Goldman Sachs Takes a Hit After an Executive’s Exit

SUSIE GHARIB: From gold to Goldman Sachs (NYSE:GS) — the Wall Street investment firm got hit today with another public relations problem. London-based executive director Greg Smith quit his job and wrote a scathing resignation letter in today’s “New York Times (NYSE:NYT).” In the op-ed letter, he accused Goldman for its, quote, “toxic and destructive” environment. Darren Gersh looks at what the letter says about Goldman’s culture.

LLOYD BLANKFEIN, GOLDMAN SACHS CEO: Compensation principles.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT : By now, Goldman Sachs (NYSE:GS) CEO Lloyd Blankfein is used to critics calling him a “money-sucking vampire squid” or worse, but this morning, the attack came from one of his own. In his “I quit” letter, Greg Smith, a mid-level executive for Goldman Sachs (NYSE:GS), said he was sick of a culture where clients were called “muppets” and employees were expected to “hunt elephants” by getting clients to make big trades that led to big profits for Goldman. Smith closed with this parting shot: “People who care only about making money will not sustain this firm or the trust of its clients for very much longer.”

CHARLES ELLIS, AUTHOR, THE PARTNERSHIP: Hard-hitting and accurate.

GERSH: That’s how Charles Ellis, author of “The Partnership: The Making of Goldman Sachs (NYSE:GS)”, describes Smith’s op-ed.

ELLIS: Goldman Sachs (NYSE:GS) had a unique, privileged position of trust, and it needs to rebuild the base upon which its clients can trust it.

GERSH: And Ellis has some advice for Blankfein as he struggles to revive Goldman’s reputation.

ELLIS: Pay attention to the real, real difficulties that are behind some of the rude remarks that are made about the firm and recognize that those problems have to be dealt with. And I know you are dealing with them, but you are going to have to deal with them even more intensively
than you have. And you’re probably going to have to make some public terminations of prominent people in order to get the message sent internally and externally how deeply committed I know you are personally.

GERSH : Goldman Sachs (NYSE:GS) says it has reached out to Greg Smith to learn more about his concerns but hasn’t heard back. In a memo obtained by NIGHTLY BUSINESS REPORT, Lloyd Blankfein told employees: “We are far from perfect, but where the firm has seen a problem, we’ve responded to it seriously and substantively.” Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.

GHARIB: Joining us now with more on Goldman Sachs (NYSE:GS), Peter Cohan. He’s a management consultant at his own firm, Peter Cohan & Associates. He’s also author of “Value Leadership,” in which he featured Goldman Sachs (NYSE:GS) as one exemplary company. Hi, Peter.


GHARIB: All right. So, is this one disgruntled employee? Or is this a universal view about Goldman?

COHAN: I think it’s a universal view about Goldman. But the interesting thing about it is that, first of all, everybody in the world of business knows that Goldman trades against its clients, which is what happened in 2007 when it ended up having to pay over half a billion dollars for advocates, which was a mortgage-backed securities bet that they made against their own clients. So, that’s one thing. As far as the employees are concerned — and I think everybody recognizes what’s going on inside the company. And this particular employee, I think, chose to basically dowse himself with gasoline and light himself on fire. I don’t know how any other major employer on Wall Street would ever hire somebody who would be willing to resign in such a public way right on the op-ed pages of “The New York Times (NYSE:NYT)”.

GHARIB: Well, let’s come back to Goldman itself, because you wrote about Goldman. You profiled it in your book. That was a few years ago, eight years ago. Has something changed at Goldman? Has the culture changed as Greg Smith wrote about in the op-ed piece today?

COHAN: Well, you know, you raise a very interesting point. In my book, I pointed out how Goldman has some very, very strong values. Things like putting the clients first, and hiring brilliant people who are really good team players. They have four team values that they still feature very prominently on their Web site.

And I think the big thing that’s happened and Lloyd Blankfein became CEO in May 2006, during that time, the stock prices fell 20 percent interestingly enough. But he was — he is a trader. And he brings that trading mentality to the firm.

And the trading mentality is very, very short term. And it doesn’t stress having relationships with CEOs. If, on the other hand, before 2006, there was a better balance between trading and investment banking. And investment banking involves establishing relationships with CEOs over the long term, where they’re kind of behavior that Goldman has demonstrated, most prominently in 2007, would not have been available.

GHARIB: OK. Peter, let me jump in.


GHARIB: We have about a half a minute left. I want to ask you this. I mean, what’s the fallout from this? From the point of view of investors, we saw a lot of them selling off the stock, and Goldman down sharply. It lost something like $2 billion of its market value. And what does it mean for clients? Is Goldman going to lose business? Real quickly.

COHAN: They will not lose business unless they lose a lot of their best people. And I think this will be an isolated incident, and therefore, I think that Goldman will be OK.

GHARIB: All right. We’ll leave it there. Peter, thanks for coming on.

COHAN: Thank you.

GHARIB: And we’ve been speaking with Peter Cohan, management consultant and author.

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