Why I Left Goldman Sachs: A Wall Street Story (30 page)

I remember thinking how bizarre this all was. The European economy was melting down; it felt as though Greece, Spain, Italy, and Portugal were on the verge of collapse; and here we were bragging about how much money we were making off these clients who were either panicked by the collapse or, worse, directly involved and losing millions and millions of dollars. It felt all too reminiscent of the panicked clients during the 2008 crisis.

A few months after Daffey’s town hall meeting on the Business Practices Study results, the firm held a series of follow-up seminars on the study for much smaller groups of vice presidents and managing directors. The one I attended, for just twenty-five VPs, was led by Brett Silverman, the partner who’d accompanied me to Asia right after the collapse of Bear Stearns in the spring of 2008, the creative genius behind that hilarious prank video for the holiday party. He had been transferred to London about three months before me—in part, some said, to try to repair the company culture there.

I thought it was a pretty good session. Silverman said, “When we survey the clients, there is a clear pattern that emerges. They trust their individual sales reps at Goldman Sachs. But they don’t trust Goldman Sachs as an organization. We need to change this perception.”

After the session, when almost everyone had left the room, I walked up to Silverman and said that I thought it was great that they were having these sessions for VPs, but that the team leaders, the managing directors, needed to put these ideas into practice by setting the right example. “I don’t see this happening,” I told him. “Young people won’t behave well if they don’t see the MDs behaving well. The MDs need to be held accountable.”

He looked at me with a blank stare and nodded wordlessly, almost robotically.

After the Business Practices Study seminar, I saw many sales leaders in different product groups acting as if they’d paid no attention at all. They’d meet with their teams and say exactly what they’d been saying all along: “How many elephant trades did we do this week? Which region did the most? Which structured products can we focus on to increase high-margin business? Which axes do we need to get off our books?”

The axes bothered me. An axe is a position the firm wants to get rid of or a risky position it wants to shore up. The firm believes, deep down, that one outcome is going to transpire, yet it advises the client to do the opposite, so the firm can then take the other side of the trade and implement its own proprietary bet.

One way to understand this is to think of selling doughnuts. Say you own a Krispy Kreme doughnut store, and you have too many doughnuts in stock and need to sell them before they go bad. In order to drive up sales, you could say, “Our doughnuts are now fat-free!” That would technically be a lie, but it wouldn’t get you sent to jail. It might open you up to legal action, but who really wants to go to court? Suddenly people would be rushing in to buy these delicious Krispy Kreme doughnuts, convincing themselves that if a brand as reputable as Krispy Kreme is saying the doughnuts are fat-free, then it must be true. Axes are something like surplus Krispy Kreme doughnuts that Goldman wants to clear from its inventory, making a compelling, but not always completely accurate, case for clients to buy them.

What struck me when I attended our daily morning meetings in London is how often our view of the world changed. The oscillations in opinion were far too frequent to make any real sense. The day’s worldview was usually based on what the traders had on their books, and what they were looking to get rid of (sell) or load up on (buy). They would often dispatch strats or quants to the room to persuade the salespeople to persuade their clients to fill these axes. Double GCs were sometimes awarded for axe-filling successes. Whatever argument the strats made could in theory have been the opposite of what we actually thought—just because we wanted clients to take the opposite side of our trade.

Abacus was the axe du jour in 2007. The axe du jour when I arrived in London in 2011 was getting clients to buy or sell options (puts or calls) on the largest European banks, such as SocGen, BNP Paribas, UniCredit, Intesa. We must have changed our view on each of these institutions from positive to negative back to positive ten times. I remember thinking,
How can we be doing this with a straight face? No thinking client could believe that conditions on the ground could change that frequently
. It was so obviously misleading and disingenuous.

In the case of the European banks, even more clients than usual got into these trades, including the traditionally more conservative mutual funds. Goldman and other banks saw an opportunity to make a lot of money in this sector because countries such as Greece, Portugal, and Spain were going through the turmoil of a debt crisis, and the U.S. politicians were in gridlock over whether to increase the federal borrowing limit and adopt a long-term plan for reducing government debt. As a result, it looked as though Standard & Poor’s would downgrade the U.S. credit rating—which would cause even more turmoil. The more tumultuous the situation, the more volatile the options, and the fatter the margins for the bank making the prices. Sure, there is more risk, but there is also far more possibility for huge profits.

Aside from the obvious dishonesty of continually switching our recommendations to clients based on what our traders wanted to do, I was bothered by the European bank-options axe also because of the impact it was having on markets. (Some of these European banking stocks could move more than 5 percent in a day.)

And these weren’t abstract assets. These were the national banks of sovereign nations, countries with millions of citizens who were depending on their governments to get their shit together. Jerking around the fates of their banks struck me as highly irresponsible.

What made matters worse, and even murkier, was the fact that a well-known Goldman Sachs strategist had come out with a semisecret report that went to only a select number of clients. The
Wall Street Journal
wrote about it. In his commentary, the strategist painted a particularly dire picture and suggested that European banks might need to raise $1 trillion in capital. He suggested some derivatives plays to capitalize on (or hedge against) this turmoil. During the same time period that a Goldman strategist was predicting the implosion of the European banking system, there were many days that our trading desk wanted to convince clients that today is a day to buy—a bullish story.

It was all too much. We had advised Greece all those years ago how to cover up its debt by trading a derivative. Now that the chickens had come home to roost, we were showing hedge funds how to profit from Greece’s chaos; and on the other side of the Chinese wall, our investment bankers were trying to win contracts from the European governments to advise them on how to fix the mess.

This complex and conflicted scenario was deflating for many people on the trading floor, and I had many conversations about it with colleagues. People saw the hypocrisy but nobody did anything about it. The bonus culture was just too entrenched. The numbers themselves militated against change.

There was a time in Goldman Sachs’s history when bonuses were very subjective. At the end of each year, your manager made an assessment based not just on how much business you’d brought in, but also on how good you were for the organization. These two factors combined indicated your true economic value to the firm.

But from 2005 until the present day, the system has become largely mathematical: you were paid a percentage of the amount of revenue next to your name. In some years, it would be 5 percent of that revenue; in better years, it would be 7 percent. So, if you brought in $50 million in revenue in a good year, and you were senior enough (VP level and above) to be tied to this formulaic system, you could, in theory, get paid $3.5 million.

The problem with the new system was that people would now do anything they could—
anything
—to pump up the number next to their name. Traders and salespeople, even very young ones, were learning from the bad example set by leadership. Watching the poisoning of young minds really began to weigh on me.

During my eleven years as one of the captains of Goldman Sachs’s recruiting effort at Stanford, I had met thousands of the best and brightest undergraduates who would become the future of the firm. There was always something very special about the recruiting process for me, about bringing new blood into a place that I cared deeply about and believed in. Someone had done it for me, when I knew nothing about finance; they saw some potential in me and looked out for me. And now I, in turn, relished doing it for people I believed in. It was extremely rewarding to be on the giving end of this relationship.

Experienced investment bankers often talk about how young people—especially summer interns and analysts who have just graduated from college—bring a sense of renewal and exuberance to the trading floors when they arrive, conveying a fresh spirit of idealism to the rows and rows of tough Wall Street veterans. I felt this was no longer the case.

Now, first-year associates were seeing their bosses, the MDs and partners, fighting over GCs. Over time, this corrosive behavior had filtered down through the system. Associates started believing they should be doing the same thing, because that’s what their leaders were doing. I must have had to referee at least ten disputes between associates who were trying to increase their share of GCs relative to those of their colleagues. When I was an associate, I wasn’t even set up in the system to receive GCs, because they weren’t a focus at the firm yet. Now associates saw GCs as the absolute yardstick for the size of their end-of-year bonus. A typical associate fight went like this:

Goldman Sachs teamwork had gone out the window. In most of these situations, I would encourage each person to take 50 percent, and then ultimately some partner would make the final decision—which was often driven by which associate the partner liked more. Then the associates would remain bitter toward each other.

Meanwhile, Daffey was in his office, behind three levels of security, with that “
PEOPLE
” sign on the wall.

Another thing that really weighed on me was that I had stopped wanting to recruit students to come to the firm. At some point in the twelve months before I left, I started actively avoiding recruiting. This gave me a louder internal signal than anything else of just how much things had deteriorated.

This was no longer the Goldman Sachs that, when I joined, young people were excited about. The images of Weinberg, Levy, and Whitehead had faded to invisibility. Goldman was still the preeminent bank in the world, but only because it was the cleverest at what it did (and because our alleged competition had become so weak). I could no longer, in good conscience, advise young people to come and work here.

At the end of every quarter, Goldman Sachs holds a town hall meeting, an internal business update, where the heads of every region go over the quarter’s results and talk about the competitive landscape. At the London office a thousand people, from junior analyst to partner, gather in the seventh-floor auditorium at River Court; all the European offices dial in on videoconference. Several thousand people in all participate. At the end of this meeting, which typically lasts about an hour, there are always about fifteen minutes of softball questions teed up—such as “What are the firm’s priorities going forward?” or “What do we think of the competition?”

A few months before I left, the town hall presenters were co-CEOs of Europe Michael “Woody” Sherwood and Richard Gnodde, the South African head of investment banking. Each stood at a lectern at one side of the big stage. As the question period drew to a close, a woman in the audience stood up and asked, “What is the firm doing to address the fact that the culture is dying and our reputation is deteriorating?” Absolute silence followed as the speakers contemplated the question.

Woody and Gnodde were utterly flabbergasted—floored not only that anyone would have the audacity to ask this question, but at the prospect of trying to answer it. The two of them looked alternately at us and at each other for a long half-minute. Finally, Woody said, “Richard, do you want to handle this one?”

The scene felt surreal. Nervous laughter rippled through the auditorium.

Gnodde, a big, friendly looking guy with a determined air, said, “Sure, Woody. I guess I’ll take this one.” He looked down for a second, then faced the audience. “We just did this sixty-three-page Business Practices Study—” he began. The culture was as strong as ever, he said. Goldman was conducting sessions around the firm to make sure people understood the study’s findings and put them into practice. He went on for a minute or two, then smiled at this unbelievably impertinent woman as if he had revealed a simple truth.

But she wasn’t satisfied with this scripted answer—she was looking for some real acknowledgment of the problem, some introspection. The woman followed up: “But what
specifically
is management doing to fix this problem that is on so many people’s minds?”

Another pause. Then Woody took the ball. He waxed philosophical. “Look,” he said. “At Goldman Sachs we’re all family people; we all have families, we’re all good people. We just have to remember that, and we have to go about our business by making good, ethical decisions, just as we would in our daily lives.”

There was a smattering of halfhearted applause, and the meeting was called to a close. Everyone walked out with a deflated feeling.

It was time for me to leave.

I knew in my heart there was something deeply wrong in the way people were behaving, in the way they didn’t care about the repercussions, in the way they saw their clients as their adversaries. My human reaction was that it was bad for the future of the firm, a place that I had put a lot of heart and soul into. I knew it was time for me to go—the young people’s disaffection had told me, the clients’ distrust had told me. But the firm’s not really caring about what was going on told me the most. So I began to write. Writing was my way to distill into simple terms exactly what I felt was wrong. I remembered how, more than a decade earlier, Carly Fiorina had advised the new Stanford graduates to keep trying to distill things down until we got them to their true essence, what we truly believed.