Monday, April 15, 2013
Goldman Sach's Whistleblower Greg Smith
Date: 14 April 2013 07:00
Producer: Esté de Klerk
Presenter: Devi Sankaree Govender
Show: Carte Blanche
Wall Street, New York City - the exemplar of power, money, wealth... It's the centre of commerce and the financial capital of the globe, home to the largest financial markets in the world - the Nasdaq and the New York Stock Exchange.
And if you're serious about being a mover and shaker in the financial world, this is where you want to work.
It's where Greg Smith found himself at the age of 21, when he was employed by one of Wall Street's most distinguished banks, Goldman Sachs.
Devi Sankaree Govender (Carte Blanche presenter): "Place Goldman Sachs into context, who are they?"
Greg Smith (Former Wall Street investment banker): "Goldman Sachs currently and frankly 12 years ago was the biggest, most prestigious investment bank in the world. So when I got a job there, it was a great, very happy day for me."
But it didn't come easy for this matriculant from King David School in Linksfield. He grew up in Edenvale in the east of Johannesburg in a middle class family and had to get a scholarship to study. With eight distinctions he was one of only 32 applicants around the world to win a full bursary to Stanford University in California.
Greg: "When I was at Stanford, Goldman Sachs was what people would call the Rolls Royce of investment banks. They took big companies like Microsoft public, Sears, Ford and it was really a golden name and what I would say a lot of people strived for."
As did Greg, after he interned at Goldman Sachs in his final year at Stanford. Only one in 45 candidates who apply is employed. When he got the job, it seemed to him that things couldn't get much bigger or better.
Devi: "What was Goldman Sachs' corporate culture like right at the very beginning when you first started to work there? What did you love about being there?"
Greg: "Goldman Sachs had a very famous principle, it had been around for about 140 years. The way it stayed in business for so long, was a term called 'long-term greedy', which is a funny sounding term. But what it essentially meant is that if you want your customers to keep doing business with you, you have to do right by them. So that means that if potentially they are going to make a bad move, you have to tell them: 'Even though I may make more money now, this is a bad idea for you.'"
Greg soon climbed the ranks. When he was promoted to vice-president in the equity derivatives division, he advised mega-corporate and government clients on how to invest their money.
Greg: "In the way I'd operated in my career, I actually saw value in having relationships with your customers for seven, eight, ten years."
But from the early 2000s the system started changing. Bankers lobbied for weaker regulations to allow them to take bigger risks in investing the bank's own money for better profits. Greg says these regulations effectively turned banks into casinos.
Greg: "We know that there are certain rules in place so when we play black-jack or poker we know that the casino can't see our cards and you still play your own bet. What happens on Wall Street is banks could now see all their customers' cards - the biggest hedge funds, the biggest mutual funds, the biggest pension funds - and they started using this information to bet against their clients. And ultimately that led to a financial crisis that by some measures destroyed 40% of the world's wealth. "
Devi: "But what was the idea then at Goldman Sachs? If you felt that a certain investment wasn't a great idea, did the firm care or did they just want the money?"
Greg: "When banks across Wall Street started pressuring sales people to sell products that weren't in customers' interests, this idea of a fiduciary duty, which means doing what is right for your customers, basically disappeared."
This type of high risk 'gambling' contributed to the global financial crisis in 2008. The US debt had ballooned and banks like Lehman Brothers and Merrill Lynch collapsed, while the remaining banks were bailed out by the US government, effectively the tax payers.
Greg: "And who ended up suffering? The customers of these banks. And who ended up getting rich? The bankers who were now public companies and bonuses just from the '90s until the late 2000s, in some cases multiplied by five or 10 times."
These practices lead to Goldman Sachs being charged with fraud by the US Securities and Exchange Commission in 2010.
[27 April 2010] Carl Levin (Chairman: US Senate Committee): "The evidence shows that Goldman repeatedly put its own interests in profit ahead of the interests of its clients and our communities. Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse."
Goldman paid US$550-billion to settle the charges, the largest penalty against a Wall Street bank in American history. Yet, in terms of Wall Street profits, it was merely a slap on the wrist.
[15 July 2010] Robert Khuzami (Former US Securities Enforcement Director): "Today's settlement is a stark reminder that there will be a heavy price to be paid if firms violate the principles fundamental to the securities laws."
Devi: "When did you realise it was time to go? Because it is one thing recognising that the culture is changing, it is another thing realising the game is up."
Greg: "I would say after the financial crisis, a lot of introspection was necessary and I started seeing all the banks do no introspection and in fact go back to business as usual while telling the public that they were serving their customers. And ultimately to me that was not the system I wanted to be part of."
It took him five months to write an opinion piece - 'Why I am leaving Goldman Sachs' - published in the New York Times on the day he resigned. He gave up a lucrative career earning half-a-million dollars a year.
Devi: "You were there for 12 years? You could have quietly resigned. You went publicly. You wrote a letter to the New York Times. Why?"
Greg: "You know, occasionally in one's own being or in one's life, you have an idea of how you can do something good and I'd had dozens of conversations with colleagues around me who all felt a similar sense of angst and disease about a system that was actually asking them to do unethical things. What I came to believe is what is legal is not always ethical."
He accused Goldman Sachs of unscrupulous business practices, saying: 'Integrity? It is eroding' and 'It makes me ill how callously people talk about ripping their clients off.'
[CNN March 2012] Ali Velshi: "Any headline including Goldman Sachs doesn't go unnoticed so it should come as no surprise that when a company executive quit his job..."
His letter became one of the most influential opinion pieces in the New York Time's history. Within hours it had been viewed by more than three million people online and sparked media attention across the globe.
[RT] Woman 1: "Goldman Sachs gets outed in a scathing resignation on the New York Times op-ed page."
[ABCNews.com] Woman 2: "An extraordinary David and Goliath battle played out..."
[CURRENT] Man 1: "It was a breakup letter read around the world and it made Greg Smith, a 12-year veteran vice-president of Goldman Sachs a household name."
Devi: "Okay, so I am trying to picture this: so, it is printed in the New York Times, but you go to work on that day?"
Greg: "I actually did not going into work that day and..."
Devi: "I am not surprised!"
Greg: "I only found out the night before that is was definitely going to be published. I sent an email that morning to the eight or nine top bosses and, in very personal terms, different to the letter, I explained to them how and why I thought leadership really lost, not just the public's interest, but their own future's interest."
Goldman Sachs stock initially lost $2-billion in market value on the day Greg's letter was published.
Devi: "What did Goldman Sachs say?"
Greg: "Goldman Sachs, like I think any firm, would say is that they are going to investigate the charges. Privately, not one person on Wall Street has disagreed with anything I've said. I think publicly, deny, deny, deny is the way banks operate."
Goldman Sachs issued a statement, saying: 'We disagree with the views expressed, which we don't think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.'
Devi: "But they turned against you. They said that you were denied a promotion, they said that you weren't given a raise and this all happened a few weeks before you resigned?"
Greg: "I think most smart people who read the stories could tell that it was a little bit of a smear campaign. I don't want to live my life, and don't think that a lot of people should live their lives making a living by deceiving people."
So he left the high-finance, high-flying world of investment banking and wrote a book about why he left Goldman Sachs and Wall Street. Although sales haven't been huge, it has been translated into three other languages.
Greg: "I wrote this book not for people on Wall Street, but for people who have no clue about what happens on Wall Street and wanted to pull the curtain back. And not to take a vindictive tone to it, but to say to people: 'You know what, banking is a very valuable thing to society, but once banking becomes a casino, it has lost all its value.'"
Greg now travels the States advising investors and corporations about how the financial system can become more transparent, with less conflict of interests.
Devi: "Future plans, what happens from here?"
Greg: "Everyone thinks the solution is going to have to come from people shouting at Wall Street. I have heard from enough people that think Wall Street can actually make Wall Street better. In the short term that is my goal and I think longer term, there is a real sense, in America at least, that this idea of fiduciary duty in doing right by customers has disappeared. So if I can be part in some way to bring that back to help how money is managed and helping advise businesses in how they can get rid of conflicts of interest, I think those will both be valuable goals to have."
While every attempt has been made to ensure this transcript or summary is accurate, Carte Blanche or its agents cannot be held liable for any claims arising out of inaccuracies caused by human error or electronic fault. This transcript was typed from a transcription recording unit and not from an original script, so due to the possibility of mishearing and the difficulty, in some cases, of identifying individual speakers, errors cannot be ruled out.