Pomerantz LLP

"Muppet-Gate" Hits Goldman

ATTORNEY:  Jeremy Lieberman 
The Pomerantz Monitor, March/April 2012

Right on the heels of the embarrassing pasting it took in the El Paso decision discussed earlier in this issue, Goldman has been struck another blow. In an op-ed piece in The New York Times, Greg Smith, a now former Executive Director at Goldman Sachs, announced his resignation to all the world and set off a fire-storm. Burning his bridges behind him, Smith took a parting shot at the entire management of the firm, including Goldman’s CEO Lloyd Blankfein.

Smith charges that the culture of the firm has drastically changed from when he joined the firm twelve years ago, a golden age when the spirit of “teamwork, integrity . . . humility and always doing right by our clients” was the watchword at Goldman. According to Smith, the “secret sauce” of Goldman’s corporate culture was that it put its clients’ interests first.

Now, he claims, Goldman has turned into a greedy money machine, where the only possible means for advancement is lining the firm’s coffers – even at the expense of clients. Smith says that are three ways to become a leader at Goldman: 1) persuade your clients to buy products that Goldman is peddling because it wants to remove them from its own balance sheet; 2) “Hunt Elephants” – get clients to trade whatever will yield the biggest profits to Goldman; and 3) trade in illiquid opaque products which add little value to the firm’s clients.

Most memorable are Smith’s tales of Goldman employees openly bragging about ripping off their clients – whom they contemptuously refer to as simple-minded “muppets” – and “rip[ping] their eyeballs out.” According to Smith, the derivative sales meetings never focus on how Goldman can help their own clients, but rather on how to line their own pockets. The prime culprits, according to Smith, are Goldman CEO Lloyd Blankfien and President Gary D. Cohn, who lost hold of the firm’s proud 143-year-old culture on their watch.

From our vantage point, Goldman has not changed significantly in the past 12 years. What shocks is not the picture of Goldman that emerges – this is, after all, the same firm that has repeatedly run afoul of the SEC, and was famously lambasted by Rolling Stone as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” It is that anyone working for Goldman has the chutzpah to say this out loud.

As for Smith’s motives in staking out the moral high ground, time will tell. As Felix Salmon of Reuters aptly commented, if he goes on to found or join a rival company, Smith’s decision to harm Goldman will look rather self-serving. But, if he goes to work regulating all investment banks from the outside, we might start taking him more seriously.