What Yves said

Yves Smith at Naked Capitalism has a long post about former Goldman Sachs Vice President Greg Smith’s new book on the company.  Smith’s book, Why I Left Goldman Sachs, describes the atmosphere at Goldman and how vulnerable clients are in an environment when making a deal and the gigantic fees that come with it is more important than selling a complicated and flawed financial instrument to unsophisticated clients.  Yves gives her own insider view of Goldman and why the company has gone ballistic over Smith’s book while at the same time insisting that Smith was too junior to know what was going on.  The money quote comes at the end of her piece:

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.

I can relate.  Those of us in the lower rungs of the pharmaceutical industry witnessed a similar phenomenon.  At one point, we were governed by scientists and MDs who rose through the ranks to head the companies.  But that started to change radically in the 90′s during the era of many mergers and acquisitions and it really accelerated in the 2000s.  The financiers began to have more influence at about that time and we read accounts of CEOs under fire from analysts to cut research and outsource heavily. In retrospect, it looks like they were setting up pharma companies for their next M&A deals but eventually, all of the restructuring and Wall Street culture of constant change tricked downwards. The performance and compensation system changed, adopting Jack Welch’s program that was designed for GE salespeople, until it resembled Enron with even the lowly lab rats ranking each other, hoarding resources and actively engaging in cutthroat activities in order to avoid the ax.  And that, my friends, is about the worst thing you can do to a research organization.  Collaboration is essential to research.  By the time Wall Street values had trickled down to our level, we could see that they were more suited to the sales executives but in the labs were alien, out of place and destructive.  When it got to the point that lab equipment repairs had to be justified and we were forced to charge other departments for services we used to provide as part of our project collaboration, it was over.

So, I have no doubt that whatever Smith witnessed at Goldman was significant, profound and deeply disturbing.  It may be a similar situation where the business has begun to run amok and eat itself from the inside out, where policies no longer make sense and where the bulk of his time was spent pushing the competition in the next office off of his pedestal.  At that point, it’s no longer a functional business.  It’s a game of winner take all musical chairs.

Yves speculates on the reasons why Smith doesn’t spill all of the beans on Goldman or is even as detailed in his account as someone like Michael Lewis.  Some of those reasons include his relatively low level and institutional omertà.  But another possible reason is that there are few former insiders, even low level insiders like Michael Lewis who can write well on what are pretty complex financial instruments and make them intelligible to the average consumer.   I loved Lewis’s book The Big Short but it wasn’t until I was halfway through the book before I understood enough of it that I saw the humor in some of Lewis’s passages.  Now I know what Wall Street was up to but I doubt that even many Wall Street analysts truly understand the math and models behind their dynamic proprietary programs.  If Greg Smith understands them, there’s probably a lot he can’t divulge without  getting the Goldman legal department to bear down on him.

In any case, Smith’s book sounds interesting but I probably won’t be adding this one to my audible queue.  It’s not because I don’t think it is a worthy read or can’t learn more.  It’s just that through Karen Ho’s book Liquidated, and Lewis’s The Big Short and Boomerang, I think I get the picture well enough to know what went wrong.  But if you don’t have the time or patience for more than just a high level summary. it sounds like Greg Smith’s book might be just the horror story to keep you up on a cold and stormy October evening.

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8 Responses

  1. During the Bush era, Jim – Mad Money – Cramer was sharing the “Boo-Ya!” with every “smart” investor who was happily raking it in with stocks in “Defense, Pharma and Oil.” Those were the big 3 upon which the entire Bush Economy was based and the “greed is good” gang chorused sanctimoniously that it wasn’t blood money but realistic cash management that made the world work. We who knew how to balance looked at it as cannibalism.

    • Read around about Jim’s wife and the kiting racket the two of them ran. She’s the queen of WS traders and he boostered many a stock they owned for the time it took to skim off the run up. He’s even been quoted bragging about it.

      • If he was Liberal leaning he’d have been pilloried for that. It’s that Ole Debbil Standard.

    • He was the carnival barker who carnied many marks into the Wall Street Tent. I remember once referring to his TV audience as info-deprived media-soaked persons trapped behind the Cramer Curtain.
      As in . . . “how do we get information to the captive minds trapped behind the Cramer Curtain”?

      If anyone wants to use that phrase, feel free.

  2. This is a very good example of how an industry is influenced by Wall Street’s movement to financialize everything. CEOs in every industry are constantly looking to maximize shareholder value lest the company become an M & A target. Time horizons shrink from years to the next quarterly earnings report. In this way, firms eat their seed corn; future productivity is ignored in favor of the quick gain. I’d recommend Jeff Madrick’s book Age of Greed in addition to your list.

    • At this point, having lived through it, I have to question whether I really need to read another book on the subject. ;-)

      • There is a little book on this period written during the Reagan Administration itself that is so fun to read you might possibly want to read it even though you don’t need to read any more books on the subject. That book is called Capitalist Fools by Nicholas von Hoffman who is/was a very readable and entertaining writer. It looks at the subject through the keyhole of Malcolm Forbes and his Magazine (Forbes Magazine) which Forbes called a “Capitalist Tool”. (Hence von Hoffman’s wry wit in calling his book about Forbes and his culture Capitalis Fools).

        It was in that book that I first read that the interest payable on debt contracted to buy and take over bussiness with . . . was tax deductible. In short, the Takeover Lampreys were funding their leveraged buyouts by farming the tax code. von Hoffman describes some cases of productive and constructive bussiness stripped all the way down to the empty floor-site by tax-subsidised debt-powered Lamprey Capitalists.

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