A BLISTERING attack on Goldman Sachs by one of its own bankers has hit a raw nerve inside the company 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, has taken 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 company 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 chief executive Lloyd Blankfein and president Gary Cohn insisting the company 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 company'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.
His 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 against Goldman Sachs in a New York court.
One of the funds operated by Basis claims it was misled by the Wall Street company, which allegedly sold it a toxic package of subprime mortgages that collapsed.
In its filing, the fund 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.
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Frequently Asked Questions about this Article…
What did Greg Smith allege in his Goldman Sachs resignation letter?
In a resignation letter published in The New York Times, London-based former Goldman Sachs executive Greg Smith accused the firm of having a "morally bankrupt" culture that puts the company's profit ahead of clients. He cited examples like senior bankers referring to clients as "muppets" and said promotions were tied to persuading clients to buy products the firm wanted to offload.
How did Goldman Sachs respond to the accusations in Greg Smith's resignation?
Goldman Sachs executives, including CEO Lloyd Blankfein and president Gary Cohn, issued a memo to the firm's 35,000 staff rejecting Smith's characterisation. They said they disagree with his views and emphasised that "we will only be successful if our clients are successful," asserting that client focus remains central to how they run the business.
Who is Greg Smith and which clients did he reportedly represent at Goldman Sachs?
Greg Smith was a London-based Goldman Sachs executive and trader. The article says his clients included two of the world's largest hedge funds and three major sovereign wealth funds in the Middle East and Asia.
What is the Basis Capital lawsuit against Goldman Sachs about?
Australian hedge fund Basis Capital filed a US$1 billion lawsuit in New York alleging Goldman Sachs misled it by selling a toxic package of subprime-mortgage–linked securities that collapsed. The filing claims Goldman sold dubious securities from early 2007 while simultaneously making large bets against those same securities. Goldman says it will vigorously defend the claim.
How does the Fabrice Tourre episode tie into criticism of Goldman Sachs?
The article recalls an earlier controversy involving former Goldman banker Fabrice Tourre, who described creating "Frankenstein" products that hurt clients. Greg Smith said the Tourre incident did not instill greater humility or integrity at the firm, using it to underscore his broader criticism of Goldman’s culture.
Are there suggestions about Greg Smith's motives for going public with his criticism?
Yes. The article notes that some people inside Goldman questioned Smith's motives, suggesting he may have been disgruntled after being passed over for a promotion or bonus. Those reports were mentioned alongside his public accusations.
Could these public accusations and lawsuits affect clients' trust in Goldman Sachs?
According to the article, former and current Goldman clients are likely to take close interest in Greg Smith's allegations and in legal actions like the Basis Capital suit. The coverage has also revived bitter memories of the financial crisis for some clients, which could influence perceptions of trust.
What are the key takeaways for everyday investors from this Goldman Sachs controversy?
The article highlights two recurring themes: claims that parts of Goldman pursued profit at clients' expense, and firm leadership denying those claims and stressing client success as central. It also notes ongoing legal challenges—such as the Basis Capital lawsuit—linked to alleged sales of toxic subprime securities. Everyday investors should be aware these public disputes can shape confidence and reputations in major financial firms.
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