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« Big Bird Richer Than Mitt Romney, Sesame Street CEO Makes $1M Per Year | Main | WATCH LIVE - Final Presidential Debate 2012 »
Tuesday
Oct232012

60 MINUTES: Inside The Goldman Sachs Muppet Show

Buy side vs. sell side.

From tonight's 60 Minutes, an interview with former Goldman VP Greg Smith who became famous last year for resigning from the firm in a scathing editorial in the New York Times.

This has been happening for decades.  Investment banks create products to be sold to clients.  I've worked both sides.  There's no excuse for buy side stupidity.  This is how the industry works.  Buyer beware.  Nor is it in any way limited to exotic derivatives product.  It happens with virtually every IPO that comes to market.

Go talk to Morgan Stanley.  Facebook ipo @ $38, anyone?

---

Greg Smith On Why He Exposed The Goldman Muppet Show

Full transcript at CBS

Partial snip:

Smith says he grew even more disillusioned after the Senate hearings, when he and a Goldman Sachs partner met in Asia with a major client, the head of one of the biggest funds in the world.

Greg Smith: And he looks me and a partner in the eye and says, "Let me be honest with you guys. We don't trust you at all. But don't worry. There's nothing to worry about. We're gonna keep doing business with you because you're the biggest bank. You're the smartest. And actually we have to do business with you." Now my jaw almost dropped because hearing from one of your biggest clients that they don't trust you when your whole mantra and reputation is built on trust, to me, it was the worst possible thing you can hear. And then I leave the meeting and the partner from Goldman Sachs who I was with is jubilant. "This is great news. The client is gonna keep doing business with us because they have to."

Smith says that in Goldman's offices the promotions and big money went to people who sold complex products with unseen risks and hidden fees.

Greg Smith: So what Wall Street will do is, they will approach one of these philanthropies, or endowments, or teachers' retirement pensions funds, in Alabama, or Virginia, or Oregon, and they'll say to them, "We have this great product that is gonna serve your needs." And it looks very alluring to these investors. But what they don't realize is that up front, they're immediately paying the bank two million dollars or three million dollars because of their lack of sophistication.

Anderson Cooper: So they don't say to the client: the price you're paying for us to execute this trade is a million dollars?"

Greg Smith: That's a huge part of the problem. Not at all.

Anderson Cooper: How can it be that the client doesn't understand what the bank is making?

Greg Smith: These are very complicated derivative securities which takes a Ph.D. in physics or in engineering to understand. And there are pension funds and mutual funds that represent people's 401(k)s and retirement savings that are trading the most complex instruments out there without fully understanding them.

Anderson Cooper: So, did the people you work with want unsophisticated clients?

Greg Smith: Getting an unsophisticated client was the golden prize. The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.

In 2011, Smith moved to Goldman's London office, the very month the company announced a wide-ranging effort to improve its business practices. Smith saw little change. He say's his coworkers in London repeatedly referred to their clients as "Muppets" and not in the kindhearted way their Sesame Street creators intended.

Greg Smith: In Europe, a Muppet is a term for someone you can manipulate, someone who is an idiot.

Anderson Cooper: So people at Goldman Sachs, who you worked with, used to call their clients idiots, essentially?

Greg Smith: All the time. Not to their face, but behind their back.

Anderson Cooper: You heard people you work with talk about overcharging clients, bragging about it?

Greg Smith: Within week one, I met a junior guy who was 24 or 25 years old and the first thing he told me was he'd just traded a sophisticated derivative with a Muppet client who paid the firm an extra million dollars because the client was so trusting that he didn't check the price with other banks. Now you could think to yourself, "Is this some rogue guy who's just talking callously about clients?" But his boss, who's a managing director, was sitting right next to him nodding and chuckling along. And--

Anderson Cooper: The boss was laughing about it?

Greg Smith: Absolutely. They were both laughing about it.

***

Related from around the web:

Big Bonuses At Goldman For 2012

Goldman Reveals Its Greg Smith Battle Plans (NY Mag)

The Greg Smith vs. Goldman Sachs Death Match Is On

 

 

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Reader Comments (17)

A Recovering Housing Market is Great News for Too-Big-To-Fail Banks (the rest of you be damned)

http://business.time.com/2012/10/18/a-recovering-housing-market-is-great-news-for-too-big-to-fail-banks/?iid=biz-main-lede
Oct 22, 2012 at 3:14 AM | Unregistered CommenterLadyLiberty
Greg Smith's Story `Never Made Sense,' Cohan Says

http://www.bloomberg.com/video/greg-smith-s-story-never-made-sense-cohan-says-Z5Kjsc7TRQmM4wAJLvgfrg.html

Smith asked for a raise to $1 million and was denied a few weeks before his op-ed.
Oct 22, 2012 at 3:18 AM | Registered CommenterDailyBail
Just to be clear, I'm not defending Goldman, just pointing out that this type of attitude is pervasive on the sell side of wall street. Always has been and always will be. Goldman is no different from every other sell-side firm, and much worse things used to be said about clients than 'muppets' back in the day, as I will be showing later today in another story.
Oct 22, 2012 at 3:20 AM | Registered CommenterDailyBail
The media focues on Smith's motivation to avoid talking about Goldman's many frauds, which are so numerous (Abacus, Timberwolf, Greece, etc.) as to raise the question: what does Goldman do that is NOT fraudulent?

Remember: there are 3 ways to form new capital--mining, manufacturing, and agriculture. Goldman does none of these. It moves and sells paper. So what exactly does fund Goldman's ludicrous compensation schemes, which are on par with rock stars and pro athletes?

Amicus Jesse's take on Smith's treatment by the Goldmanite media is on the (real) money:

"The rationales take on the character of the schoolyard. Everyone does it on Wall Street, and singling out Goldman isn't fair. And what was Greg Smith expecting? Everyone knows Wall Street is crooked and will do whatever it takes to abuse their customers and make millions out of it. And if the customers are dumb enough to fall for it, they deserve it. What a fool.

"What people do not realize is that the fraud cuts so deep and wide that it hard to escape it, even if one has no dealings personally with any of these firms. These Wall Street financiers have their hands in everyone's pocket through the manipulation of the financial system and the money supply. And IF YOU DO NOT UNDERSTAND THAT BY NOW, YOU UNDERSTAND NOTHING."

http://jessescrossroadscafe.blogspot.com/2012/10/greg-smith-and-goldman-sachs.html
Oct 22, 2012 at 12:58 PM | Unregistered CommenterCheyenne
Cohan's real problem is that Greg is not related to the Smiths of Tel Aviv.
Oct 22, 2012 at 1:10 PM | Unregistered CommenterTed Sargeant
Steve,
when you think the homebuilders will be a good short? they are all up 200% for the year on the bs manipulation.
Oct 22, 2012 at 1:11 PM | Unregistered CommenterSell Short
Goldman fraud is another story. I was speaking to the narrow issue of wall street buy side vs. sell side, and the term 'muppets.' In the 80s and 90s, our institutional sales staff used to call it 'ripping the face off of clients' when they made a good sale.

This is why it's important that buy side folks, pension funds, states, municipalities, etc., have former wall st. sell siders on their staffs, otherwise they can become prey. As a buy sider, skepticism should be your watch word, and you should assume that you are being ripped off on every deal, and then act accordingly.

Here's the simple secret to buy side success. When Goldman comes knocking with a new product to sell you, get a copy of the numbers and then call Morgan Stanley. Ask them to look over the deal and report back to you. Then when Morgan Stanley hits you back with a deal of their own, call Goldman and ask them to examine the Morgan deal you've been offered. Pit them against each other and you will quickly learn how each plans to rip you off. Do this on a few deals and you'll be better prepared to act on your own in the future.
Oct 22, 2012 at 1:22 PM | Registered CommenterDailyBail
When you think the homebuilders will be a good short? they are all up 200% for the year on the bs manipulation.

---

I'm not following that sector closely. But I'lll try to take a look later. I do agree that housing optimism is getting out of hand. Shadow foreclosure inventory will continue to haunt many regions.
Oct 22, 2012 at 1:27 PM | Registered CommenterDailyBail
Let’s bet the farm. Everybody in.


http://martamossburg.com/columns/39-the-baltimore-sun/241-kamenetzs-risky-pension-bet
Reading about how you guys think of the manipulated trading on the stock market. Just seems like a real bad idea. Apparently there are some other municipalities either cosidering doing this or are actually doing this. Could be catastrohic if shit hits the fan.
Oct 22, 2012 at 2:31 PM | Unregistered CommenterSKINFLINT
"AND IF YOU DO NOT UNDERSTAND THAT BY NOW, YOU UNDERSTAND NOTHING."

Cheyenne Jesse's right, I think I understand.
I think the Banks are being managed by professional swindlers committing criminal fraud and extortion to steal trillions of dollars from the Global Economy. The corrupt federal governments insure their success with powerless, incompetent regulators trying to enforce complicated, incomprehensible laws and regulations and by stonewalling any serious investigation of what is obvious felony fraud on an unimaginable scale.

When someone like Smith lifts the lid on the fancy Goldman Sucks box or other corporate box of crooks, and show the rotten illegal garbage inside, Anderson Cooper and the other MSM corporate puppets bury him with meaningless bullshit that the sheeple think is real investigative journalism.

The only people I know who have had any dealings with Wall Street, lost their retirement and investments in the crash and they don't accept the government and MSM bullshit that no laws were broken.
Oct 22, 2012 at 3:50 PM | Unregistered CommenterSagebrush
Sage, There ain't gonna be anything left anyway. They are going to take it all and leave us with nothing, like in Greece and take off for their islands and yachts while the unfortunate slug it out on the streets.
Oct 22, 2012 at 4:16 PM | Unregistered CommenterSKINFLINT
Great link Skin:

http://martamossburg.com/columns/39-the-baltimore-sun/241-kamenetzs-risky-pension-bet

I used to live in Baltimore, worked for Alex Brown back in the 90s.
Oct 22, 2012 at 4:23 PM | Registered CommenterDailyBail
Which part of Bawlmer did you live?
Oct 22, 2012 at 6:09 PM | Unregistered CommenterSKINFLINT
Hell, Is Alex Brown still around. They used to have offices over there by the now defunct mall in O.M., which by the way is slated for the big crumble so that they can put box stores up there. Too many murders and such, just like at the waterfront where running gun battles are common enough. Don't go there anymore though.
Oct 22, 2012 at 6:21 PM | Unregistered CommenterSKINFLINT
Gary Kaminsky bashing Smith and sniffing GSuchs jock this AM on CNBCuks made me wanna puke. He failed to mention GSuchs $500mil fine a few years back for f'ing their clients...

Also, Lloyd B was asked to comment on Buffet's generic comments on banking revenues this AM, including comp and he effectively said GSuchs is only about comp. It's what they do. It's what they are. GSuchs has a couple of buildings, and people to put in them to make money. That's it. Sounds like God's work to me...
Oct 24, 2012 at 3:05 PM | Unregistered CommenterJosie
I'll look for it, thanks josie.
Oct 24, 2012 at 3:20 PM | Registered CommenterDailyBail

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