Why They’re Not Leaving Goldman Sachs

An angry letter by one Goldman employee changes little for the industry

07 Apr, 2012 7:04

Written by Alexander Petralia

On March 15th, Greg Smith, an executive director at Goldman Sachs, controversially publicized his resignation from the firm in a letter to the New York Times titled “Why I Am Leaving Goldman Sachs.” In it, he detailed how Goldman has changed from a company which once prioritized the interests of its clients to one which sidelines them in favor of short-term profits. The new Goldman, he writes, exploits these “counterparties” by selling them complex products they do not understand, in order to maximize margins or clear them from Goldman’s books. Smith solemnly portends, “if clients don’t trust you they will eventually stop doing business with you.”

Immediately, the story caught fire within the media. Article after article emerged, questioning whether investors should drop Goldman, why Smith publicly announced his departure and how this will affect the future of Goldman. The truth is, however, that his letter doesn’t mean anything.

The fact that Goldman has prioritized its interests over those of its clients is not news. In fact, it was only two years ago that the heads of Goldman Sachs were accused on public television of betting against securities they recommended to their clients and selling assets on their books they knew had no value. However, clients continue to use Goldman because, as Bethany McLean wrote in Vanity Fair, “Goldman is better.” As one hedge-fund manager with whom she spoke explained, “I can’t tell you why it’s better. It’s just better. It’s six p.m. in New York City, and Goldman will figure out how to get the right person in Hong Kong – a guy we’ve never spoken to – on the phone to walk us through exactly what we want to know…Try the same thing with Citi.” Within the industry, Goldman simply has the reputation for getting things done.

Goldman is so effective because it has a monopoly on talent. While there are grandiose – and arguably excessive – bonuses, there are also intelligent, hard-working graduates. In a 2011 survey by Universum, “Goldman Sachs ranked fourth…behind Google, McKinsey & Co., and Apple” when American MBA students from 72 schools were asked where they want to most wanted to work. And when clients need answers, they consult the smartest people in the industry – most of the time, they belong to Goldman.

Even before the financial crash of 2008, investors recognized that Goldman was a firm dedicated to being the best in financial services, and consequently, maximizing profits. While suspect advice on the part of Goldman is certainly to blame for the pervasive “investor gullibility,” equally important were investors’ beliefs that the market would rebound. No one expected that the government would let Lehman Brothers declare bankruptcy, so investors filled their portfolios with complex products they believed would perform after the bail out. Goldman’s reputation for self-dealing has long been recognized in the industry, but clients continue to use Goldman for its ability to close deals and provide sophisticated advice. After all, the company led all financial firms in mergers and acquisitions activity for 2011.

So while Smith’s article rekindled public outcry against Goldman Sachs, it did not change the perceptions investors held about the firm. The public wants to believe that after the financial crisis of 2008, Goldman has reformed – that financial firms still value loyalty to clients and accountability – but to its surprise, Goldman is still Goldman. Investors, however, know better. Smith’s letter will not cause clients to drop Goldman because everything he wrote, they already knew.

The bygone days of white-shoed financial firms has been replaced by fierce competitiveness in an uncertain economic environment. Well-intentioned letters lamenting a declining standard of fiduciary responsibility make for a catchy story, but don’t change reality: clients need Goldman. As Peter Cohan in Forbes recently put it: “until a wave of talented people leave Goldman and go work for some other bank, many clients will stick with Goldman and hope for the best.”

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