The Trouble with Wall Street

Twenty five years ago I quit a job on Wall Street to write a book about Wall Street. Since then, every year or so, UPS has delivered to me a book more or less like my own, written by some Wall Street insider and promising to blow the lid off the place, and reveal its inner workings, and so on. By now, you might think, this game should be over. The reading public would know all it needed to know about Wall Street, and the publishing industry would be forced to look to some other industry for shocking confessions from insiders. Somehow this isn't the case. The inner workings of our biggest financial firms remain obscure to the general public, and their outer workings still promise to shock. To writers and publishers at least, our financial system has become the gift that keeps on giving, like one of those trick birthday candles that, no matter how hard you blow on it, flickers back to life.

Enter Greg Smith, in the latest attempt to extinguish the eternal flame. Why I Left Goldman Sachs began last year as the most e-mailed and talked-about opinion piece that The New York Times had published in a long time. Here the author recounts how he spent most of the six months leading up to last March working at Goldman by day while writing up his deeply felt grievances against Goldman by night. When he finished he had a 1,500-word counterblast but no place to put it: he e-mailed it to the general address for blind submissions to the Times op-ed page. He heard nothing for a month, and so finally dug out the e-mail addresses of four Times editors, and sent his piece to all of them. The next morning the Times got in touch with him. (There's a lesson here for aspiring Times op-ed writers.) Skeptical that a Goldman Sachs employee was prepared to break ranks, the Times sent a reporter over to Goldman's London office—where Smith worked—to confirm his existence. The day before the paper finally published his piece Smith went into Goldman, cleared out his stuff, and caught a flight back to New York. When the piece hit the Web, he appears to have been somewhere over the Atlantic. It and he were instant sensations.

In his piece Smith argued that, in the decade since he joined Goldman Sachs out of Stanford University, the firm had become corrupt. He hadn't seen anyone at Goldman do anything illegal, but he had seen them do a lot of things that he considered shameful. Goldman now rewarded its people for advancing their narrow interests at the expense of their customers, the wider society, and even the firm's own long-term interests. Since the route to the top of Goldman had changed, the sort of people who ran Goldman had changed, too:

Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” 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.

None of this exactly came as news. The news was that a living, breathing Goldman employee had said it. There was also, between the lines, a fresh hope: Goldman had employed an idealist! For a decade! Either that, or this not-so-young investment banker was saying what he was saying because he had figured out that it paid him to say it. In a way that was the more hopeful thought: that the calculations propelling legions of self-serious Stanford graduates to Goldman Sachs since the early 1980s were now, perhaps, about to propel them in a different direction.

Either way, you had to admire Greg Smith's nerve. Still, his piece raised a couple of questions that I hoped his book might answer. The first is, why now? Goldman was helping the Greek government deceive the European Union about its indebtedness back in 2001; by 2004 the firm was busy manipulating the ratings agencies and the investing public to help expand the market for subprime mortgage bonds; by 2006 it was designing securities to fail (the infamous Abacus program) so that its own traders could bet against them, and make profits at the expense of their own customers by, in effect, pumping vast amounts of trust-reducing pollution into the financial system. For a very long time now the firm has been famous for being more frightening than helpful to its customers. Smith first worked for Goldman as an intern in the summer of 2000, near the peak of an Internet bubble that was inflated with the help of Goldman's analysts. If some Goldman employee was going to go and get himself worked up over his firm's destructive financial behavior, why did it take him until last spring to do it?

Smith seems to realize that the reader might wonder about this. At one point he even offers a kind of Sergeant Schultz defense: I know nuthink. Goldman's complicated machinations in the bond markets, he writes, "were happening on another side of a wall as tall and as strong as the Great Wall itself, in an area whose doings I was not even privy to." This is probably true, but it is a problem for his book. This Goldman defector witnessed only the tiniest sliver of what was happening inside his firm, and it wasn't close to the most interesting sliver. Smith worked in the equity department, doing exactly what I still don't completely understand; but whatever it was, it had nothing to do with Goldman's most outrageous behavior, which took place in and around the bond departments. And about that he has almost nothing to add to accounts published years ago. He wasn't particularly aware of the strange direction that his firm was taking, he was just particularly upset about it.

The other, related, question raised but not answered by Smith's initial salvo was this: what exactly changed inside the firm between 2002, when he joined as a full-time employee, and 2012, when he quit? Goldman Sachs may have suffered a moral collapse, but his piece did not explain why it happened. His book doesn't either—until the end, and almost in passing, perhaps because the timing doesn't sync up with his own moral awakening circa 2012. Way back in 2005, Smith writes, Goldman changed the way it paid its employees:

There was a time in Goldman Sachs’s history when bonuses were very subjective. At the end of the year, your manager made an assessment based not just on how much business you’d brought in, but also on how good you were for the organization. These two factors combined indicated your true economic value to the firm. But from 2005 until the present day, the system has become largely mathematical: you were paid a percentage of the amount of revenue next to your name. In some years, it would be 5 percent of that revenue; in better years, it would be 7 percent.... The problem with the new system was that people would now do anything they could—anything—to pump up the number next to their name.

The incentives changed, the behavior followed. Smith doesn't go into it—again, the timeline screws up his personal narrative—but this change in incentives almost certainly can be traced back to Goldman's decision, in the late 1990s, to go public. The moment the firm ceased to be a partnership and became a public corporation, the people who ran it ceased to have a long-term interest in Goldman's reputation and a long-term exposure to its losses. The deeper incentives changed late at Goldman—the firm was the last of the big investment banks to go public; but they did change, and well before Smith arrived.

Still, Smith genuinely seems to believe that the Goldman Sachs he left is a far more sinister place than the Goldman Sachs he joined. (About the only time in his account when the reader thinks, "Thank God Goldman Sachs exists," is when the firm sets out, on the down low, to help Muammar Qaddafi with his investments, and winds up losing more than a billion dollars of the monster's savings.) He also pretty clearly thinks our Goldman problem is even worse now than it was before the crash, if only because the firm is even sneakier and less transparent than it was before the world started paying close attention to its business.

Smith mentions, in passing, a "sexy new black box" investment recently created by Goldman—the latest elephant trade. Like the Abacus deal, it was a great deal for Goldman but not such a great deal for Goldman's customers—and so Goldman mobilized its entire sales force, Smith included, to jam it into customers' portfolios. But this time Goldman gave its creation a dull name, which Smith calls "Clorox," because, Smith writes, "the firm was very concerned, post Abacus, that new structured products be designated as blandly as possible ... to avoid drawing undue attention to them." Goldman's big takeaway from the financial crisis seems to be that it has nothing more than an appearance problem. To which this book, obviously, has now contributed.

But then again, maybe not. While Smith's op-ed hit a nerve, his book has come and gone. And it's not hard to see why: credibility. It isn't that Smith cannot be believed; it's that he is conflicted, and a little tone-deaf. Well beyond the point at which it is relevant or even faintly interesting, he is offering the reader a Pooterish blow by blow of his life and his career—toting up the e-mails sent to him from fellow Goldmanites telling him how great he is, recounting the praise his superiors lavished upon him, and so on. ("Dude ... you're the kind of guy who I think could do any job at Goldman Sachs—I would put you in any seat, trading or sales.") Often he sounds as if he is still trying to impress Lloyd Blankfein and win some big promotion.

Smith has been accused—most pointedly in a long article in Bloomberg News—of quitting Goldman not out of principle but because he demanded a million-dollar bonus and received only five hundred grand, and failed to receive a promotion. I doubt that's the full explanation for his defection, but it is not hard to see why Goldman's flacks are exploring the angle. It pretty clearly still bothers Smith that Goldman Sachs did not think as highly of him as he thought of himself. And, in a funny way, he has written exactly the sort of book you might expect from an employee of Goldman Sachs: narrowly self-interested, curiously myopic. It's almost as if the Goldman public relations department decided that someone at Goldman was eventually going to leave and exploit the market for an insider exposé, and set out to encourage the person who would least damage them. At any rate, they dodged a bullet.

In the end, the reader puts down Why I Left Goldman Sachs a little mystified. Why exactly did Greg Smith leave Goldman Sachs? What did he hope to achieve? If it's change he is after, his particular story comes too late. If, say, back in 2004, someone such as Greg Smith had stepped forward and explained to the world what was going on inside Goldman, he might have spared us all a lot of pain and trouble. But today's insider confessions feel like vain and useless acts. And what would he have us do, four years after the Great Collapse, to fix the system, or to change in any way his former employer's behavior? The dystopia often imagined in the world of artificial intelligence—in which computers somehow take on a life of their own and come to rule mankind—has actually happened in the world of finance. The giant Wall Street firms have taken on lives of their own, beyond human control. The people flow into and out of them but have only incidental effect on their direction and behavior. The firms may not be intent on evil; they aren't intent on anything except short-term profits: they're insensible. If anyone attempted to seize control of one of these strange machines and impose upon them a clear moral direction, the machine would hit its own button and he would be ejected.

Stop and think once more about what has just happened on Wall Street: its most admired firm conspired to flood the financial system with worthless securities, then set itself up to profit from betting against those very same securities, and in the bargain helped to precipitate a world historic financial crisis that cost millions of people their jobs and convulsed our political system. In other places, or at other times, the firm would be put out of business, and its leaders shamed and jailed and strung from lampposts. (I am not advocating the latter.) Instead Goldman Sachs, like the other too-big-to-fail firms, has been handed tens of billions in government subsidies, on the theory that we cannot live without them. They were then permitted to pay politicians to prevent laws being passed to change their business, and bribe public officials (with the implicit promise of future employment) to neuter the laws that were passed—so that they might continue to behave in more or less the same way that brought ruin on us all. And after all this has been done, a Goldman Sachs employee steps forward to say that the people at the top of his former firm need to see the error of their ways, and become more decent, socially responsible human beings. Right. How exactly is that going to happen?

If Goldman Sachs is going to change, it will be only if change is imposed upon it from the outside—either by the market's decision that it is no longer viable in its current form or by the government's decision that we can no longer afford it. There is a bizarre but lingering aroma in the air that the government is now seeking to prevent the free market from working its magic in the financial sector-another reason that the Dodd-Frank legislation is still being watered down, and argued over, and failing to meet its self-imposed deadlines for implementation. But the financial sector is already so gummed up by government subsidies that market forces no longer operate within it. Could Goldman Sachs fail, even if it tried? If someone invented a cheaper way to finance productive enterprise, would they stand a chance against the big guys?

Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher's office and offers to write up his experiences, the publisher looks at him blankly and asks, "Why would anyone want to read that?" 

Michael Lewis is the author, most recently, of Boomerang: Travels in the New Third World (W. W. Norton).