Wall Street and its Clients

Ann Althouse has a good post today. I can’t get through her Captcha system so I thought I would post a few comments here. This NY Times op-ed piece is the source for her observations. It is behind the Times’ idiotic payment wall so go to her blog for the link.

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

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. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

That certainly states the issue clearly. What does he complain about ?

I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

What specifically is the problem ?

I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

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.

Well, that’s clear enough.

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,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. 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.

Wow ! Read the rest of it.

A few years ago, I read Nicole Gelinas’ book, “After the Fall: Saving Capitalism from Wall Street-and Washington” She has a great deal of information in that book and this sounds like she was right. My review of her book is here. Greed wasn’t the problem. It was a casino mentality brought on to some degree by the fact that the big investment banks, like Goldman Sachs, went public and the money they lost was investors’ money, not their own. Brown Brothers, Harriman, a private partnership, never got into trouble. They were using their own money. It is interesting that Bain and Company, the company that Mitt Romney worked for, got into trouble later, after he had left, because partners borrowed money so they could cash themselves out. Junior partners asked Romney to return and straighten out the mess. He did and convinced Bill Bain to personally borrow money to pay back a large share of the firm’s debts. Subsequently, Bain Capital has more than quadrupled its investments and is profitable. That’s why I support him and hope for his election.

Gingrich and Santorum are lobbyist-politicians. Sorry if I hurt anyone’s feelings.

19 thoughts on “Wall Street and its Clients”

  1. I spent about 35 years as a securities lawyer and asset manager. Here is what I learned.

    All full service brokerage firms are the same. All of them have rap sheets as long as your arm. Their “trusted advisers” are commission salesmen who would be happy to sell your grandmother rat poison and tell her that it is a spring tonic. The only way to deal with them is to hire an outside investment manager who will work for a percentage of assets invested, and make sure he is the only one who talks to the broker. When the broker calls you up to tout a great deal, tell him to call the manager.

    A couple of notes: Brokers like Schwab, Fidelity, TD Waterhouse, who deal with you impersonally are cheaper and less annoying than Goldman Sachs, Merril Lynch.

    It may be hard to find an investment manager if you have less than a million dollars of investable assets. In that case stick to no load mutual funds or ETFs purchased through low service brokers. In a typical year, the SP index funds outperform about 2/3rds of the investment managers.

  2. I could never have confidence in brokers, a fact that probably cost me a lot of money. I once had an account with Kidder, Peabody and got a call one day from the local manager. I had my money in a money market fund they had and he told me that, unless I was interested in investing, they didn’t want to keep my account. I said “OK.” Our conversation continued as he realized I was serious. I had about a half million in the account. Finally, I agreed to invest but limited my choices to European ADCs. It was right after the Berlin Wall came down and I was sure there would be a German boom. The German unions killed the boom but I gradually got more comfortable with the broker. Anyway, I finally called him and said “Go for it !”. He called me a few months later and said he was quitting KP to mange his own investments. He had made too much money to work for anybody else. That was my lost chance. Why the hell didn’t he call me ten years earlier ? The only other broker I dealt with touted me into a $20,000 loss, which I later realized was him dumping on me a better client’s dogs.

    Most doctors are bad investors and most good investor-doctors, I wouldn’t go to. I do know some very savvy doctors’ wives who made their husbands a lot of money. Never my good fortune in spite of a couple of tries. One of my ex-wives had a very successful career in banking after our divorce, which has stimulated some questions in my mind. Necessity is the mother of invention and so forth…

  3. No surprise that investment banking has commoditized. Naturally, once that happens the culture changes and everything not directly related to bottom-line becomes “nice to have”. The problem this guy may have is finding anywhere to go in the industry that is any better.

  4. Robert – I can say that 99% of the brokers fit your description. They don’t make any money unless they buy or sell from you.

    If you find that 1% chances are they have been in the business for a long time (20+ years), have a decent portfolio of their own and don’t need to churn their client’s accounts. They don’t have to advertise or make cold calls.

    People learn about them through trusted friends and come to them.

    Greed – and short term thinking for gains – has become an epidemic and not limited to the big brokerage houses.

    As to Goldman Sachs in particular, word eventually gets around. One may say that they are “too big to fail” but eventually it will come.

    Oh – as to Schwab I wouldn’t deal with them if my life depended on it.

    Had to go to arbitration with them over some transactions years ago.

    Impersonal service is rarely good service.

  5. Nobody has gone to jail. No one is going to jail. Your system is completely co-opted by your financial institutions.

    Good luck with that.

  6. Michael – I once had a friend whose aunt – long retired – had virtually her entire account churned – with questionable transactions (stocks one wouldn’t buy for an old retired lady) – to the point that her account was almost wiped out.

    On the successful broker that you lament not fully using – if you know that he has the same investment goals and strategy as you – he was a good one but I would never simply trust anyone with everything and tell him “do with it what you think best”.

    They should always call you first.

    The current one I have – since 1987 – I know I could probably have done better with my investments – there are some I should have sold years ago – Yahoo???? (been waiting for that as a takeover for – ugh – 15 years now ;-) ) but he rarely calls me. Maybe once a year?

    The fact that he doesn’t bug me weekly wanting me to buy or sell outweighs for me the fact that he rarely calls!

    Unfortunately for most brokers – the upper tiered (successful) ones – these days the name of the game is “portfolio management” – where they want a set percentage of your portfolio every year – whether they do well or not. But it is very lucrative for them.

    That’s not for me…(I am too small for most of them anyway)

    When it comes to brokers these days you are usually between a rock and a had spot.

  7. Most doctors are bad investors and most good investor-doctors, I wouldn’t go to.

    I read an interesting theory about this – doctors spend so much time (their youth, basically) in training, that their income really doesn’t really pick up until they are in their late 30s/early 40s. This makes them particularly susceptible to “get rich quick” pitches, in an attempt to make up time. Dr. Michael, your thoughts?

    Always remember that brokers have no fiduciary duties to their clients (i.e., putting the client ahead of their own pecuniary interest), which is a higher ethical and legal standard. It is truly caveat emptor with them. I can’t speak for other professional designations, but at least CFA charterholders have a code of ethics that stress loyalty to the client’s interests above all.

    I can definitely tell you that bond brokers fleece individuals a disturbingly high amount of the time. Bond trades have been reported on something called TRACE for some time now, and you wouldn’t believe the spreads (basis points over Treasuries) that we see reported on small lot transactions. People receive way too little when selling, and pay way too much, with the broker pocketing the spread. Transparency is getting better in the bond market, but still has a way to go for the individual.

    However, institutional investors in structured product should be ashamed of themselves for bitching that Goldman, et al, sold them crap. Unless you are buying a straightforward equity or bond, when you make a purchase of an exotic security, you are taking a position on the opposite side of someone else’s hedge. So you’re basically betting that you’re smarter than the other guy. If it turns out you’re not, don’t complain that you got snookered.

  8. Not sure why this should come as a surprise to anyone as Michael Lewis described the attitude in some detail 20+ years ago in Liar’s Poker. The best advice is that from Percy Dovetonsils, above,that brokers have no fiduciary interest. Look up the definition of that word and memorize it. You’re on your own out there.

  9. “doctors spend so much time (their youth, basically) in training, that their income really doesn’t really pick up until they are in their late 30s/early 40s. This makes them particularly susceptible to “get rich quick” pitches, in an attempt to make up time. Dr. Michael, your thoughts?”

    Doctors, who tend to rely on friends and acquaintances in practice, do the same in investing. I have lost money doing this, too. The husband of a teacher at my daughter’s private school solicited me for a product that I thought had good prospects. It was the “BrickPak.” The box that contains soda or fruit juice. They are in all the supermarkets. He had a franchise in the Middle East where soft drinks (no alcohol) and hot climate combine to make it a huge market. His plan sounded good but I still didn’t understand his business plan. How was he going to get the product into the little stores so common there. He apparently had a contract to supply US Army bases and this would be an extension.

    As I was trying to understand the details, he wormed $10,000 out of me. I wouldn’t invest any more until I understood the details better, Another doctor I knew invested his whole pension plan, never a good idea. Well, this fellow just took the money and kept right on living in San Juan Capistrano. His wife continued at the school. And nobody ever saw any money. He did have a law license and I pursued that but he just ignored everyone.

    My best investments were second trust deeds we bought in the late 70s with the first real estate boom in Orange County. A realtor I knew well (when she had back surgery, she insisted I be there) sold a lot of property and often a second TD of one or two year maturity was part of the deal. I never lost a cent on them. Some of them were $50,000. Good as gold.

  10. Some billionaires and Paul Volcker are giving Smith some backing on his critique of Goldman Sachs business ethics:



    Let’s assume, for sake of argument, that Smith has exaggerated but is 50 % accurate. Given that, what are the implications of an entity that corrupt having wildly disproportionate backdoor influence at Treasury and the Fed?

  11. I am with Dennis on this one. There is nothing new here. Smith took a job in a brothel and, years later, is shocked to find prostitutes working there. My guess is that his outrage at the decline of ethics at GS is not the only reason, or even the main reason, that he is leaving and that he is working on a book.

  12. Goldman may feel they are immune as long as Obama is in office as he seems to have gotten in bed with Wall Street even more than GW Bush. If he loses to Romney, who probably knows where the bodies are buried, I suspect they will have a changed attitude, at least publicly. The financial industry has gotten way too far from the interests of the rest of us. Ford was almost wrecked by the financial guys. They forgot how to make cars. It sounds almost like the Panic of 1907 when what was going on in New York was more important than the rest of the country. It’s the casino system.

  13. ”Smith took a job in a brothel and, years later, is shocked to find prostitutes working there.”

    The reliable information I hear from contemporaries who went into banking in the late 1980s and the early 1990s is that the culture changed. It went from having an ethical dimension to it, to having none, from people being concerned about getting caught ripping off clients, to openly joking and boasting about it. One of these friends were so sickened by it that he left a lucrative position at a big bank to start his own operation. He is doing fine and he is happy he left.

    So, I believe this guy when he says things changed.

    Goldman went public in 1999. That was probably when the decline began to steepen.

  14. Goldman went public in 1999. That was probably when the decline began to steepen.

    That is what Nicole Gelinas says in her book. She points out Brown Brothers Harriman as a contrary example since it is privately held by the partners.

  15. Probably going public made everything worse. They took bigger risks and their ethics deteriorated. That’s hindsight, however. I remember how smart going public appeared at the time, at least to me. I thought the increased firm capital would reduce the risk of LTCM-type blowouts and increase scrutiny of their operations.

    Anyway, something else must be going on with Smith. Otherwise he would have quit without going out of his way to embarrass Goldman.

  16. Read the post and read the comments and understand why Romney can’t get 50% of the vote anywhere. The average American has no taste for electing someone who thrived in the Wall Street culture – and calls it “business” and “job creating” experience.

  17. If Romney can’t get elected, we’re toast. I am not sure there are enough American voters who understand the world to defeat Obama. I don’t think Romney, from what I have read about him, is anything like the people Smith describe. At least he could look into Putin’s eyes and see the devil.

  18. Michael,

    Nominating Republicans because they are electable,rather than because of their principles, is what cost the Republican Party is soul and got us in this mess. I have to wonder exactly what principle is non-negotiable, non-compromisable with Romney? Is there even one? Does the champion of Romneycare really stand for anthing?

  19. In reading Greg Smith’s op-ed, I was struck at how self-aggrandizing it was: he went to Stanford, he advised two of the largest hedge funds in the world, he appeared in their recruitment videos, etc. I get the impression that once it no longer became “cool” to be working at Goldman Sachs, Mr. Smith wanted to make a face-saving exit.

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