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Video: Former Wall St. exec: Firms ‘ripping off’ clients

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updated 10/22/2012 7:45:28 AM ET 2012-10-22T11:45:28

As a Goldman Sachs executive, Greg Smith had an amazing career within one of the most respected investment institutions in the world. But when he noticed that the system was transforming the prestigious firm into a corrupt financial predator, he spoke up with an Op-Ed in the New York Times that shook Wall Street to its core. In “Why I Left Goldman Sachs,” he tells his story. Here’s an excerpt.

Chapter 9

"Monstruosities"

On April 16, 2010, I went to the South African consulate in Midtown Manhattan to renew my passport; in a few days I would travel across the Pacific to visit a number of clients in Asia. After some haggling to expedite my application, I walked outside into one of those crisp early spring days that make you love living in New York. I took my time finding a cab to get back to the office, enjoying a few minutes of sunshine, and started thinking ahead to my trip. It seemed that slowly, though excruciatingly so, the world was healing.

I was looking forward to visiting some of my clients whom I had not seen in a number of months. We would discuss the latest developments in the markets, but we would also go out for dinner and drinks and have some fun. A big part of this business is face-to-face interaction; there is a human element to it. That was probably the thing I always liked most about being in sales. Some people in investment banking find traveling ten thousand miles around the world to have a few meetings to be a chore. But it never got old for me. Business-class flights with wine and sashimi at thirty thousand feet. Ritz Carlton or the Four Seasons? Three-star dinners with a $150 per-person budget when dining with clients. If I had time: a stop at a tailor in Asia to get some quality suits hand-tailored (for less than you would pay for one at Brooks Brothers). Also, a short ferry ride to the Wynn Hotel in Macao (a crazy sight—an almost identical replica of the one in Vegas, but smaller). What part of this is a chore? These are things I always tried to savor and appreciate.

A quick glance at my BlackBerry put an end to my Asian daydream.

Grand Central Publishing

My eyebrows rose. The markets were not rallying. In fact, Goldman Sachs’s stock was down more than 10 percent, and volume was ten times what was normal. Something was wrong. Badly wrong. I started scanning my e-mails. The same word showed up in every subject line of every e-mail on the screen: SEC, SEC, SEC. The Securities and Exchange Commission. The federal agency responsible for enforcing the securities laws and regulating the financial industry.

I jumped in a cab and hustled back to the office at 200 West Street. Riding back downtown, I started reading the e-mails. I couldn’t believe it. It was the worst possible thing you could read.

FOR IMMEDIATE RELEASE

SEC Charges Goldman Sachs with Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

I read further . . .

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The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

My immediate reaction: this must be a witch hunt. The SEC has been asleep at the wheel for the last two years and now it needs to show the public that it’s doing something? Why isn’t it going after the bad guys, the ones who caused this mess, the ones who took the irresponsible risk, blew up their companies, and brought the entire global economy to its knees?

My immediate feeling: anger.

The cab finally pulled up in front of Goldman Sachs. I paid the driver, walked into the lobby, scanned my ID, and took the elevator to the fourth floor. When I walked out onto the trading floor, I found the familiar hum of activity in the vast and sparkling space muted. Every face I saw was pale with shock. People were staring open-mouthed at their screens. I could instantly see on the tape running across the bottom of a nearby monitor that Goldman Sachs stock was down close to 13 percent. (It was by far the largest and most precipitous percentage decline in our stock since the dark days of late 2008 and early 2009.) A drop of 13 percent in this calmer climate could mean only two things: panic and disaster.

I quickly went to my desk and pulled up my Bloomberg screen. Whenever Bloomberg News reports a vitally important story, the news scrolls up on the screen from bottom to top in red. It is not a frequent occurrence. My entire screen was red.

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What kind of misrepresentations was the SEC alleging? I started talking to my colleagues; everyone was trying to piece it together. The chatter on the floor was about one of our products built on CDOs (collateralized debt obligations, basically a sausage stuffed with subprime mortgages). Why now? Why us? Everyone, including me, was on the defensive. Ever since the federal government had bailed out the banks thanks to TARP, there had been murmurings in the world at large that someone needed to be held accountable for the crisis; for months there had been the sense of a gathering lynch mob. A series of big articles—in Rolling Stone, New York magazine, and Time, among others—castigated Wall Street in general, and Goldman Sachs in particular, for surviving and thriving on the backs of U.S. taxpayers, for using bailout money to make big bets, then using the winnings to award executives obscenely big bonuses. When I heard the term vampire squid, popularized by Matt Taibbi in Rolling Stone, I was repulsed by it. Propaganda, I thought. It angered me. Why don’t they ever write about 10,000 Women and the way the firm is helping to nurture the next generation of female entrepreneurs or any of the other philanthropic endeavors we fund and lend our expertise to?

Everybody on the trading floor, myself included, had the same reaction to whatever it was that the SEC was cooking up: What the hell are these guys doing? Why aren’t they going after Dick Fuld for cratering Lehman, or Stan O’Neal of Merrill Lynch, or Jimmy Cayne of Bear Stearns, who all ran their firms into the ground—some of them, while they were on the golf course or at the card table? They just want to get us because we’re the only ones doing okay . . .

Clients began to call, wanting to know what was going on.

Management had been very quick to anticipate this. Don’t say anything substantive, we were told; don’t be defensive. Just say, “We’re not sure; we’re looking into this.” We’ll have a list of talking points for you later in the day.

Within an hour or two we got an internal e-mail that gave us some very general talking points and a slightly better understanding of what had been alleged. The SEC was charging Goldman with materially misstating and omitting facts in disclosure documents for a synthetic CDO product that we’d originated. The product was called Abacus 2007-AC1.

Abacus 2007-AC1. I had never heard of it. Nor had anyone sitting around me. Nor had any of my clients. It sounded like something from another planet. These CDO deals and other customized products in the derivatives space were always given enigmatic, important-sounding designations. It was marketing. It turned out that Abacus was an entire class of CDOs that Goldman had been marketing since 2004—a product that had come back to haunt us. The number referred to the date of issue.

Goldman Sachs responded quickly, and in no uncertain terms: “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.” The firm hired a prominent lawyer, Greg Craig, President Obama’s former White House counsel, to spearhead its defense. Good, I thought, not knowing anything about Abacus or what the facts of the charges were. Let’s fight back. Hard.

Amid the chaos and the flurry of client phone calls and internal e-mails, Mr. Cleanse was marching up and down our row. “We want to hear what clients are saying,” he said emphatically. You didn’t have to do much reading between the lines to see that senior management was freaked out that clients were going to start panicking and pulling their money.

At that point I was in the process of booking my trip to Asia. “Should I still go?” I asked Cleanse. “Absolutely,” he said. “Now is a very important time to make this trip. We need for clients to see us, and we need to be in front of them. We need to defend ourselves in exactly the right way.”

I decided to go to Asia and stand up for Goldman Sachs.

Excerpted from WHY I LEFT GOLDMAN SACHS by Greg Smith. Copyright (c) 2012 by Greg Smith. Reprinted by arrangement with Grand Central Publishing.

© 2012 MSNBC Interactive

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