A golden boy, an executive working at Goldman Sachs came to his senses. Greg Smith executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa resigned on Wednesday. Not only that. Greg Smith went public and wrote an open letter in New York Times in form of Op-Ed column. There he talks loudly about what other golden boys just whisper: That profits come before the interests of investing clients, who are often derided as “muppets” by people at Goldman Sachs.
Smith, who worked for Goldman Sachs for 12 years, wrote in his letter among other about GS policy culture towards its clients:
“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.”
In another part of his letter, Smith wrote:
“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.” (Read Smith’s Full Letter here)
Unfortunately Greg Smith did not mention anything about how Goldeman Sachs helped Greece to set up a secret loan swap deal in 2001, a loan swap that helped the country hide its debt levels in order to meet requirements to join the European Union.
The deal has been called a “very sexy story between two sinners” by former head of Greece’s Public Debt Management Agency, Christoforos Sardelis, because of the intentions of the two parties involved—Greece was trying to cover up its high debt levels and Goldman Sachs was trying to make a profit.
Bloomberg has the nice and sexy story….
Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.
On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.……
Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed.
Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.
A gain of 600 million euros represents about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001, a business segment that includes the bank’s fixed-income, currencies and commodities division, which arranged the trade and posted record sales that year. The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan.”
Read the Full Bloomberg Story HERE. It reads like a book thriller full of suspense….