Yes, Wall Street Deserves Some Blame

by Kevin D. Freeman on March 14, 2012

There is an Op-Ed in the New York Times from a disgruntled former Goldman Sachs executive. He was employed there yesterday, in fact. Basically, what he charges is that Goldman put profits ahead of clients. We will go one step further. Wall Street can be accused of putting profits ahead of national security and we are all paying a price for it today.

Now, we do not make this charge lightly. In fact, our contacts both in Washington and Wall Street have warned that there is a backlash effort in the works to undermine the message of Secret Weapon and this Blog. It is a blatant attempt to deny the truth of the book and discredit me as the author. Never mind that the documentation we have is rock solid, well researched and properly referenced. Never mind that we have proof of just how well the research was received based on emails and shares that took place at the time and even months afterward. The discredit effort, we are told, will be to acknowledge the reality of economic warfare and even the risks of financial terrorism but to deny outright that any of that happened in 2008. This was the approach taken last year by critics when Bill Gertz first wrote about my 2009 Pentagon report that very clearly documented suspicious behavior connected to the 2008 collapse. There is a political and economic motive for denying that anything untoward happened in the crash. Many on Wall Street and others in Washington don’t want the American people aware of how greed and incompetence almost destroyed America. Don’t look back. Only look forward. Nothing to see here.

The problem with this “only look forward” sentiment is that it covers over some very bad behavior that put our country at grave risk. Bad things happened in 2008 and Wall Street looked the other way until it was almost too late. The greed factor was underscored today in an unusual letter of resignation published in the New York Times. Here are critical excerpts from the Op-Ed by the former Goldman employee, Greg Smith describing the toxic culture he claims exists at Goldman Sachs:

The Opinion Pages


Why I Am Leaving Goldman Sachs

By GREG SMITH  Published: March 14, 2012

…In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus,God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen…

Greg Smith resigned as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.

It is bad enough that such behavior may have taken place at Goldman Sachs at the expense of clients. It is worse that the same attitude appears to permeate much of Wall Street. But, that pales in comparison to the national security implications. Please understand that we are not accusing Goldman Sachs or any other American firm of purposely putting our nation’s security at risk. But, we do believe that an “anything goes” attitude built on greed and the naive belief that all market activity has an economic purpose created a culture of vulnerability for terrorists to exploit. Consider also, according to press reports and a scathing report from Inspector General David Kotz, that the SEC seemed to be non-existent in enforcing important regulations regarding naked short selling. This is very serious as naked short selling is part of the “bear raid” approach that sealed the fate of Lehman Brothers and nearly took down the whole system. We have word that there may be some disclosure of Goldman Sachs emails related to naked short selling in a Utah case. That should prove interesting. Only very recently (two weeks after the publication of Secret Weapon) did the SEC begin an enforcement action related to naked short selling activity from 2006. Perhaps taking almost six years to bring an action is reasonable for criminal activity? But, for potential terrorism?
Goldman Sachs is no doubt embarrassed by today’s Op-Ed. The backlash against Greg Smith is certainly coming because he dared accuse the firm of bad behavior. There is a backlash starting against David Kotz because he dared point out the failings at the SEC. Now, we are told that there will be a discredit operation aimed at the truth of Secret Weapon.
What happened in 2008 matters. Don’t let anyone tell you otherwise.

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