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Does Greg Smith Have a Point? 7 Differing Views

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A day after the release of the former Goldman Sachs employee's op-ed, pundits across the financial industry weigh in on its merits.

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Former executive director of Goldman Sachs (GS) Greg Smith shocked the financial world yesterday when he renounced his employer of 12 years with an op-ed in the New York Times. The letter included his belief that Goldman's "environment now is as toxic and destructive as [he has] ever seen it" and that he could no longer work there in good conscience because of how Goldman exploits its clients. The op-ed has gone viral with myriad parodies and spoofs spawning all over the Web (see Why I Am Applying for an Executive Director Position at Goldman Sachs), and by late yesterday afternoon the article had drawn 3 million page views.

Many have dismissed Smith's writing as a diatribe from a disgruntled employee, saying that he has negatively colored normal business practices in the financial industry. Despite his senior-sounding title, he was one of 12,000 vice presidents in the company, and some downplayed the article by conjecturing that a midlife crisis or a cut in bonuses motivated Smith to write the article.

Others have lauded his article and defended his expose on the current state of Goldman. These people assert that the financial industry has changed for the worse in the past decade, only focusing on profits to the harm of clients and society.

Who's right? Below are seven thoughtful responses to the letter, including everyone from Smith's former bosses to Goldman's clients.

1. The Company Morale-Boosting Response
CEO and Chairman Lloyd Blankein and President and COO Gary Cohn responded yesterday to the letter of their former employee with an internal memo to employees highlighting how the company sees itself as possessing a healthy corporate culture and a great client-centered attitude. Here's an excerpt:

In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people. Everyone is entitled to his or her opinion. But, it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.

While I expect you find the words you read today foreign from your own day-to-day experiences, we wanted to remind you what we, as a firm – individually and collectively – think about Goldman Sachs and our client-driven culture.

First, 85 percent of the firm responded to our recent People Survey, which provides the most detailed and comprehensive review to determine how our people feel about Goldman Sachs and the work they do.

And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today's commentary was, that number was similarly high.

Read the full memo here at the Wall Street Journal.

2. The Smith-Speaks-Truth-to-Power Reaction
Some high-profile individuals who wish to see more reform enacted in Wall Street spoke up to support Smith. Former Federal Reserve Chairman Paul Volcker weighed in and sided with Smith, pointing to the bank bailouts in 2008 for the corruption of the investment banking industry, MarketWatch.com reported. Volcker affirms that Goldman's business model results in Goldman having an incentive to drain money from its clients.

Volcker said that the Wall Street powerhouse's transformation into a publicly traded firm that acquired a large trading operation drove it away from its former strategy of focusing on client needs.

"That changed the mentality and I'm afraid it's a business that leads to a lot of conflicts of interest," Volcker said at a conference hosted by The Atlantic magazine.

Volcker referred to Smith's editorial, which said that "…the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."

Volcker also raised concerns about Wall Street compensation, pointing out that the years leading up to the financial crisis were "brilliant years" for Wall Street but that there was no evidence that the years were equally great for the economy. He added that a lot of young talent, "the best of American graduates," was "siphoned off" by Wall Street.

Check out the full article here.

3. The Smith-Is-a-Hypocrite Argument
Nathan Vardi at Forbes wrote an instant-hit article accentuating the conspicuous inconsistencies in the message of Smith's op-ed, and Smith's critics have voiced similar responses. Vardi's article became popular when he attributed Smith's criticism to a midlife crisis and a disappointment with the direction of his life.

But after making the decision to go to Wall Street, it took him until 2012 - almost 12 years after signing up at Goldman Sachs - to figure out there was something "toxic" going on. Somehow during the credit boom years when Smith was banking big bucks that no doubt have set him up for life, the state of affairs wasn't as bad as it is now at Goldman. Smith had a lot of "love" for the place during that period, when Goldman played an important role in the Wall Street machine that nearly brought down the world.

The way Smith tells it, his decision to work on Wall Street was pure and good, driven by his desire to best help his huge hedge fund clients. But somehow Goldman recently lost its way in helping two of the planet's biggest hedge fund managers earn 20% performance fees.

Smith is not the first person who wants to tell his former bosses to shove it. He is also not a whistleblower. He remained happily employed at Goldman after it took a massive taxpayer bailout. He stuck around to enjoy the firm's $45 billion of 2009 revenues after Goldman got $10 billion from the Treasury Department's Troubled Asset Relief Program and sold $29 billion of low-cost bonds backed by the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program. Goldman was also allowed to become a bank holding company and borrow cash from the Federal Reserve's discount window for just about nothing while riding the yield curve the Fed had set up. Smith stayed for all that.

Here is the rest of Vardi's critique.

4. The "So, What?" Shrug-off
Matt Levine from Dealbreaker.com wrote a piece for CNN that highlights why clients know what they are getting into with Goldman, and why he believes this letter isn't scandalous. He also points out that Smith's 2011 bonus check would have cleared before his departure.

Yes, there was once a time when big investment banks made most of their money by advising clients on mergers and capital raising, rather than by trading with clients. And yes, those times are long gone. But they were long gone when Smith started. And he was in the derivatives sales business, which has always and necessarily been a business in which Goldman is on one side of a trade and its clients -- or, in the more neutral term popular in such businesses, "customers" -- are on the other. Each dollar that Goldman makes comes directly out of its clients' pockets.

Of course, Smith's clients, who included some of the largest hedge funds and asset managers in the world, knew this. They did not come to Smith for impartial advice about their personal and professional problems. Rather they came to him to execute trades at attractive prices and for trade ideas, ideas that they hoped would make them money but that they certainly expected would make Goldman money.

Thus, worries that clients will flee Goldman are overblown. Goldman's clients know that the firm is trying to make money off of them -- and they know that every other bank is trying to do the exact same thing. They are not looking for charity. They are looking for good ideas and good execution, and the bank that provides those benefits will continue to get business.

Levine shares the rest of his thoughts here.

5. The Magnanimous-Adversary Response
JP Morgan (JPM) CEO Jamie Dimon did not take the opportunity to capitalize on Goldman's PR headache. He sent out a memo to the bank's global operating committee and other parts of the company to warn them against acting like vultures with Goldman clients. In other words, no poaching allowed.

Today's New York Times op-ed by a Goldman Sachs executive is generating a lot of discussion around the street. I want to be clear that I don't want anyone here to seek advantage from a competitor's alleged issues or hearsay – ever. It's not the way we do business. We respect our competitors, and our focus should be on doing the best we can to continually strengthen our own standards.

Reuters discusses it more here.

6. The That's-How-Clients-Remember-It-Too Reaction
Smith has found allies among some of wealthy former customers of Goldman. Forbes reports that billionaires Jim Clark and Stephen Jarislowsky sided with Smith and announced they would never do business with Goldman again. Writes Forbes:

Clark, who re-joined this year's Forbes Billionaires List after dropping off for three years, tells me via email that Smith's criticism of Goldman's treatment of its customers is "what I experienced over the four to five years" he entrusted some of his funds with the firm's private wealth management division. [...]

Billionaire Stephen Jarislowsky, CEO of Canadian investment firm Jarislowsky, Fraser, says he also supports Smith's op-ed. "It's about ethics and fiduciary responsibility, and the lack thereof," explains Jarislowsky. "If you're a fiduciary you should work for your client and not for anyone else. If you're a doctor, you're not supposed to work for your pocketbook, but for your client's health."

The full article is here.

7. The Sell-Off
Investors sided with Smith yesterday, according to Bloomberg, but the impact has worn off as Goldman shares are up in today's trading.

Goldman Sachs Group Inc. (GS) saw $2.15 billion of its market value wiped out after an employee assailed Chief Executive Officer Lloyd C. Blankfein's management and the firm's treatment of clients, sparking debate across Wall Street.

The shares dropped 3.4 percent in New York trading yesterday, the third-biggest decline in the 81-company Standard & Poor's 500 Financials Index, after London-based Greg Smith made the accusations in a New York Times op-ed piece.

Here's the rest of the article.

Editor's Note: What do you think of Greg Smith's op-ed? Is he brave or self-righteous? Leave us your comments.
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