Gillian Tett has a book called “Fool’s Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe.” It’s a pretty good book about the creation and rise to prominence of synthetic CDOs, and I’m sure the subtitle isn’t her fault, but it’s always bothered me, because how exactly was the “bold dream” of creating synthetic CDOs “corrupted” into … like … selling more synthetic CDOs? If you think synthetic CDOs are a Bad Thing, they were a Bad Thing at their creation. This is not an orphanage that was taken over by bandits and turned into a source of black-market organs. It was a financial derivative that was sold to people looking to buy financial derivatives.
Similarly, Greg Smith spent twelve years flogging equity derivatives to “two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia” and is just now discovering that they’re designed to make money for his employer? I imagine his contacts at these hedge funds reading his op-ed today and being like “holy shit, Goldman was trying to make money off of us?” Wait no I don’t. I’m pretty sure they wanted to make money too.*
I actually think that the equity derivatives business – whose fields Greg and I both tilled, though in different bits of it and I don’t think we ran into each other – is an interesting one to think about in the context in which Greg sort of failed to think about it. A starting point in my thinking is that it is pretty zero-sum. Whereas if I sell you a stock and take my commission and the stock goes up you are like “yay” and I am like “yay” and the issuer is like “yay” and we’re all friends and go golfing with each other, if I sell you a call option and I am a dealer and am replicating it then there are basically two possibilities which are (1) I replicated it more cheaply than I sold it for or (2) not. In the case of (1) you would have – in a sense – been better off not buying it (and maybe replicating it yourself by like buying stock); in the case of (2) I would have been better off not selling it. This is not exactly right! Dealers are probably mostly better at replicating than clients are, there are legal things, portfolio effects, blah blah blah. But it’s not a terrible first approximation if you want to feel bad about selling equity derivatives. I always had this nagging sense that selling a client a 60-delta call for X% edge was an X% rip-off because they could have just bought 60 deltas of stock on their own and saved X.**
But clients can figure that out too: even the “muppet” clients (Greg’s word) can usually bring themselves to ask “well why don’t I just buy stock instead?,” and this guy was dealing with various numbers of the thingiest things on the planet – the whole wide planet! – so presumably they had even better questions. And the answer to those questions can’t really be “because we enjoy having money and would like you to give us some.” It needs to be a story, a story about how the derivative works for the client. So when Greg says:
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.
That just rings false. Now I’m sure not one single minute is spent asking questions like “how can we teach this client to grow as a husband and father?” or “how can we improve this client’s widget-manufacturing supply chain management?” But if sales people aren’t asking “how can we offer this client products that they will think offer them a good risk/reward proposition,” then they are not likely to get many clients. And, in my experience, the best way to get clients to think that your products offer them a good risk/reward proposition is by offering them a good risk/reward proposition. Banking on client stupidity is not much of a long-term strategy.
That’s, like, your job as a salesman: to think about how to build trades that will get your clients to do them and give you lots of money. You can talk about that in terms of “helping clients,” or you can talk about it in terms of “making the most possible money off of them,” but they’re the same thing. The successful salespeople feel that intuitively: whatever your vague musings about zero-sum-ness, they really – and plausibly – think that their job is to find win/win solutions that help clients and make money for the firm. Those who have trouble with that quit in the New York Times.
Also, just, this. I mean, this:
My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
Maybe if he’d gotten the Rhodes, or won a gold medal for regular tennis at the goyish Olympics, he’d have made MD and would still have a job.***
Why I Am Leaving Goldman Sachs [NYT]
Related / endorsed: Bankers versus bitching rights, a graphical representation [FTAV]
Earlier: Resignation Letter Reveals Goldman Sachs Is In The Business Of Making Money, Hires People Who Don’t Know How To Tie Their Shoes
* Also, like, not to be too much of a dick, but, the fact that this epiphany hit Greg Smith after twelve years on the job may explain why he’s apparently at least a sixth-year VP, which to me suggests that he was at a dead end. And everyone’s all “huge Goldman EXECUTIVE (or ‘partner’ or ‘golden boy’) and HEAD of blahbittyblahblahs resigns!!!” No. He’s an “executive director,” which sounds nice but which at Goldman is just the term used outside of the US for VPs. And that is quite a few rungs from “partner.”
As for being the head of “the firm’s United States equity derivatives business in Europe, the Middle East and Africa,” one of my very favorite things about banking is that you’re pretty much the head of something as soon as you walk in the door, because clients like to deal with the heads of things. I had a similarly impressive pseudo-title (“executive director and head of the North American X business for Y industry”) when my “business” consisted of me and one analyst. [UPDATE: Amazingly, Greg's "business" consisted of him and zero analysts.] I never went to a first client meeting where I wasn’t introduced as the head of whatever we were talking about that day. Sometimes I introduced the analyst as the head of something or other. And sometimes I’d go to meetings with senior bankers who didn’t really know who I was and they’d introduce me as like “this is Matt, he runs our global capital markets business.” What did it hurt?
** I consoled myself with tax structuring, which is zero-sum in a different way.
*** Random question: will he lose his undelivered RSUs? Will GS enforce a nondisparage against someone who clearly has access to the press? You can see why this might be of interest to me.