Why I Left Goldman Sachs: A Wall Street Story (31 page)

On airplanes, in airport lounges, in hotel rooms, and in my flat late at night, I tried to set down in writing many of the things that were poisoning the institution I loved. At first the thoughts were lengthy and convoluted. I went over and over them, tried to boil them down to their core meaning.

For the first two or three months, the goal of the writing was just to help me understand exactly what I was feeling. Then gradually I started thinking about an idea: I could leave quietly, say nothing, and let the system fester. Or I could try to change the system—since I could clearly see that the partners I spoke with weren’t going to do anything about it.
If the firm’s culture couldn’t be changed from within
, I thought,
maybe it could be changed from without.
I decided to try to craft an op-ed or editorial, a piece of writing that might alert people to what was going on in the financial world, that might change some minds. The sentences came…
I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

My essay, or whatever it was, quickly ballooned to three thousand words, then five thousand. I knew I had to get to the essence of what I was trying to say—which was what? That Goldman Sachs and Wall Street had lost sight of their mission: servicing clients. That the culture was rotting, which presented a dire threat to the firm and the industry. When the client no longer trusts the bank, calamity ensues. And that the buck ultimately had to stop with the board of directors and people like Lloyd and Gary and Woody and Gnodde who had turned a blind eye to all that was happening right under their noses, on their watch. They had put the sole pursuit of short-term profits ahead of a reputation that had taken decades to build up, but could be destroyed in an instant. They didn’t fully realize that you can’t just say that you are different and that you put clients first: you actually have to act this way. And if you don’t, the smell of hypocrisy soon starts suffocating your employees and your clients.

I discussed with Lex the idea of my leaving Goldman Sachs. I didn’t tell him specifically that I had been working on a piece, but I wanted to know if he thought there would be moral value in my saying something publicly about why I was leaving, what I thought was wrong with the system. Idealistically, I thought I could make a difference. I wanted to know if he agreed.

Lex was one of the only people I trusted enough to keep this locked shut. He didn’t drink much. He didn’t mix in crowds where he could let it slip. We had such a long history; we’d always stood by each other. Lex had known over the course of my career how my mind-set had evolved. Over the last year, I’d told him a number of times about my growing disillusionment with the firm.

Lex vigorously urged me, as my friend, not to say anything publicly. “Look,” he said, “while there’s merit in what you’re saying and what you’re arguing, you’re going up against a behemoth. I worry for your personal safety, and your legal well-being. I worry about the consequences. You have to think about yourself here. It’s not worth the risk.”

He let me think about that for a moment. It was a Sunday and I was at a restaurant in Smithfield, near the City, trying to talk into my iPhone as discreetly as possible.

Lex went on: “You’ve got to think of yourself. This might just get ignored, and then you’ve walked away from a career, you’ve taken a financial loss by losing your unvested stock.” Lex meant that I would lose all my future income: salary, bonus, plus stock in Goldman Sachs that had been promised to me for the next few years as an incentive to stay with the firm.

I pushed back, getting on my high horse. In my mind, I told Lex, the moral benefits outweighed the risks. I felt incredibly strongly about this.

“Great,” Lex said. “I’m telling you, this thing is too risky. I wouldn’t do it.”

That was the end of the conversation. I didn’t speak to Lex again until my piece had been published.

For the next month, I kept going to work every day, doing my job as I’d always done it, as best I could, and writing and honing my op-ed piece late into the night—and telling no one. By early February, I’d finally whittled the piece, titled “Why I Am Leaving Goldman Sachs,” down to 1,500 words. I decided that the place it would have the most impact was the op-ed page of the
New York Times
, but I didn’t know anyone there to send it to. The op-ed page listed only a mandatory general e-mail address to which all submissions needed to be sent: [email protected]. Deciding to entrust my fate to the newspaper gods, and with the feeling of making an irrevocable but completely correct decision, I hit the Send button.

There was no response from the
Times
for a month. Radio silence. My piece had disappeared into the ether; but I decided to give it another shot.

Protocol or no protocol, I thought I would have a better chance if I sent the piece to specific people instead of into a vacuum. So I looked up the individual e-mail addresses of the editors. On the night of March 7, 2012, I sent the piece to four of them.

By the next morning, I heard back.

The
New York Times
was interested in running the piece on the op-ed page. I discussed with the editors how strongly I felt that it should be published in the form I had written it—it had taken me five months to whittle my five thousand words down to what I really wanted to say, I believed in it with all my heart, and I wasn’t willing to see a chopped-up or sanitized version in print. I was taking too big a risk, and this was my one shot.

Once the
Times
agreed to publish it, I didn’t hesitate.

As I continued to work day to day as a derivatives sales trader at Goldman Sachs London, the final editing of my op-ed proceeded under conditions of maximum secrecy. Then an unusual request came from one of the
Times
editors.

“We need to verify with one-hundred-percent certainty that you are who you say you are. We want to send one of our reporters to come and meet you at the Goldman London office to absolutely prove that you are genuine.”

“How on earth can that happen?” I said. “I’m happy to give you any evidence you need, but having a
New York Times
reporter show up at the front desk of the Goldman Sachs London headquarters and ask for me is insane.”

It was like something out of a spy novel.

“Don’t worry. My guy will be discreet.”

The
Times
sent over one of its London-based business reporters, Landon Thomas Jr., to make sure I was exactly who I was purporting to be, and that there was no scandal surrounding me, nothing that would blow up in the face of the paper of record. Thomas, who had been covering Goldman Sachs for the
New York Times
for a decade, came to the reception desk at 120 Fleet Street.

We had arranged for him to arrive at 9:30
A.M.
on Monday, March 12, and to ask for me at reception. When the receptionist called me, I would come down and meet him in the lobby. We hadn’t discussed if he would use his real name, but to my surprise, precisely at 9:30
A.M.
, the front desk called: “Landon Thomas is here to see you.”

“I’ll be right down,” I said.

I went to the rest room near my desk to quickly splash myself with water.
This is going to be interesting
, I thought. Interesting? Unprecedented. I walked down, cool and calm. I saw a tall guy with a shoulder bag: Landon. I walked right up to him, and we shook hands in the Goldman Sachs lobby. “Nice to meet you,” he said with a smile.

“Feel like going to grab a coffee?” he asked.

We walked up Fleet Street, away from St. Paul’s Cathedral. I suggested that we walk not to the closest Starbucks to Goldman, but perhaps to one that was two or three stores away. We walked for about ten minutes. Finally we settled on a Starbucks across the road from the Royal Courts of Justice. In London, most coffee shops have a lounge area in the basement, so we got our coffees and headed downstairs, where it was quiet. Once again, it felt like espionage.

Landon could tell that I was sincere, and the vetting turned into regular conversation. I told him up front that it would all be off the record.

He asked me all the questions I would have expected him to ask. First, why did I want to do this?

Because I thought it was the morally right thing to do and I wanted to make a difference, I told him. I would have felt wrong not doing something about it.

Was I disgruntled?

No. I was saddened, though, that a firm I had devoted so much of myself to had lost its way.

Was I about to be fired?

No, I said. In fact, I had built the business 35 percent in my first year in London, had fixed a decade-long legal hurdle, and had increased the numbers of clients we traded actively with by 80 percent. I had been roundly praised in my year-end reviews.

Was I upset about my bonus or not getting promoted?

I told him I had outperformed my peers by 10 percent on my bonus, and yes, I would like to have been promoted. But the average age to move from vice president to managing director was thirty-five or thirty-six, and I was thirty-three. I had been told by multiple partners that a promotion was about two years away for me.

Was I naïve? Thomas asked. Hadn’t things always been done this way on Wall Street? Had I been living under a rock?

No, I said. First of all, I told him, let’s say this
is
the way things have always been done on Wall Street. Why does that make it okay? Second, things had changed. Over the three years since the crash of 2008, I had seen the bank’s fiduciary responsibility erode so far that it was now actively trying to take advantage of clients. This was happening all over Wall Street, but Goldman Sachs was supposed to be a leader. By 2012, I said, the firm had completely lost sight of a long-run mentality in favor of a profit-at-all-costs model. No lessons had been learned from the crisis.

Why didn’t I speak to my bosses about this?

I had spoken to nine partners over the last year about culture and ethics at the firm, and while behind closed doors half of them agreed there were problems, I could tell that not one of them would do anything about it. They were simply making too much money.

We chatted for about forty-five minutes and then started walking back.

“How are you feeling about this?” Thomas asked me. “This is really going to happen.”

In the crisp late-winter air, with some rare rays of sun making St. Paul’s Cathedral all the more beautiful, I told him that I was feeling good about it. Happy, in fact. Optimistic that I could make a difference, however small, in reforming the system. But I told him I did not know how to anticipate what the reaction would be. Neither of us knew.

Landon wished me well. We shook hands, and he headed off in the other direction. I went back up to my desk on the trading floor at 120 Fleet Street.

The op-ed was finally scheduled, for Wednesday, March 14. I edited it up until the very last minute. It was fact-checked thoroughly, and I was proud of what would be published.

On Saturday the tenth, I went in to the office at around 8:00
P.M.
to clean out my desk. I’d specifically chosen a Saturday night because I knew there wouldn’t be many people around. This was a firm that had been my entire working life, and I didn’t want to rush out of there. I wanted to take my time packing up my belongings, reminiscing a little bit about my career. The trading floor was empty; it was just me and a security guard. Most of the lights were off, for energy conservation, as was the air-conditioning. It was hot and stuffy. I sat at my desk, rolled up my sleeves, and took off my watch. I had a few bites of a McDonald’s Filet-O-Fish I’d picked up around the corner. Then I started clearing out my belongings. I saw the deal toy for the Turkish communications company and the button Rudy cut off my shirt after my first trade. I thought of my days with Corey and all he’d taught me about the business and how to be a person of integrity. I found the dusty picture book from my summer internship: out of the seventy-five who started at Goldman in that summer of 2000, there were only seven of us left. I packed an old Springbok rugby ball, and the cricket ball I used to toss around the trading floor in New York during the old days with Daffey. It occurred to me again just how much the tone and the culture of the place had changed in the twelve years that began with my first day in the Open Meeting.

For the next four hours, I sat, alone and utterly calm, in the midst of the eerily quiet floor—no traders shouting, no phone lines ringing—carefully listing everything I needed to do to make my departure at midday on Tuesday as quick and unobtrusive as possible. I was planning to fly back to New York, to begin the next chapter of my life, whatever it might be. When I walked out the door, I wanted the break to be as clean as possible. I wanted my desk empty of personal effects. I wanted to leave the office with no
i
undotted, no
t
uncrossed.

Finally, a little after midnight, early on Sunday morning, I logged out of my computer, took my backpack and a small box that contained a decade’s worth of memories, and left. Goldman would later tell me they had surveillance video of me walking out the front lobby with my box and backpack. They thought I had larceny in my heart, when all I had was freedom.

I landed in New York at JFK International close to midnight on the day the op-ed was published. My picture had been all over the place, and I wasn’t sure if people would recognize me, so—perhaps stupidly—I wore a makeshift disguise: a dark brown straw fedora and an unshaven beard. I headed straight for Phil’s place on Seventy-Ninth Street and Third Avenue. Phil had arranged a blow-up mattress for me to sleep on, and said I should come straight over when I landed.

I had not known what to expect that day, and hadn’t spent a lot of time planning for it. The argument I was making in the piece was one I believed in strongly, and I thought publishing it was the right thing to do. I would deal with the reaction when it came. And once it did come, I was overwhelmed with both how broad it was and how many thousands of messages I started receiving from the general public: from rural Texas to Russia, to India, to China. I also heard from dozens of former colleagues and clients.

The messages had one theme: support. People liked the idea of trying to reform a system that had lost its way. They liked the idea of speaking truth to power. They liked the idea of taking a risk to do what you think is right, even at personal cost. I was touched by the outpouring of encouragement I received. But once the media barrage came, I am glad that my first instinct was not to respond. My brother, and my best friends, Lex and Dan, shared my instinct on this front. Here’s why:

The op-ed had taken me almost five months to write, and it captured exactly what I wanted to say. It distilled my argument down to its essence. I had thought it out fully. Anything I could have said that day would have distracted from letting the op-ed speak for itself. I was proud and excited that, in some small way, I was contributing to a debate on irresponsible behavior and conflicts of interest in the financial industry, a debate I believed was vital for the public to have. With all the media attention, it was extremely comforting to be able to go straight to a good friend after I had landed in New York.

As I got out of the cab and started gathering my suitcases, Phil’s doorman walked outside to help me. Suddenly his face lit up, and he gave me the biggest, most welcoming smile I could have ever imagined.

“You’re Greg Smith, aren’t you?” the doorman asked excitedly. I was shocked that he would recognize me. I had been on a plane from London most of the day and hadn’t realized the full extent of the news coverage.

“Welcome to New York,” he said to me warmly when I first arrived. “I just want you to know that you have a lot of support here. Normal people like me are behind you—we thank you for speaking up for us.” I was touched and humbled by what he had said. I took a moment to think about the poignancy of it as I waited for the elevator to arrive in Phil’s pre-war building. I then got in—excited to see my friend.

Kelvin, the doorman, was a young African American guy in his early twenties who wanted to break into finance someday. He was working at Phil’s building to pay for his education in the evenings and to support his family. The guy loved finance. He was optimistic and idealistic about it. He was fascinated with stock markets—what made them go up and down, how to value companies, how to understand balance sheets.

Over the three weeks that I slept on the blow-up mattress at Phil’s place, I chatted with Kelvin every day as I came in and out of the building. We talked about which finance textbooks he should be reading, which were the best market periodicals, what he could do to give himself an edge to get into the financial industry.

Kelvin reminded me of why I’d gone into the industry in the first place. And why anyone should decide to do anything: because they are passionate about it. I hope he breaks into finance. I hope it doesn’t let him down. Because it needs people like Kelvin.

When it comes to the financial industry, there is a major fallacy that exists: that Wall Street deals only with elite, rich people who deserve to lose their money, and that Mom and Pop are not directly affected by the antics and conflicted practices in the industry. This couldn’t be farther from the truth.

Even when Wall Street CEOs are hauled in front of Congress—as Lloyd Blankfein was amid the SEC fraud charges against Goldman Sachs, and as Jamie Dimon was after JPMorgan Chase lost $6 billion on bad trades—they try to make this argument. “We are all big boys.” “We are all sophisticated institutional investors who know exactly what we are doing.” But stop and think about this for a second. Whose money is being played with anyway?

Look at
just
the recent scandals: Who gets affected when a county in Alabama trades a structured derivative with JPMorgan that goes sour, and brings the county closer to bankruptcy? Who gets impacted when a government such as Greece or Italy trades derivatives with Goldman Sachs or JPMorgan to cover up its debt and kick its problems down the road? Who ultimately loses when Morgan Stanley misprices the Facebook IPO and mutual funds lose billions of dollars of retirement and 401(k) savings? Mom and Pop, that’s who.

Whose lives are affected when a sovereign entity such as Libya loses a billion dollars of its own people’s money betting on derivatives? Who loses when Barclays and other major banks rig the London Interbank Offered Rate (LIBOR), the interest rate that underpins trillions of dollars in student loans and mortgages? Whose savings evaporate when JPMorgan brokers sell underperforming mutual funds to their clients to generate more fees?

The list goes on and on and on. All this ultimately affects the citizens, teachers, pensioners, and retirees whose destinies are tied to these organizations that are managing their money. Mom and Pop are more affected by the bad behavior on Wall Street than anyone else—it is
their
money on the line.

But how does Wall Street make so much money, anyway? Surely there are times when they must lose? Don’t count on it. Think about this:

There are certain quarters when a Wall Street bank makes money every single day of that quarter. Yes: ninety days in a row. One hundred percent of the time, it generates a profit. Bank of America recently pulled off this amazing feat. That is like batting a thousand. A perfect record. How is this even possible?

Two words:
asymmetric information
. The playing field is not even. The bank can see what every client in the marketplace is doing and therefore knows more than everyone else. If the casino could always see your cards, and sometimes even decided what cards to give you, would you expect it ever to lose?

Here’s how it happens: Because Wall Street is facilitating business for the smartest hedge funds, mutual funds, pension funds, sovereign wealth funds, and corporations in the world, it knows who is on every side of a trade. It can effectively see everyone’s cards. Therefore, it can bet smarter with its own money.

Worse, if Wall Street can persuade you to trade a custom-made structured derivative that serves the firm’s needs, it is as if your cards have been predetermined. Certainly not much scope for the casino to lose in this scenario.

Now consider where the gambling takes place. In a real casino, it is on a casino floor with cameras all over the place. Even if you don’t like Las Vegas gambling, it
is
regulated.

On Wall Street, the gambling can be moved to a darkened room where nothing is recorded, observed, or tracked. With opaque over-the-counter derivatives, there
are
no cameras. In this darkened, smoke-filled room, there is maximum temptation to try to exploit clients and conflicts of interest. And this temptation and lack of transparency are what led to the global financial crisis in 2008.

Finally, think about the dealer. Your salesperson or trader might seem objective—like a friendly casino dealer who jokes around and is on your side—but there are times when he or she might be trying to steer you toward the thing that makes the casino the most money. If you were playing blackjack and you had 19, would you ever expect the dealer to tell you to hit? Sometimes, on Wall Street, they urge you to take another card.

Ironically, real casinos may actually be better regulated than Wall Street banks. The SEC and the U.S. Commodity Futures Trading Commission (CFTC) were not able to stop what led up to the crisis, and are still struggling to put appropriate measures in place to limit the conflicts I’ve described. With all these advantages, how can Wall Street ever lose? Even real casinos don’t make money every single day of the quarter.

As proof of this information advantage: Why do Goldman Sachs and JPMorgan Chase mutual funds—housed in their respective asset-management divisions on the other side of the Chinese wall—underperform their peers, as measured by Morningstar? Why do some hotshot traders from banks such as Goldman Sachs, Morgan Stanley, and JPMorgan go out on their own, start their own hedge funds, and flounder? Because they no longer have the advantage of being able to see everyone’s cards. No more asymmetric information, no more batting a thousand, when you are out on your own without unfair advantage.

The reforms Wall Street is pushing back the hardest against are in the areas it knows are the most profitable: opaque derivatives and proprietary trading. But these also happen to be the areas that are most dangerous to the stability of the financial system. The Wall Street lobby has already spent more than $300 million trying to kill measures to regulate derivatives (so that they are brought into the light of day and become transparent on exchanges), and to eliminate proprietary trading so banks can no longer bet against their customers using their information advantage as prescribed by the Volcker Rule. Wall Street hates transparency and will fight as hard as possible to prevent it from coming.

I am a capitalist. I am all for people getting rich and for businesses making as much money as possible. It is the fuel that keeps our economy growing and wealth should be an aspiration to motivate entrepreneurs everywhere. But I want it to be done fairly. I just don’t believe that capitalism is embedded with some kind of assumption that ethical boundaries should be pushed as far as possible, and that deceiving your customers is necessary to generate maximum returns.

I believe in a business model that is long-term-oriented, where there is an intrinsic fiduciary responsibility to do right by your clients so they will keep coming back to you. Not only is it the right thing to do, but it is also better for business. You will make just as much money—but you will make it more slowly and steadily and transparently. This should be good for shareholders, too, who like a predictable revenue stream and a steadier book of business. Today’s take-the-money-and-run model is just not responsible, or sustainable.

How can it be that four years after the crisis nothing has been done to fix any of this? Don’t we live in the greatest democracy in the world? People should be outraged that there is no political will to fix a problem that hurts everyone, enriches a super minority that has learned to rig the game, and could threaten the world with another calamity in a few years’ time.

People know that there is something deeply wrong with the system, but very few can put their finger on what the problem is. After the crash in 1929, the U.S. Senate conducted the Pecora Hearings, to investigate the causes of the crash. This inquiry led to real reforms that held banks accountable and eliminated the abusive practices that had caused the stock market crash. This was followed by decades of calm in the financial system. If I achieve one thing with this book, I hope it will be to empower some people with enough understanding to call their congressman, congresswoman, or senator and ask this question: Why don’t you have the guts to do the same thing?