A BLISTERING attack on Goldman Sachs by one of its own bankers has hit a raw nerve inside the firm seen to symbolise the excesses of Wall Street.
It has stoked bitter memories of the financial crisis among some former clients.
Greg Smith, a London-based former Goldman executive, took aim at the "morally bankrupt" culture there.
The searing attack, through a resignation letter, which ran in The New York Times, came just two years after Goldman was damaged by another of its own bankers, Fabrice Tourre, who described creating "Frankenstein" products that badly burnt clients.
Mr Smith said the Tourre incident had not taught the firm humility or integrity.
He wrote: "Over the last 12 months I have seen five different managing directors refer to their own clients as 'muppets', sometimes over internal email." Mr Smith said the fast way to a promotion involved persuading clients to invest in stocks or other products "that we are trying to get rid of because they are not seen as having a lot of potential profit".
"Today, if you make enough money for the firm (and are not currently an ax [sic] murderer) you will be promoted into a position of influence," he wrote.
The culture of Goldman today was all about raking in the bucks from clients, he said, and he saw "virtually no trace of the culture that made me love working for this firm" for many years.
Goldman rebutted Mr Smith's comments, with its chief executive, Lloyd Blankfein, and president Gary Cohn, insisting the firm was focused on the client.
"We disagree with the views expressed, which we don't think reflect the way we run our business," the two said in a memo to the firm's 35,000 staff.
"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." Some inside the bank claimed Mr Smith's sincerity was not all that pure, amid suggestions the former trader was disgruntled after not getting a promotion.
There were also reports he had been passed over for a bonus.
Mr Smith's clients at Goldman are said to have included two of the world's largest hedge funds and three major sovereign wealth funds in the Middle East and Asia. Mr Smith's central claim in his resignation letter that Goldman pursued its own profit at the expense of its customers is common among the bank's critics.
Former Goldman Sachs customers are likely to take close interest in Mr Smith's comments.
One, the Australian hedge fund Basis Capital, last year filed a suit worth $US1 billion ($937 million) against Goldman Sachs in a New York court.
One of the funds operated by Basis claims it was misled by the Wall Street giant, which allegedly sold it a toxic package of subprime mortgages that collapsed.
In its filing, a fund managed by Basis described a scheme by Goldman to sell a batch of dubious securities from early 2007 linked to US subprime mortgages.
It also claimed the bank was making large bets against the securities at the same time it was reassuring clients they were sound.
"The matter is still very much alive," a spokesman for Basis said yesterday.
Goldman Sachs has said it would vigorously defend the Basis claim.
Frequently Asked Questions about this Article…
What did Greg Smith say in his resignation letter about Goldman Sachs' culture?
In a resignation letter published in The New York Times, London-based former Goldman executive Greg Smith described the firm's culture as “morally bankrupt.” He said some senior bankers referred to clients as “muppets,” that promotions rewarded staff who pushed clients into products the firm wanted to get rid of, and that the firm pursued its own profit at the expense of customers.
How did Goldman Sachs respond to Greg Smith's accusations?
Goldman Sachs' CEO Lloyd Blankfein and president Gary Cohn issued a memo to the bank's roughly 35,000 staff saying they disagreed with Smith's views. They insisted the firm is focused on clients and that Goldman believes it will only succeed if its clients are successful.
Who is Greg Smith and which types of clients did he work with at Goldman Sachs?
Greg Smith was a London-based Goldman Sachs executive. According to the article, his clients included two of the world’s largest hedge funds and three major sovereign wealth funds in the Middle East and Asia.
Has Goldman Sachs faced similar criticism or controversies before?
Yes. The article references Fabrice Tourre, a former Goldman banker who earlier described creating “Frankenstein” products that hurt clients. It also notes a high-profile legal claim by Australian hedge fund Basis Capital alleging Goldman sold a toxic package of subprime mortgages while betting against those securities.
What is the Basis Capital lawsuit against Goldman Sachs about and what did the article say about it?
Basis Capital, an Australian hedge fund, filed a US$1 billion suit in New York claiming it was misled by Goldman Sachs when it bought a package of subprime mortgage-linked securities that later collapsed. The filing alleges Goldman sold dubious securities in early 2007 and was making large bets against them while reassuring clients. The article says the matter is still active and Goldman intends to vigorously defend itself.
Did anyone suggest reasons why Greg Smith went public with his criticism?
The article notes that some people inside Goldman questioned Smith’s motives, saying he may have been disgruntled after being passed over for a promotion and reports suggested he had been denied a bonus.
How might this public attack and past cases affect investors' view of Goldman Sachs?
According to the article, the criticism hit a raw nerve, stoked memories of the financial crisis among some former clients, and is likely to draw close interest from clients and market observers. The controversy highlights reputational risk and why past conduct and ongoing legal disputes matter to investors and clients.
What should everyday investors watch for following the Goldman Sachs controversy?
Based on the article, everyday investors may want to monitor official responses from Goldman Sachs, updates on related legal cases like the Basis Capital suit, and any client or regulatory fallout. The firm’s insistence that it focuses on client success and its pledge to defend against claims are key developments to follow.
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