Why I Am Leaving Goldman Sachs

Cholly wrote:

For example, this guy is 33, not really a senior executive by any measure

Banking and finance firms are notorious for assigning impressive titles to mundane jobs. "Vice President" is one step above "bank teller." A lot of grad programs post their students' resumes online. Take a look sometime. Every kid who is 3 years out of undergrad has been the Vice President of something.

zman byebye wrote:

http://www.youtube.com/watch?v=pUY7o7pX6vk

criminal znists have destroyed the usa

Please take your antisemitism elsewhere. Trolling is fine, but that really isn't cool.

I think this was a pretty good response to the piece:

http://freddestin.com/2012/03/why-i-left-goldman-sachs-oh-please.html

I hear you that he is only 33, and not a sr exec, but 12 years is still a long time to be in banking. I don't think he made enough to call it quits, but short of a good pe or hedge fund gig he probably did about as well as he could for his age. He arguably waited until he was comfortable to do this.

This is a big nothingburger.

Anyone who suffers from the delusion that Goldman Sachs-- or any other corporation-- is doing anything other than maximizing profits is a fool.

Goldman Sachs is not your friend. They are not your sibling. They are not your mommy. They are bound by law to maximize profits for shareholders and if that means treating clients like muppets, they will do it.

4runner wrote:

They are bound by law to maximize profits

Sorry???

kartelite wrote:

They are bound by law to maximize profits

Sorry???[/quote]

Goldman Sachs-- like all corps-- is bound by their fiduciary duties to maximize return for their shareholders. This really isn't anything new or surprising.

What's surprising is that people like Mr. Smith seem disturbed by this...

Aren't CPAs supposed to have a fiduciary obligation to their clients? I know I'd be pretty pissed with GS if I found out they tried to sell me their own garbage (which is what they do). The author's point is that you can't run a business that way, and he's right.

If you went to a used car dealer and they deliberately sold you a lemon, would you ever go back? What if you went to a restaurant and they served you a rotten steak? Is that really a good financial practice just because it maximizes their short term income?

4runner wrote:

kartelite wrote:

They are bound by law to maximize profits

Sorry???

Goldman Sachs-- like all corps-- is bound by their fiduciary duties to maximize return for their shareholders. This really isn't anything new or surprising.

What's surprising is that people like Mr. Smith seem disturbed by this...[/quote]

Show me one corporation whose sole fiduciary duty towards its shareholders is pure profit maximization. That might look good in your Econ 101 book, but in reality there are many other considerations, whether explicitly stated or not. Most firms have codes of conduct/ethics, and recognize a need for social responsibility. Our firm contributes way more money to various causes than it could ever hope to get back from "positive CSR coverage" as a result those donations.

Many corporations also have sustainability or other mandates that violate the pure profit maximization theory. For example, we won't deal with "sketchy" clients; while doing so may not be illegal per se, if our shareholders were somehow linked to those unsavory characters through us, perhaps our profits wouldn't be damaged but their reputation could be. That's just one of many examples of how maximizing shareholder interests is not the same as maximizing returns.

Well, isn't that just the point. If GS investors do not get the return they desire they will take their money elsewhere. It they receive bad service they will take their money to another brokerage.

Clients don't care what Goldman's motives might be as long they are getting good return, and what they perceive to be good service. If GS stops delivering the market will take care of them and competitors will benefit - just like in any other business.

I'm not sure I really understand the point of the story here.

The point of the story is that the company has become so obsessed with short term returns and bonuses that they've lost sight of the long term. The company will eventually go under if they continue that way, and that's his point: that it's developed a toxic culture. This kind of culture is increasingly common in the financial industry and elsewhere.

4runner wrote:

Goldman Sachs-- like all corps-- is bound by their fiduciary duties to maximize return for their shareholders. This really isn't anything new or surprising.

What's surprising is that people like Mr. Smith seem disturbed by this...

I don't think you're getting all of Mr. Smith's point. He is saying that Goldman's strategy is going to harm the company in the long run when clients lose trust in the firm. He thinks that the company is going to bring about its own destruction if the culture doesn't change. In this sense, trustworthiness is not just a moral issue, but a business decision as well. Is Goldman maximizing shareholder interest by sacrificing long term success for short term gain?

This is not econ-- this is corporate law.

The directors and officers by law in most states-- including Delaware-- owe their fiduciary duties solely to shareholders. Yes-- there is old caselaw from Ohio in the 1970's that says that the directors and officers can also consider other things than their shareholder's interest-- but how many important corps does Ohio have?

If your directors and officers start considering anything other than their shareholders, they can get sued.

It's fine that they have a code of ethics and make charitable contributions, but if you get the directors and officers in court they will swear on a stack of bibles that these things are in the best interest of their shareholders.

Don't get me wrong-- ethical behavior is often in the best interest of the shareholders. However, those codes are in place to protect the shareholders.

So for example-- was it in GE's shareholders' interests for GE to have dumped PCB's into the Hudson for years? Was it in Phillip Morris' shareholders' interests for Phillip Morris to contended that cigarette smoking does not cause cancer?

No. Like I said, ethical behavior is often profit-maximizing, but not always.

Corporations have a fiduciary duty to their shareholders to maximize profits. But, that duty is heavily tempered by the business judgment rule which does not allow shareholders to basically second guess the day to day business judgments of directors and officers. The fiduciary duty is not as much a requirement to make profits at any cost or face a lawsuit as much as it is a prohibition on self-dealing by officers/directors.

Goldman Sachs has fiduciary duties to its clients when it is acting as an investment advisor or broker. But at other times, Goldman Sachs can be simply selling a financial product and stand at arms length to its clients.

The article is spot on in pointing out how the profit pressure inside the big firms creates a culture of putting the firm's interests before the client. Depending on the circumstances, there could definitely be a breach of fiduciary duty as well as a bunch of securities fraud and common law fraud claims. But clients drive a firms culture as much as the firm does. Over the past fifty years, the clients of the big investment firms have changed drastically. They hold way more money and have the power to move markets with their investments. They are far less risk averse and are far more interested in high return, high risk, big time short-run gains. Thus, it is easy to get away with selling junk to a hedge fund that has billions because they gamble hard and expect to lose big now and then.

Bear of Bad News wrote:

I don't think you're getting all of Mr. Smith's point. He is saying that Goldman's strategy is going to harm the company in the long run when clients lose trust in the firm. He thinks that the company is going to bring about its own destruction if the culture doesn't change. In this sense, trustworthiness is not just a moral issue, but a business decision as well. Is Goldman maximizing shareholder interest by sacrificing long term success for short term gain?

Goldman Sachs makes a lot of money. Plus, they are not stupid people.

Taking advantage of their clients' ignorance for short term gain works well for them.

It is theoretically possible that Mr. Smith sees a market opportunity that is unexploited by Goldman and the rest of the financial services industry, but I doubt it.

Precious Roy wrote:

Corporations have a fiduciary duty to their shareholders to maximize profits. But, that duty is heavily tempered by the business judgment rule which does not allow shareholders to basically second guess the day to day business judgments of directors and officers.

The business judgement rule just means that-- for the most part-- the "business judgment" of the officers and directors will not be questioned. It does nothing to change the fact that the sole obligation-- in most states, inc. Delaware-- is to the shareholders.

The fiduciary duty is not as much a requirement to make profits at any cost or face a lawsuit as much as it is a prohibition on self-dealing by officers/directors.

Really? So if I'm an officer or a director and I think that a plant should be kept open solely because it benefits the community, I can do that since it is not self-dealing?

Great post.This guy was a triple A all-star. He never made it to the big leagues in anything and the Wall St vendatta having NYT let him have his Jerry Maguire momentum.I'm shocked given the high reputation and ethics of the British Newspaper, they didn't publish it.

Cholly's post is indeed spot on.

By the way, I agree with Cholly that Goldman clients are or should be well aware that Goldman puts its own interests first. This means that there should be no naivete over the fact that, for example, the position they are pushing for a client may indeed be the opposite one they are executing in their own trading book.

Goldman and Wall Street does have a history of making money off of truly dumb money. Look to the S & L crisis in the early 90's, the dot bomb era where companies with no chance of a future income stream were foisted on to the IPO market, and the sale of CDO's to all sorts of acolytes who believed that the Triple AAA rating on the tranches they purchased were, well, worth something (which of course ensnared Wall Street when they could not sell these pieces of junk and kept them on their books). And don't forget the biggest dumb money of them all, Fannie and Freddie, which, in a fervor to meet housing goals so they could keep up a Government subsidy and continue having overpaid employees with connections to Democrats, bought hundreds of billions of mortgage obligations in 2005-2007 right at the height of bubblicious idiocy. Nothing is new about the dumb money phenomenon - Wall Street finds dumb money, uses it, and moves on to the next one. This "whistleblower" would have had a far better message if simply opined that Wall Street and Goldman will likely find dumb money marks harder to come by in the future, and that future business strategies will likely be wrapped around financial intermediary services that if practiced well earn an honest, very well paid, but not outsized living.

My first thought was that if someone is giving their money to GS and is happy with their return then the fees or GS profit or gouging doesn't matter much.

But information like this getting out will make some think twice.

It hurts investor confidence.

And it has already hurt Golman Sachs' value.

http://www.washingtonpost.com/business/goldman-sachs-loses-market-value-after-searing-greg-smith-essay/2012/03/15/gIQAn686DS_story.html

They lost over $2 billion in value after the article came out.