The 2007 crime drama Michael Clayton begins with a lawyer representing a multinational chemical company in a multi-billion dollar class-action suit filed by the residents of a small town where the chemical company has operations. Wracked with guilt over his defence of the company whose actions, he is fully aware, have been detrimental to the plaintiffs, the lawyer has a breakdown at one of the hearings — he takes off his clothes and shouts gibberish.
The bosses at Goldman Sachs would have faced a similar dilemma when one of their own, a high-profile executive director, “went rogue” and made public his reasons for leaving Goldman Sachs in a letter published in The New York Times in March this year.
In a bitterly critical piece, which was expanded into the book under review, Greg Smith lashed out at the chief executive officer, Lloyd Blankfein, and the president, Gary Cohn, for losing “hold of the firm’s culture on their watch”. He revealed how the firm encouraged traders to “execute on the firm’s axes’, which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit”. He was scathing in his denunciation of “hunting elephants”, the practice of getting clients to trade whatever would bring the biggest profit to Goldman. “Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets”, sometimes over internal e-mail,” he wrote in The New York Times.
In Why I Left Goldman Sachs, Mr Smith charts the full course of his disillusionment with the company in which he spent 12 years, and which saw him grow from a callow intern to the head of the firm’s United States equity derivatives business in Europe, West Asia and Africa.
The book is not merely a primer on the shady practices at Goldman Sachs, but it roundly incriminates the investment banking world in general. Some of the stories are well-known: complex instruments devised by “quants” that were little understood either at the time of selling to clients or later; practices that had the American system in the cross hairs, forcing the US government to intervene; a culture that prized unmindful risk-taking at the cost of systemic failure.
It is in detailing the inherent chasms of the job that Mr Smith shows real talent. He writes of his salad days at the company when, under the tutelage of a supportive senior, he learnt the ropes of futures trading. His anxiety at selling, instead of buying, seven futures on a sleepy morning is almost laughable. It caused Goldman to take a hit of $80.
Mr Smith’s description of Bonus Day, the year-end event where everyone learns how much the company thinks they are worth, is stellar. Working an investment banking job, Mr Smith explains, forces one into a vicious pattern that is extremely difficult to escape. “A lot of people ... factor [bonuses] into the planning of their family lives — things such as private schools, summer houses, nannies, vacations. So when the number doesn’t measure up, it can mean unpleasant conversations when they get home, about things that, to the rest of the world, are considered extreme luxuries,” he says.
While it would be charitable to think that Mr Smith’s fury stems from a sound moral compass, perhaps deeper forces are at work here. Born and raised in South Africa, Mr Smith showcases himself as an outsider who cannot believe his luck. We learn how he landed on the New York derivatives desk at Goldman Sachs because he did not make the cut for a Rhodes scholarship. We are treated to gratuitous displays of bliss at his receiving a Green Card, the all-important signifier of the American life.
As someone who learnt to play the system and benefitted tremendously from it, the timing of Mr Smith’s outburst is suspect. He points to the Securities and Exchange Commission filing against Goldman Sachs as a watershed moment that hardened his resolve to blow the whistle. But that was in April 2010. He refers to the obviousness of Lehman Brothers’ collapse. That was 2008. What took him so much time to get cracking on his values?
Be that as it may, the larger point Mr Smith raises is valid. In Michael Clayton, the lawyer who went rogue is killed by hitmen hired by the company, unleashing a chain of events that end in disaster for the firm. No such drama plays out in real life. Mr Smith survives, as do Mr Blankfein and Mr Cohn. Like elsewhere in the banking world, the storm seems to have passed and things have returned to their normal, inertial states. Until the next crisis, that is.
WHY I LEFT GOLDMAN SACHS
277 pages, $16