Wednesday, October 24, 2012

Yawoh! Herr Kommandant!


60 Minutes ran a piece on Greg Smith, an ex Goldman Sachs employee who wrote a “tell all” book on his former employer. In it, he recounts how Goldman routinely screwed their own clients out of their money with nefarious investments that only a physicist could understand.


I found another article, below, where another Goldman Sachs employee discusses what Smith never touched upon, and that was the culture inside of Goldman. The culture prepped and preened it's own to insure compliance to the overriding Goldman goal, “make money in any shape and form.” This included buggering their own customers.


I can't but help think of this from history. Mein Ehre heißt Treue. The SS creed. “My Honor is my Loyalty.” In both cases, remaining loyal to Goldman or the SS, meant carrying out any order, no matter how ridiculous.



*****



"...Smith doesn’t get, and therefore couldn’t articulate, the implications of Goldman’s cultishness. Just the way fish don’t recognize that they are swimming in water, Smith likely does not appreciate how insular and inward looking Goldman is. The aggressiveness of Goldman’s response isn’t just to protect its external reputation; it’s also because, on some level, people at Goldman really believe their PR. Look at how remarkably thin-skinned Wall Street employees have been in the wake of the crisis, how utterly unwilling the overwhelming majority are to take any responsibility for blowing up the global economy. Goldman, with its exaggerated sense of righteousness, is even less willing to hear even a very watered down version of reality.

 
It’s been nearly 30 years since I worked at Goldman, but even back then, Goldman was quite explicit about the lengths it went to to build and reinforce its “culture,” and from everything I can tell, it has if anything gotten more extreme since then. For instance, it still puts recruits through far more interviews than other firms do, which helps screen not just for “fit” but also for how badly they want the job (most sane people would lose patience with the process). Goldman then, and I believe still, prefers younger MBAs (as in those with less rather than more work experience) because it likes to “shape” people.

 
Even though the investment banking industry is famous for requiring that staffers be willing to put in punishing hours, in my era, Goldman was unique on the Street in thinking it was perfectly normal to ask people to reschedule their wedding if it conflicted with a deal timetable. I did a summer at Salomon, and Salomon people didn’t socialize much outside of work, while at Goldman, there was quiet pressure to; junior Goldmanites were encouraged to get their summer “shares” in the same area frequented by other Goldman employees. To give an idea of how insular Goldman was then: of all the married non-secretarial women, the only women who were not married to Goldman men had come to the firm married.

 
The firm enforced behavior on far more levels than other firms: dress code, communication (both frequency, which was one of the firm’s strengths, but also mode: a sort of PC-ness about giving credit, not being openly political or self-promoting, not denegrating competitors or clients). The firm was dead serious about preferring people who hewed tightly to the Goldman cultural ideal. Guys who drove fast cars, got divorced and were a bit too flashy would not be promoted as quickly as guys who were somewhat less big producers but were complaint Goldman soldiers (yes, I can name exceptions to that pattern, but they were far fewer than you’d see anywhere else on the Street).

 
The firm was Machiavellian in its organizational design. In investment banking, it had product specialists (corporate finance, meaning stock and bond underwriting, M&A, real estate) and salesmen who covered clients and sold all products to them (Hank Paulson came out of that corporate calling group, called Investment Banking Services). The party line was that this promoted expertise and made sure there was consistent attention to corporate clients and prospects. That no doubt was true, but I doubt this was the operative truth. This structure also circumvented the way big producers normally had leverage over a firm, that if push came to shove, they could leave and take clients with them. If you have one person who has the relationship dependent on other people executing the business, neither group can readily leave with clients. Similarly, in my day (and it has changed since then) people were hired into a department and people very very rarely switched departments; the internal PR was that (again) it was to promote expertise. Again, the operative truth was that Goldman went to great lengths to keep politics to a bare minimum, recognizing how it diverted energy from making money for the firm. Having partners poach on other departments for talent would be enormously divisive, so best to make that an exceptional event.


Goldman people then genuinely believe Goldman was the best place to work; leaving was seen as a fall from grace. I knew very successful individuals who departed after I did, and were 6-10 years into their careers, and each said virtually the same thing, verbatim: that it took them two years to get over the idea that leaving Goldman meant they had taken a big career step down (and objectively, none of them had).


This is a long winded intro, but the critics of Smith’s naivete about Goldman’s conduct don’t get that the failings he saw were a big deal if you’ve identified strongly with the Goldman culture, and the firm works extremely hard to recruit and inculcate people with that end in mind. It appears from Smith’s age and his tenure at the firm that this was his first real job, so he was the perfect sort to be imprinted by Goldman. It’s like having been a loyal Catholic, say 40 years ago, and realizing not only that the church had pedophile priests, but the top leadership was aware of it and refused to do anything about it. Now with hedge and PE funds having knocked Goldman off the apex of financial glamor jobs, and the firm now a sprawling global enterprise, it’s actually remarkable that it has managed to maintain as much of its cultishness, um, cohesiveness as it has.

 
Goldman’s dedication to clients has fallen in the Blankfein era. Even though Smith doesn’t deliver the goods in his book, his bottom line is correct: Goldman’s internal ethics have declined, and the fall over Smith’s tenure likely is on a steeper trajectory than in its peers.

 
I’d have dinner a few times a year with a senior Goldman officer in a staff function that put him in front of the of the Executive Committee and department heads on a regular basis. He was extremely circumspect about his day-to-day activities. However, he found it pretty much impossible not to convey to me how the firm was changing, and how disturbing he found it to be. While he did not think much of Hank Paulson, he did regard the co-presidents under him, John Thain and John Thornton as both concerned with preserving Goldman’s culture and franchise (Thornton had been particularly opposed to going public for that reason) and were long-term oriented. By contrast, he was distressed by and contemptuous of Blankfein and the new leadership, who largely came out of the commodities/trading side of the firm (the view from the old Goldman that commodities was lower class and less ethical than the more highly regulated securities markets was strong in my day and was confirmed by the negative reactions internally by non-partners to Goldman’s acquisition of J. Aron. I was the most junior staffer on that deal). My dinner buddy made it clear he thought the new management team was less able, less thoughtful, concerned only about as much money as possible now, and didn’t care much about what impact that might have long term.

 
Confirmation of the change in the firm under Blankfein comes from former Goldman co-chairman John Whitehead’s unusually direct criticism of Goldman’s bonus policies in 2007. Similarly, I’ve been told that the Weinberg family (Sydney Weinberg played a huge role in Goldman’s rise to pre-eminence; his son John was co-chairman with Whitehead) is distraught over the disclosures made over firm practices in recent years.

 
Goldman has such a strongly developed internal culture that even a change at the top would take a while to percolate through, and Smith appears to have seen the impact.

 
Finally, critics don’t recognize a hidden upside to Smith’s dramatic exit. If you leave Goldman, the assumption is you are some sort of loser and perhaps on the verge of being fired. Yet in Goldman’s efforts to trash Smith, the worst they had on his was his bonus ask was way too high given the firm’s overall results; one managing director even told him that he needed to be patient, it had taken him a long time to become managing director and Smith needed to keep the faith. So Goldman officially confirmed that while Smith was not on the fast track, he was still a contender, which is a lot more than most places will say when someone slams the door on their way out."

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