Joseph Aguirre's  Instablog

Former Goldman Sachs (GS) executive Greg Smith has resigned from the firm today. He leaves behind a twelve year career and a warning to the rest of the world about the activities of GS. Smith steps down from his position as the Executive Director and Head of Equity Derivatives business in Europe, the Middle East and Africa.

Smith said the environment at Goldman Sachs was "as toxic and destructive as I have ever seen it." He goes on to say:

"To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."

It may come as no surprise to people who view Goldman Sachs as the evil empire of the banking industry. The firm has many ties with the Federal Government including the former Bush Treasury Secretary Henry Paulson, who was the Goldman CEO prior to his appointment. The list of former GS employees who have or are currently involved in politics has grown over the past decade.

Smith's words obviously apply to Goldman Sachs but have deeper consequences in terms of how GS views itself politically. Smith goes on to place the blame directly on CEO Lloyd Blankfein and President Gary Cohn.

"When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm's culture on their watch."

One has to wonder how much their political gains have influenced the way that they view themselves and their clients. After all, we know that Blankfein sees his place in the world as just a simple banker "doing God's work". The practices under Blankfein and Cohn that Smith describes would infuriate any current or former client.

"What are three quick ways to become a leader? a) 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. b) "Hunt Elephants." In English: get your clients - some of whom are sophisticated, and some of whom aren't - to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."

Other highlights from his New York Times op-ed include:

"I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It's purely about how we can make the most possible money off of them."

This falls under the category of things you assume firms are doing, but at the same time a strong firm should be concerned with creating a symbiotic profit relationship. Why would people continue to invest with a company which takes more than it gives? Of course you can make a lot from clients who are also making money, but at what point does the difference between the gains start to matter to GS?

"It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as "muppets"..."

I could make a comment about how muppets are operated but I'll leave that one alone.

"I don't know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact."

It would seem Mr. Smith is protecting himself a bit here. Given everything he has stated, there doesn't appear to be much distance between their willingness to make money and their willingness to break the law. Goldman Sachs was recently hit with a record $550 million dollar SEC fine related to their involvement in subprime mortgages. I'm not sure how Smith can expect investors to believe his denial of illegal activity while sending his dire warning of the "toxic and destructive" Goldman Sachs who is "too integral to global finance to continue to act this way."

Smith displays some idealism in this piece but any admiration for Goldman Sachs is washed over by his condemnation of the senior leadership. Many may say this is business as usual at GS but the now former executive disagrees. As of 11:30am the market has retraced all of yesterdays gains for GS (-3.45%), whether this is a natural pullback or a reaction to Smith's op-ed has yet to be seen.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The recent rise of Sears Holdings (SHLD) has been largely attributed to the sales and value of its real estate, as well as the dealings of Eddie Lampert. Lampert is known for having a concentrated portfolio and does not haphazardly jump into a stock without having a purpose in mind. So why did Lampert begin acquiring shares of iStar Financial (SFI) in the third quarter of 2011? In the fourth quarter it was the only stock that he did not reduce, but in fact, increased.

iStar Financial focuses on lending, net leasing, and real estate investment; primarily commericial but they do some high end residential as well. The 3.5% position that Lampert holds is hardly enough to start takeover rumors, but one has to wonder the reasoning behind Lamperts decision. The combination of his move to capitalize on Sears real estate and his new position in a commercial real estate company is quite intriguing.

One of SFIs major announcements in their fourth quarter earnings report was that they secured a $900 million dollar senior secured credit facility arranged by Barclays Capital. If I'm connecting the dots between SFI and Lampert I would mention that one of the callers during the SHLD Q&A for their fourth quarter earnings was Emily Shanks from Barclays Capital, who asked a question about their real estate sales. Shanks is a Managing Director at Barclays and a former Vice President at Lehman Brothers.

Going further, an Executive Vice President of iStar, R. Michael Dorsch III, was formerly a principal at Acre Partners, a real estate investement firm run by Eddie Lamperts fund, ESL. Lampert has not made any public statements with regards to iStar but perhaps there is a future link between the recent dissolvement of Acre Partners and his growing stake in SFI.

The question is, does Lampert see SFI as a beaten down value opportunity like the contrarian investor that he is, or did he invest because he has plans to do future business with them and knows he can profit from their rise?

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SFI over the next 72 hours.