as comfortable as anyone facing a televised Senate subcommittee hearing could be expected to look. In a moment that became famous, Levin, grilling Sparks, quoted verbatim an internal Goldman e-mail from Sparks’s boss, about a CDO called Timberwolf: “‘Boy, that Timberwolf was one shitty deal.’” Levin then asked Sparks, “How much of that shitty deal did you sell to your clients after June 22, 2007?” Levin couldn’t seem to get enough of the word
shitty
, which he said at least five more times, right on live international television, in a proceeding of the U.S. Senate.
Shitty
deal.
Shitty
deal.
Shitty
deal. Again and again and again.

Late at night, in a sedate living room ten thousand miles away, the effect was both comic and tragic. Taku and I laughed, but my laughter was nervous. While we could make fun of some of the senators who had little idea of what they were talking about, the fact that Goldman Sachs was on the stand was no joke to me at all. It was about the worst possible thing that could happen to a firm that had prided itself on maintaining its golden reputation.

At a certain point, I felt a need to defend myself and my firm to Taku. But it wouldn’t have helped: Taku was out cold. The hearings had by now bored him to sleep. Hmm. Sitting in your client’s mother’s house watching your firm on trial, in a foreign land, when everyone else in the household had gone to sleep—a strange circumstance I could not have predicted. But I quietly kept watching.

Finally, Lloyd came on. Viniar had looked somewhat shell-shocked under Levin’s verbal barrages; Lloyd struggled in a similar fashion. Goldman Sachs was not good at this: appearing in public, in the limelight, under interrogation, was not our strong suit. These were muscles we had never exercised before. There was a sense that this was a no-win situation for Lloyd and the other Goldman people getting grilled that day. It was a show trial. The best they could do was come out alive having not said anything too bad or, in a nightmare scenario, too incriminating. You could tell that Lloyd was annoyed to be there. But he was doing his best to fight back as hard as he could. The thing I kept thinking about was the argument Lloyd kept making: that in a sales and trading business, there is no fiduciary responsibility; that we are not obliged to do what is in the client’s best interest; that we were not
advising
the client; that we are just there to facilitate trades between big boys (i.e., large institutional investors). The two things I thought were:
No one ever told me this
. I was advising my clients every day, telling them what I thought was right for them. Why did we have salespeople with clients if we were just trading monkeys matching up buyers and sellers? And second, that the argument about “we’re all big boys here,” that the markets are a level playing field, rang hollow.
S
urely it’s obvious that Goldman knows the most in any situation because it can see what both buyers and sellers are doing.

I looked over at Taku, who was still asleep. I nudged him gently and said, “Hey, I’m going to get out of here. Thanks for having me.” I took a cab back to my hotel and stayed up till the early hours of the morning watching the rest of the hearings. Even though I was exhausted, I kept watching until the sun rose.

The meeting the next day was to be a formal sit-down with Taku’s boss’s boss’s boss, the head of the fund. I’d met the man several times over the years. He was middle-aged, dignified, formal—reserved in the way his culture called for.

It was an important meeting, so I spent the morning at Goldman Sachs’s local office going over talking points with the local partner, a native of the region. He’d been with Goldman a long time, but what was puzzling to me, and to quite a few of my colleagues, was that this guy wasn’t especially conversant with the fund or its personnel. A lot of people wondered,
How can this guy be a partner?
But it turned out he was a trading partner, and traders, as I’ve said, tend to be somewhat introverted, managing risk but not dealing as much with the clients as the salespeople do. He just happened to be the most senior guy in the office, and (a bit embarrassingly for him) I, a South African Jewish guy living in New York, was going to be introducing him for the first time to the head of the fund that was Goldman’s client, even though the two worked ten blocks apart.

We went into the meeting. In our preparation, the local partner and I had gone over several possible scenarios for ways we thought the talks might go—clearly the SEC investigation was going to come up—but we didn’t know exactly how things would go down. After handshakes and niceties all around, the head of the fund immediately brought up the SEC charges against Goldman Sachs. No bullshit on his part.

The normally extremely dignified and guarded head of the multibillion dollar fund did not mince words. He looked at the partner and then at me and said, “Let me be clear with you guys. You don’t need to worry. We’re not going to stop doing business with you. The truth is, we haven’t trusted you guys for a long time, because we think Goldman Sachs is a hedge fund; we know you have exclusively your own interests at heart. Yet we also recognize that you’re the smartest guys on the Street, and there are times when we need to trade with you.”

I tried to keep my mouth from falling open. He went on. He was not unsympathetic, he said. He was with us in thinking that the hearings were a bit of a witch hunt. He was taking the tack that some people in the media had also begun taking: Of course Goldman Sachs advances its own interests. This shouldn’t be a surprise to anyone. We know it. There’s nothing illegal about that. The firm is just matching up buyers and sellers—and often, the firm itself is one or the other. But, he said, we’re not naïve enough to think that Goldman is always going to do right by us, either.

The meeting continued. We spoke a little bit about the markets; the local partner, finally seeing a place to jump in, gave some opinions about what Lloyd was saying and thinking in that regard. The senior client said, quite politely and mildly, that given the length of his relationship with Goldman Sachs, he was slightly surprised not to have heard directly from Lloyd. I cringed. Then, after parting handshakes, we left. I felt extremely deflated. I hated not being trusted. My instinct was to think,
How can we fix this? How can we make this client trust us again?

But the local partner’s reaction was one of relief. “Thank God they’re not going to cut their business off,” he said. “This is a good outcome! I thought it was going to be much worse.”

I shook my head.

In the days that followed, I kept shaking my head, trying to adjust to the new reality. Here was a Goldman Sachs partner expressing relief that business with a client was going to continue even though the client’s top guy didn’t trust us to do right by him. Partners used to take on themselves the mantle of stewardship of the firm, but this partner was not acting like a steward of the firm at all. It was demoralizing for me to see so senior a person act in such a totally self-interested and shortsighted way. In effect, he was saying, “I’m not going to get into trouble; I’m going to keep making money. And if this client stops doing business with us five years down the line, I’m probably not going to be here anyway.” Maybe this was an isolated example, but it was not what I expected from a partner.

What had become of the 14 Principles—specifically, principle 2: “Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore”? We seemed to have entered some strange Future Zone, where the last asset wasn’t merely tarnished; it had vanished. It appeared that a Goldman Sachs employee now had to accept as a fact of life that we were no longer to be trusted. This was not a great fact for me to think about. I expected the leadership of the firm to try hard, to do whatever it took, to fix this. But would they?

As soon as the SEC charges hit the tape, Goldman started to lose the momentum it had been building steadily since March 2009. When investors saw the regulators going after the most profitable bank on Wall Street, they couldn’t help wondering,
What’s coming next? When will the next shoe drop?
The financial world was already more than a bit shaken up when May 6, 2010, came along.

I remember it very clearly. The markets had been down all day on worries about the Greek debt crisis. Early in the afternoon, I stepped away from my desk to go to the bathroom. I remember chatting with someone who was at the urinal next to mine, our futures strategist, and then going back to my desk to find that the market had plummeted an extraordinary amount: the Dow had been down 9 percent at one time and quickly recovered. This swing of 1,000 points was one of the largest moves in Dow Jones history. Everyone was gawking at their screens. What the hell was going on? Another thing people noticed is that stocks such as Accenture, CenterPoint Energy, and Exelon had, for a brief moment, lost the entirety of their value, and had traded as low as one cent per share. This wasn’t possible. How could a stock instantaneously lose its market cap in less than a second? This was unprecedented, to say the least.

This was the flash crash.

Between 2:42 and 2:47
P.M.
, the Dow Jones dropped 600 points beyond the 300 it had fallen earlier, for a loss of almost 1,000 points on the day. By 3:07
P.M.
, the market made back most of the 600 points.

Whenever there is a very big and precipitous drop in the market that cannot be explained by any one news headline, investors almost always speculate: “Oh it must be a fat finger in the E-mini S&P futures”—meaning some clumsy trader accidentally sold off a massive amount of volume, far more than he intended, wreaking havoc in the process. In the early 2000s, there were a few famous fat-finger issues as the E-mini was taking over the big futures contract that had been traded in the pit. We used to joke on the desk that the guy who kept “fat-fingering” was a mysterious character known as the “E-Mini Bandit.”

But was the flash crash the E-Mini Bandit’s work?

What actually happened was never clear to me—nor, I think, to anyone else. Various theories were offered, but the one thing a number of people started saying was that the crash had been triggered by a large sale of E-mini S&P 500 futures, the very product I had traded years ago on the Futures desk with Corey, the most liquid futures contract in the world. In the midst of this bizarre twenty-five minutes, a number of senior people, remembering my experience with these futures, came up to me for an analysis of what was going on. I told them I didn’t think it was caused by the E-minis. There was just not enough volume going through to cause such a crazy move.

What was so disturbing to me—and to millions of people around the country who invest in the stock market—was the utter fragility the flash crash revealed in a market that had become insanely complicated. There were interlocking technologies and backup systems, none of them necessarily able to communicate with the others when things went wrong. High-frequency trading—computers making millions of trades per second—had become a massive proportion of the daily trading volume. Eventually, the SEC and the media settled on a trade made by the mutual fund company Waddell and Reed as the catalyst. No one will ever convince me that a mutual fund manager selling $2 billion in E-mini futures was responsible for what happened that May afternoon. When I was on Corey’s desk, I would routinely trade $3 billion of them myself. I never caused a flash crash. To an outsider, the mini-disaster may have looked reasonable: a big sale triggering a sell-off. To me, it simply looked scary—one more sign that the global capital markets were officially out of balance.

Investors felt the same way. With the flash crash following hard on the heels of the SEC charges, clients were rattled. And being rattled, they stopped trading. They froze. Things turned dead quiet once more; the layoffs recommenced. The mood on the Goldman trading floor was dire.

In July, Goldman Sachs agreed to a settlement of $550 million in the SEC suit: $300 million to go to the government and $250 million to investors. Fabrice Tourre was not included in the settlement, further reinforcing the impression that the firm had hung him out to dry. As to the SEC’s charges, Goldman neither admitted nor denied any wrongdoing. Many people found this very strange. What was a settlement of $550 million if not an implicit admission of wrongdoing? The spin doctors at the SEC crowed that it was a huge victory, the biggest settlement of all time. Skeptics on Wall Street said, “This is a huge victory for Goldman Sachs; they got away unscathed.” For anyone in America, $550 million was a mindboggling amount of money. But for a corporation whose Securities division was bringing in $5 billion a quarter, $550 million was a parking ticket.