One of the most memorable openings of any novel in Western literature is the one that starts off The Sun Also Rises. Do you remember from high school? “Robert Cohn was once middleweight boxing champion of Princeton.” Hemingway writes. “Do not think that I am very much impressed by that as a boxing title, but it meant a lot to Cohn." Yes. I think I know people like that.
Robert Cohn came to mind earlier this week when I opened the New York Times op-ed page and was introduced to Goldman Sachs’s newest former employee. It was as if Hemingway were whispering in my ear:
Greg Smith won a bronze medal in ping-pong at the Maccabiah Games. Do not think that I am very much impressed by that as a ping-pong title, but it meant a lot to Smith.
Oh, did it ever. I’ve never met Greg Smith—but you’ll forgive me if I have the sense that he’s perhaps a bit too impressed with his own accomplishments and sense of moral superiority (typical Goldman!), and that his capacity for loyalty could use some work. And gratitude, for that matter. Say what you will about how Goldman Sachs (NYSE:GS) conducts its business, Smith worked there for a dozen years and was very well paid to do so. He (presumably) leaves behind many friends. And yet he walks out the door and then ostentatiously dumps all over each one of them. That is a scummy thing to do—even for someone as accomplished as a bronze medalist at the Maccabiahs.
But while Smith might be a sanctimonious putz, he actually does have a point about how Goldman Sachs has changed over the past 12 years—only it’s not nearly as profound as he thinks it is and doesn’t have much to do with any purported collective moral collapse underway there. It’s a lot simpler than that. The Goldman that Greg Smith went to work for back then was a much different firm than the Goldman of today. It had just transformed itself from a private partnership into a public company, for one thing, and was on the verge of enormous growth. In 1998, the year before Goldman came public, the firm ended the year with $217 billion in assets. By 2007, that number had quintupled, to $1.1 trillion. And as that growth happened, Goldman changed its basic business in an important way. The firm went from being primarily an investment bank to a trading shop. Trading profit accounted for just 23% of net revenues in 1998; by 2007, they were 64%.
None of this is a secret. For years now, the throwaway line has been that Goldman Sachs has become a huge hedge fund. Goldman’s last three CEOs have come from the trading side of the business. Greg Smith knows this. Everyone knows this.
I have a message for Smith—and anyone else who’d like a basic understanding of how Wall Street works: trading isn’t the same as investment banking. More to the point, traders don’t operate under the same set of obligations and constraints that investment bankers do. They can’t. The successful investment banker’s stock in trade is prudent, disinterested advice. Sometimes the advice will result in a deal, other times it won’t. In theory, at least, the banker doesn’t care. He knows he’ll get paid eventually. Regardless, credibility and a commitment to the client’s interests are paramount. Without them, he’s out of business. That’s why Goldman has traditionally emphasized teamwork, integrity, and putting clients first. It used to be a pure investment bank.
It goes without saying that trading isn’t like that. At all. If investment banking involves (in theory, anyway) a certain indifference to transactions, trading by definition is all about transactions. Greg Smith ran the U.S. derivatives desk in Goldman’s London office. Did he feel like he was “ripping his clients’ eyeballs out” when he traded with them? I doubt it. Did his desk earn an adequate return as a result of that trading? I suspect it did. So was he putting his clients interest first, or not? And if he was, where were all those profits coming from?
You’ll get no argument from me that Goldman Sachs occasionally finds itself in an interesting set of circumstances on certain deals it’s involved in. That NYSE-Archipelago three-way was one for the books, that’s for sure. And no one’s going to forget the Kinder-Morgan/El Paso deal anytime soon. But if Goldman Sachs really has become the corrupt enterprise Greg Smith seems to believe, its clients (who aren’t exactly babes in the woods, remember) would have long ago stopped doing business with it. But they have not. Goldman Sachs may not measure up to Greg Smith’s standards anymore, but that’s because his standards are beside the point.