Why I Left Goldman Sachs: A Wall Street Story (9 page)

Ted Simpson and I were looking on as PPM took down another pigeon. “So what are we thinking here?” I asked Ted. “I’m going to meet this guy in the final, and if I play properly, I’m going to beat him twenty-one to two. What’s the right course of action?”

Ted looked thoughtful. “Well,” he said after a moment, “this guy is one of our biggest clients; he takes this stuff really seriously.” At that moment, PPM whaled away at a forehand that just clipped the table edge and skipped off, unreturnable; he raised his arms in victory. “We need to make it a close game,” Ted said. “Get some good rallies going.”

I told Ted I had been thinking along the same lines. That I should beat PPM, because it was obvious I could beat him, but that I should keep it close. Not embarrass him. I knew how to do that, I said. You just make a few unforced errors here and there.

“Hmm,” Ted said.

“You have a different idea?” I asked.

“Well, the guy
is
one of our biggest clients,” he repeated, giving me a significant look.

“You’re suggesting—?”

“Maybe,” he said. And then: “Watch for my signal.”

I gave Ted a look—he was smiling—and took my Donic out of its case.

The match began. A crowd had gathered to watch us play. Everybody was having fun—except for my opponent, who was taking the match very seriously. When I won a few points in the early going, I could see him getting upset.

So I eased up. I could have really turned on the heat, hit some crazy shots past him that would have whizzed by his ear—but I didn’t. My whole plan was to keep the ball in play. To give the crowd a good show, instead of slicing the ball back when PPM smashed it at me, I would lob it up for him so he could smash it again. Smash, lob. Smash, lob. Oohs and ahs from the onlookers. After three or four exchanges like this, I’d either hit it into the net or give PPM such an easy pop-up that he could make a legitimate put-away on me. I was letting him show off for his fellow clients a little bit. He loved it.

He won the first game 21 to 17.

The matches were best two out of three, and my plan was to squeak out a win in the second game, then maybe win by just a little more in the third. But when I was ahead 15 to 12 in the second, Ted Simpson caught my eye. He gave a little shake of the head, and then, using his left hand as a shield, gave a quick thumbs-down with his right. I’m quite sure nobody but Ted and I knew what was going on. I nodded. After all, wasn’t putting the client first number one of John Whitehead’s 14 Business Principles?

The Putnam portfolio manager was very magnanimous in victory—as was I in defeat.

The Ping-Pong tournament was a bright spot in a dark summer. The worldwide recession continued, and emerging markets, a niche area in the best of times, started falling apart. That summer, the sharp-elbowed Slovak analyst on my desk was moved to Goldman’s London office to become a European shares sales trader. Now it was just Rudy and me, and the management buzz saw seemed to be headed straight in our direction: the writing was on the wall for Emerging Markets Sales. I knew I needed to find a lifeline—a new job—in order to survive at the firm.

Apparently Rudy had the same feeling about himself. As the summer wound down, he became uncharacteristically secretive, constantly leaving the desk for “private internal” meetings, talking extra softly on the phone. Even though we were partners in crime and sat right next to each other, he wasn’t acting much like a partner anymore. I had a pretty good hunch what was going on, a hunch that was confirmed when Rudy turned to me one day and said, “Springbok, I’m moving up to the fiftieth floor, to U.S. Equity Sales, on Monday. I know this is scary, but you’re going to be fine. I’ll do what I can to help you.”

Another colleague on the floor pulled me aside that day and gave me some unsolicited advice that stuck with me for a long time. “Change is scary,” he said. “But often change is good. It can lead to new and interesting experiences. Keep your head up and keep an open mind.”

In retrospect, I realized what Rudy had been up to: tapping his contacts in the U.S. Equity Sales group with a view to moving there. It was a more stable, less volatile area than Emerging Markets Sales, focused on selling larger and more liquid U.S.-based stocks to U.S. investors. But it was also a bigger playing field, with dozens of salespeople: Rudy was becoming a small fish in a big pond.

But stability was what he was after. All along, he’d been effectively interviewing for a new position, without saying anything about it to me. Part of me thought he should have tried to save the two of us together, by negotiating a “package deal” with the U.S. Equity Sales desk—it wasn’t completely uncommon for a VP to change teams along with a “trusted analyst,” a sidekick. Maybe it was unfair of me to expect this of him; it’s even possible that Rudy tried to negotiate such a deal. I don’t know for sure that he didn’t. But with all the firings, times were so tough that it isn’t surprising that he negotiated his own move first.

Rudy moved up to the fiftieth floor in September 2002. The international group was being decimated. For several years, it had occupied the entire forty-ninth floor; now there simply weren’t enough of us left to justify the space. Soon we all went upstairs to fifty, where all Goldman’s Equities trading operations were now consolidated. I was the last man standing in my group, which I kept running by myself—calling clients with market ideas and information, setting up meetings. But the buzz saw was still closing in.

I also couldn’t stop thinking about the fact that the clock was ticking on my two-year contract. I’d passed my one-year anniversary in July, and I knew that Goldman promoted only about half its analysts to a third year—maybe, in this market, it would be even fewer.

Yet I felt strangely optimistic that I could hustle hard enough to find a new place in the firm before time ran out. Goldman has an annual 360-degree review system in which you pick ten of your colleagues (both senior and junior) to score you from 1 to 5 in a host of categories such as technical skills, teamwork, commercial ability, compliance, and recruiting. HR then tabulates the scores and your manager gives you your numbers and quartile ranking, plus some qualitative feedback. Both my comments and my numbers had been good. I was in the top 25 percent, the top quartile, of analysts.

I felt I had a fighting chance to stay on. It was much the same feeling I’d had as a sophomore at Stanford, when the odds of getting a summer internship in finance were minuscule, but I knew that if I knocked on enough doors, someone would give me an opportunity.

I followed many leads. A lot of them were dead ends—the climate was so bad that people just wouldn’t commit to hiring anyone. Then I got an e-mail from a woman I knew in HR, saying, “Corey Stevens is looking for an analyst on the Futures Execution desk. You should go interview with that group.”

Futures—I had studied them a little bit in college, but my practical knowledge of the subject was virtually zero.

It was right around this time that I decided to apply for a Rhodes Scholarship. An odd decision, you might think, for someone who had made a commitment to investment banking—and, more to the point, to an investment bank. I still believed in Goldman Sachs, and even in my ability to find a new job in the firm. It was the markets I was worried about. Further deterioration would cause the firings to move up the echelons: no one would be safe.

But more to the point, I was only twenty-three years old. My whole life was still ahead of me, and lives can take many paths. I thought getting a Rhodes would be a great achievement, and could be a terrific experience. I might even be able to go to Oxford for two years and then return to Goldman as an associate, the graduate-level position. A few years earlier I had read David Maraniss’s biography of Bill Clinton: I’d been impressed at how Clinton had handled the tough Rhodes Scholarship interview process, and enthralled to learn about his experience at Oxford, where he’d made enduring friendships with Strobe Talbott, who would go on to cover U.S.–Soviet relations for
Time
and then become Clinton’s deputy secretary of state; and with Robert Reich, the economist who would serve as Clinton’s secretary of labor.

In the meantime, I met with Corey Stevens.

Stevens was an associate who carried himself like someone much more senior: that is to say, with great style and a certain air of mystery that fell just on the cordial side of aloofness. He was an intensely private guy. Well groomed and suavely dressed at all times, he favored custom-made suits and shirts; business casual held no allure for him.

There were seven candidates for the job as Stevens’s right-hand man on the Futures Execution desk in Goldman Sachs’s Derivatives Sales group. Little did I know that Corey would consult a special, and very famous, adviser the night before the interviews were to take place: an NFL superstar happened to be Corey’s half-brother and closest confidant.

Corey would later tell me that his brother got a good feeling from my resume, and for some reason he picked it from the pile of seven. He also apparently got a kick out of the fact that I spoke Zulu.

Well, a little bit, anyway. In the space for “Languages” on my résumé, I’d written: “English, Afrikaans, Hebrew, Zulu (three years).” Which was exactly true. I’d studied Zulu for three years at the King David School in Johannesburg. I could say things such as “Hello,” “How are you?” and “The giraffe is running fast.”

“What do you know about derivatives?” Corey asked, beginning my interview.

Derivatives are securities that derive their value from an underlying asset. They can be complex, and they have a long and controversial history of creating havoc. But if understood correctly, derivatives can help investors hedge against (or speculate on) very specific risks. The term
derivatives
can be used as a catchall to include products such as options, swaps, and futures. And you can get derivatives on all asset classes: equities, foreign exchange, commodities, fixed income. At Goldman Sachs, derivatives teams were divided by asset class. Corey’s Futures Execution desk was a subsector of the broader Derivatives Sales team.

I took a deep breath and told Corey the whole truth. “I did a little bit of it in college,” I said. At Stanford I’d taken a course called Economics 140, which dealt with the basics of options, futures, and other derivatives. After my summer internship, I’d taken another course on the subject, in the business school. But it was all theoretical stuff. Once I’d joined Goldman full time, I never interacted with a derivative. The theory of derivatives was kind of rattling around in the back of my head, but I suspected that the practice of trading them was a very different matter indeed. I said as much to Corey.

He smiled a little. He was stocky, on the short side, but powerful-looking. His hair was trimmed closely, as was his goatee. He was wearing what looked like a Hermès tie, knotted under a heavily starched spread collar. “Look,” he said. “I didn’t know a lot about derivatives either when I started on this desk. If you’re smart, you can learn this stuff.”

It was a short conversation, but it felt promising. The next morning, the HR person e-mailed me: “Three people made the cut—you’re one of them. Corey would like to meet with you again, and have you meet a couple of the people on the desk.”

That day, I went by Corey’s desk. He had lined up a series of interviews for me with six different derivatives salespeople—mostly VPs and associates. None of the really big guns yet. But less than two years after my summer internship Super Day in San Francisco, it now felt as if I was having another one. Fortunately, I brought a good game. I was honest about my limitations but expressed strong excitement about the product, and a desire to learn. I liked the derivatives salespeople. None of them grilled me: the meetings were mostly about personality, and we got on well.

Afterward, the HR woman e-mailed me again: “You made the cut. One more hurdle—Corey’s boss.”

Corey’s boss was Michael Daffey.

Daffey, still in his mid-thirties, was a rapidly rising star at Goldman Sachs. An Aussie, he was a lateral hire from another bank who began working in Asia for Goldman in the late 1990s. By the time I was a summer intern in 2000, he had come to New York as a vice president; by the end of that year, he’d made managing director. He then became a partner in 2002—an almost unheard-of jump in two years’ time.

Daffey was about six foot two and lightly balding, with an athletic build and a friendly, open face. A friend of mine called him the Curiously Tall Guy, for his tendency to slouch in his desk chair and then surprise you with his height when he stood up. He was probably the most charismatic guy on the whole trading floor, universally liked and respected.

A Daffey story: Once Gary Cohn—then the global cohead of the Securities division, later the president of Goldman Sachs—walked onto the trading floor while Daffey was at his terminal, in conference with a genius strategist named Venky, a twenty-five-year-old who’d graduated from the legendary Indian Institute of Technology (IIT). The subject of his and Venky’s discussion was a crazy spreadsheet Venky had created: the spreadsheet tracked, in real time, every possible statistic of every player at that year’s Masters Golf Tournament. Daffey, who loved to bet on the Masters, was in golf nirvana. “Gary, come over here!” he yelled to Cohn.

The floor went dead quiet. It was like one of those moments in a Western when someone calls out the big gun in the middle of a saloon. Few people would have had the familiarity or the guts to yell an order at Gary Cohn. But Gary went over.

“Gary, meet Venky. Venky, meet Gary,” Daffey said. Towering over the diminutive strategist, Gary shook Venky’s hand. “Venky is smarter than you and me combined,” Daffey told Gary.

Venky lit up. Daffey had just made his year. Venky then demonstrated to Gary how the algorithm on his spreadsheet worked. Gary was also impressed. “Send me a copy,” he said. (Venky would go on, a couple of years later, to be the main brain behind the reinvented VIX volatility index on the Chicago Board Options Exchange. The VIX is widely followed and traded as a gauge of fear in the marketplace.)

A lot of Daffey’s popularity stemmed from senior management’s sheer awe at his client base, which consisted of the biggest, smartest macro hedge funds in the world. Hedge funds are investment funds that can undertake a wide range of strategies, both going long (buying an asset with the view that it will rise in value) and getting short (selling an asset without actually owning it, betting it will go down in value). Because these funds are not highly regulated, they are open only to very large investors such as pension funds, university endowments, and high-net-worth individuals.

Macro hedge funds—named for their tendency to bet on big-picture events such as movements in interest rates and currencies, as opposed to stock prices—command exceptional respect. Daffey’s client portfolio was almost like the Cowboys, the Giants, the 49ers, and the Patriots. He knew all the big guns:

Tudor Investment Corporation
, run by southern investing legend Paul Tudor Jones, manages more than $10 billion. Tudor Jones, a billionaire in his own right and usually ranked in the top few hundred wealthiest people in the world, first made his name with his prowess for commodity trading, then developed a stellar track record of generating returns for his investors year in and year out. He founded a charity, the Robin Hood Foundation, which has become one of the foremost innovators in fighting poverty in New York City; it has distributed more than a billion dollars over the last two decades and raises millions of dollars at its annual star-studded benefit.

Moore Capital
, founded by Louis Bacon, also a billionaire, and a significant donor to environmental causes, manages assets in the double-digit billions. Bacon got his start by betting correctly both on the 1987 crash and the subsequent recovery. Moore has offices all over the world: in New York, London, Geneva, and Hong Kong, among other locations.

Duquesne Capital
was founded by Stanley Druckenmiller of Pittsburgh. Druckenmiller worked for George Soros as the lead portfolio manager at the Quantum Fund, where the two of them famously made $1 billion in 1992 by shorting (betting against) the British pound sterling. Druckenmiller later started Duquesne Capital, where he became one of the most successful hedge fund managers of all time, generating average annual returns of 30 percent and never having a losing year until he voluntarily shut down the fund in 2010. He once tried to buy the Pittsburgh Steelers and has been a major philanthropist, giving hundreds of millions of dollars to foundations that support medical research and education and fight poverty—among them, Harlem Children’s Zone and NYU School of Medicine.

Fortress Investment Group
is a hybrid investment management firm with both a private equity arm and hedge funds. Michael Novogratz, a former Princeton University wrestler and U.S. Army helicopter pilot, was Daffey’s guy here. Novogratz (or “Novo,” as he was called) was a pre-IPO Goldman partner. Fortress eventually went public in 2007, and at the time, managed $30 billion in assets.

Daffey developed a strong rapport with these four clients, becoming not only their buddy—he had a high-stakes fantasy football league with all of them for a long time; the proceeds went to charity—but also, in effect, a common link among men who were essentially competitors.

Because these clients knew how smart Daffey was, and understood that he was in the center of this high-powered information flow, it wasn’t hard for him to persuade any one of them to do a trade he liked—in massive size. It sometimes took him less than two minutes. He had turned it into an art.

Daffey: “Dude, implied correlation is too high. The markets are normalizing. You need to get short correlation.”

Because of his reputation, this was about as detailed as a Daffey sales pitch needed to get. The essence of this hypothetical trade was that stock prices were all moving in unison because of macro fears in the world. Daffey was betting that this correlation would break down and the individual stocks would start dispersing. There is a complicated way you can place this bet using derivatives. But Daffey didn’t even need to go that far to explain it.

Client (with a thick southern drawl): “You think so, Michael?”

Daffey: “I know so. Everyone is putting this trade on. It’s our highest-conviction idea right now.”

Client: “Fine. I’ll do half a billion dollars of this trade.”

Just like that. I saw it happen any number of times, with any number of trades. When you are talking to a billionaire who runs a multibillion-dollar hedge fund, he can make decisions quickly. Daffey didn’t need to go through five layers of portfolio managers. He just went straight to the big guy. This gave him an aura that Lloyd Blankfein (a rising star at the time, later to become CEO of Goldman Sachs) and Gary Cohn loved.

Clients and colleagues alike respected Daffey because he was a rare combination: a charismatic guy’s guy with a deep understanding of people, who also happened to be the smartest guy on the floor. Typically at Goldman, people were either very smart and not so adept socially, or they were politicians and schmoozers. Daffey blended all these qualities perfectly, hence his rapid rise to power. I would learn more about his legend later on. At the time, all I knew was that he was an Aussie, a newly minted Class of 2002 partner, and the head of U.S. Derivatives Sales.

When I first met with Daffey, I expected to find a Very Important Person who’d be glancing at his watch as he asked me a few pointed but perfunctory questions. This was how I’d always found very senior Goldman people to be: at best, displaying short attention spans; at worst, inattentive. Instead, Daffey seemed to have all the time in the world for me; he chatted with me as if I were one of his buddies, shutting out the rest of the world—he never checked his BlackBerry or lost focus once. I later realized that he was a kind of social genius: he could be comfortable with absolutely anybody. He passed a test I would learn about years later, in a Goldman Sachs leadership program called Pine Street: the Onstage/Offstage Authenticity test measures to what extent someone acts and talks the same with the CEO of a corporation as with the mailman or the security guard. Onstage/offstage authenticity is a trait that truly admired leaders display. I was ten levels below Michael Daffey, yet he didn’t really seem to care.

He asked me how the Stanford basketball team was looking. He threw a few gibes at me about how much better Australia was than South Africa in rugby and cricket—the rivalry in both sports is ancient and intense. Warmed to the occasion and the company, I teased him right back. “You guys got lucky winning the last cricket World Cup,” I said.

“It’s not luck, buddy. It’s skill,” he told me. Then he said, “Dude, tell me—why do you want this job?”

I didn’t feel I had to make anything up. I said, “It seems exciting. I like the idea of derivatives. I’m looking for something more quantitative and fast-paced.” Emerging Markets Sales had been interesting to me, but often we could be talking about the same stock for days at a time. Derivatives changed by the minute.

“Well, then you’ve come to the right place,” Daffey said, smiling.

I did get the job with Corey, much to my relief. But then there was the pending matter of the Rhodes Scholarship.

I’d submitted my written application in September, not long before my interviews with Corey and Daffey. I then found out that I had made it through to the second round, also known as the state round, of the Rhodes. This involved flying to Johannesburg in November for a two-day evaluation—and to pay a springtime visit to my family. (I had been in the States so long now that I had to remind myself that November in South Africa equals spring.) Despite the interrogation-like atmosphere of my formal panel interview for the Rhodes, which was conducted at a big oval table with me at one end and the eight judges at the other, I felt calm, and afterward I was notified that I was one of three Johannesburg candidates to go on to the final round.

In early December 2002, I flew to Cape Town (on my own dime) for the final interviews, which were conducted by some very high luminaries from South African society: a justice of the Supreme Court and the CEOs of some of the biggest companies in the country. From the first moment, it seemed as though I couldn’t say anything right—a palpable scent of disapproval hung in the air, and it centered on my association with the United States.

This was during the lead-up to the U.S. invasion of Iraq, and I could tell at once that all the Rhodes judges, and particularly the justice, were critical of the U.S. response to the 9/11 attacks. America, they all agreed, was rattling its sabers, and worse, it meant to take the sabers out and use them. It was an imperialist power on the order of ancient Rome, bent on a foreign policy of colonization. Someone at the table actually said this to me.

I disagreed—passionately. I had experienced 9/11 personally, I told the judges; I had keenly felt its terror and heartbreak. The United States had to hunt down the perpetrators and punish them. How could the judges extrapolate from an understandable wish for justice to imperial longings? I loved America, I said. It was far from perfect, but unlike so much of the rest of the world, it was a land of optimism and possibility. I had prospered there, academically and professionally, and I was grateful.

The judges looked sideways at one another, with narrowed eyes. In the end (my high school principal found out from some of the people on the judging panel), I had ruffled too many feathers. Four of ten South African candidates were selected as Rhodes Scholars; I was not one of them.

It was a big disappointment. At the same time—maybe it’s my Jewish upbringing—I tend to think that things happen for a reason. I had an important new job to do, and I was ready to do it. On December 16, 2002, five days after I turned twenty-four, I went to work for Corey Stevens on the fiftieth floor of One New York Plaza.

Moving up from the forty-ninth to the fiftieth floor was a little like being called up to the Major Leagues from Triple-A baseball. If forty-nine was like a camping trip to Yosemite, fifty was like being thrown into the middle of the Amazon jungle with just the clothes on your back and no survival guide. Back in Emerging Markets Sales on forty-nine, I’d mostly spent my days phoning institutional clients and talking stocks—the action moved steadily but fairly slowly, because the job wasn’t particularly transaction-oriented. On the Emerging Markets Sales desk, I’d had two computer screens; in my new chair, right next to Corey’s on the Futures desk, I had four screens. I had wanted something fast-paced, and I would get exactly what I wanted.

Multiple computer screens aside, the fiftieth floor at One New York Plaza was not the kind of gleaming, sterile environment you might see in the Hollywood version of a trading floor. In fact, Goldman’s trading floor was, in the early 2000s, borderline shabby: people’s desks were piled with crumpled paper, takeout containers, and empty soda bottles; the gray carpet was threadbare and stained. Sterility was not on the program. The five or six hundred people on the floor were packed in like sardines, cheek by jowl, desk by desk. You were right on top of other people’s family photos, sports memorabilia, private phone conversations, and lunch smells. You had no privacy, so you had better get to like the person who sat next to you.

The Futures desk was smack in the middle of a rectilinear array of twenty-eight derivatives salespeople. Corey and I sat next to each other at the end of one row, positioned centrally to make it easy for the salespeople around us to yell out trades for us to execute. Two rows of seven salespeople extended lengthwise in front of us, and two additional rows of salespeople sat directly behind us, only positioned crosswise, so they were looking directly at the backs of our heads. The best thing about the chaotic layout was that the men’s restroom was about ten steps from my desk. I loved having the easy access.