Why He Left Goldman

It was the culture, he contends

Recall about a year ago. It was the op-ed piece heard all around the business world, when Goldman Sachs vice president Greg Smith dared to announce his resignation on the pages of the New York Times. After an 11-year stint in its institutional sales unit, Smith announced he had had enough and it was time to depart. He decided to share publicly why his disappointments in the business culture led to his decision to leave a fairly lucrative position.

(See  CFN: Goldman Sachs and the Letter, Mar-2012)

At the time of his departure, Smith was head of U.S. Equity Derivatives in Goldman's London office. (In London, he was an "executive director," which at Goldman was equivalent to a U.S. "vice president.") He had progressed swiftly through the ranks and was highly regarded for his expertise in markets, clients and derivatives in his special perch. By most accounts, he was not a difficult employee and colleague. He had made meaningful contributions in many ways--building a new business in Europe, preparing  market insight in the form of frequent, written commentary to Goldman salesmen around the world, and agreeing to transfer to the London office, when he didn't want to.

The revered culture of clients coming first had evolved, he said, at Goldman in ways he felt uncomfortable. The crisis was partly at fault.  Every partner, managing director, vice president, and associate, he observed, was out for him- or herself. Survival was the mission of the day.

It boiled down to this, he observed:  The trading culture had evolved into a massive mission of accumulating "GCs"--gross credits, sometimes at the expense of doing the right thing for the client.  The value of the employee to the firm was determined by the total amount of GCs he or she accumulated during the year.

Mindful of this, the employee overlooks teamwork, partnership, and support for other colleagues and focuses singularly on maximizing GCs and, therefore, the year-end bonus, even if it means swiping GCs rudely and unfairly from colleagues or being willing to unload "toxic waste" securities onto unsuspecting or unknowing clients. 

So after he had his apocalyptic moment (on a business trip to Southeast Asia while Goldman executives had been summoned to a Congressional hearing), he decided to quit. As many expected, after the  op-ed blast in the Times, Smith went into hiding. He emerged from a  self-imposed rest when he published a book last fall to recount his experiences at Goldman and explain his well-publicized departure more thoroughly.  The book, Why I Left Goldman, received lukewarm reviews.  Reviewers and industry-insiders, and perhaps Government regulators, were looking for something more, perhaps a hint of scandal, a more detailed account of mishaps and fraudulent business practice. He presented none of that.

The book is similar to other detailed accounts of a young banker or trader's venture onto Wall Street. They are views from the ground up, from the trenches, from entry-level positions as the novice tries to adapt to the ways of a zoo-like trading room.  Smith's book reminds us Michael Lewis' Liar's Poker."

Smith is fresh out of Stanford and thrust onto a derivatives-sales desk.  Lewis had just graduated from Princeton and encountered the bowels of Salomon Brothers' legendary trading floor and lived to write one of the most spectacular, humorous accounts of Wall Street ever.  Smith's book is also similar to a lesser known, recent book, A Colossal Failure of Common Sense, by Lawrence McDonald of Lehman, an up-and-coming fixed-income trader, who viewed his last days at Lehman, not with sarcasm and humor, but with anger and humiliation.

Notwithstanding the so-so response to a book we knew he would write, for the newly minted MBAs, those who contemplate career paths in sales & trading at major banks, those who are considering institutional sales, the book has its strengths. It is an invaluable introduction to the trading floor, describing the environment, work pace, client groups, and specific roles.  Institutional sales will have an important role at big banks, as regulation prohibits much of proprietary trading.

Reform and new rules, whenever they are finally implemented in full, will permit the big banks (from Goldman Sachs to Bank of America and Citigroup) to engage in trading on behalf of clients, not necessarily on behalf of themselves.  Proprietary trading is being eased out of existence. Trading for clients will be permissible.  (Trying to distinguish between the two will sometimes be a nightmare for banks and regulators.)

Some will argue that as technology advances and clients get more comfortable with it, electronic trading and execution will replace sales professionals.  But as the book shows, sales professionals will be necessary to bring clients on board, help them with best execution, guide them through rough markets, and present new trading ideas.

Thus, the book provides a day-to-day overview of institutional sales and explains a conventional career path from analyst to managing director.  It describes the structure of a sales & trading organization, the management, and the relationship among sales professionals, traders, researchers, and floor brokers. It shows how the firm generates revenues from trades, the more difficult or exotic trades generating the largest commissions or mark-ups.

The book is a reflection on firm culture from the vantage point of the trading floor. Firm culture is important, but what is more critical is how the culture penetrates all activity, roles, relationships and transactions in the firm. Smith, in the book, contemplates firm-wide goals vs. personal goals, how the two intersect, but how they sometimes collide. And he shows how bad, selfish personal goals can be inferred from vague firm-wide goals.

Especially in the wake of the financial crisis, he highlights how personal goals sometimes became a higher priority than firm goals. In a vivid, poignant scene in the days after the collapse of Lehman Brothers as markets nose-dived, Smith watches a senior managing director on the trading floor glued in a silent trance to the computer screen, studying his personal portfolio of assets, having no care in the world with what was going on elsewhere with his clients or with Goldman.

Thirdly, Smith demonstrates the impact of corporate politics on a personal's career success. He had learned quickly, perhaps in his first few weeks, that success at Goldman or at any large financial institution would not be a result of effort, hard work, and time commitment. To get promoted to vice president or managing director, to have the opportunity to work abroad (in London, in his case), or to transition into a different role all required special networking skills. He would either have to learn those skills or rely on buddies, mentors or managers to guide him.

In his case, Smith wasn't a schmoozer. He was, however, fortunate to have advocates nearby on the trading floor, champions on his behalf, people who liked him and were willing to grant a favor or speak up on his behalf.  Generating "GCs" (or client-related revenues) could lead to a big bonus, but finding someone to spread the word about him could lead to a promotion. Over time, he learned to win favors in bars, accompany managers on business trips and bachelor parties, attend social functions and farewell receptions, and even allow clients to look good in parlor ping-pong games.

Diversity. Smith's book hardly touches the subject.  He had the opportunity to address it, because he describes himself as an outsider trying to find his way within a powerhouse firm. (He is a foreigner who grew up in South Africa before coming to the U.S. to go to college.)  He might have been so consumed by his frustration with how he perceived Goldman had evolved that there was much he couldn't get to. (For example, he barely discusses other parts of Goldman, including its investment-banking machine or its sectors in asset management, private equity or private banking.)

It appears, nonetheless, that women in sales & trading have had scattered chances to reach the highest rungs.  A handful of his bosses or senior colleagues, over the decade, are women. And he observes how they have had to evolve to survive or change to battle the machismo ways of trading-room trenches.

The fanfare around the op-ed piece book will likely fade into memory and become a mere, colorful chapter in the history of Goldman. Smith will likely move on beyond Wall Street. He learned a lot about global markets, clients, derivatives, financial products, exchanges, and business management. You can bet he has another book in mind. He highlights the foibles of certain banking cultures in this one. In the next, he'll probably present solutions.

Tracy Williams

See also:

CFN: How Does Goldman Do It? 2010
CFN:  Goldman Tweaks the Ladder, 2012
CFN:  The Role Goldman's Board, 2010
CFN:  Morgan Stanley Tries to Please Analysts, 2012
CFN:  The Volcker Rules, 2011

Why is Dell Going Private?

Many know the story already. The story about how Michael Dell formed his own company in his college dorm room to sell personal computers. The story's plot soars toward an apex. Dell eventually took his company public, seized substantial market share, and eventually became a billionaire. His stake in the company today exceeds $3 billion (while he has maintained substantial wealth outside the company).  But the story is far from over.

In recent years, the company has struggled to maintain market share and has suffered ups and downs in earnings and share prices.  It has reached a pivotal point, where it must decide what it wants to be, who its customer base should be, and what products, beyond conventional desktops, should it sell.  In recent days, founder Michael Dell decided it's time to buy back the company from the public and take it private with investments from himself and the private-equity firm Silver Lake. While reviewing alternatives (remaining a public firm or seeking higher bids from other groups or Michael's group), the company's board is near an agreement to permit Michael Dell and his group to purchase Dell, Inc. for $24 billion.

Fans of private-equity can't help but emit a cheer in unison, as they see this as a signal that the era of big deals (big buy-outs in the billions) is back. That era has not yet returned, partly because big deals require mammoth financing, especially from banks, who have been shy in recent years about stepping up to provide funds to support leveraged buy-outs.

Meanwhile, why has Michael Dell decided that it makes sense to go private via a buy-out?

The proposed deal is not too complex. Michael Dell has found a way to raise $24 billion.  He will contribute the $3 billion-plus stake he already has and will add more (up to $1 billion) from his own investment fund, the fortune he extracted from Dell and runs separately.

Silver Lake will invest $1 billion. Dell, Inc., the company, will repatriate as much as $3 billion in cash in overseas subsidiaries to repurchase stock of existing shareholders. And then comes a mountain of debt:  $14 billion from a bank group and $1 billion from Microsoft. Microsoft still yearns to work with Dell in partnership, perhaps to ensure Dell will continue use its software. But Microsoft elected to invest in the form of a loan, not in equity. (Microsoft's loan suggests, too, it desires an exact cash return on its investment and a fixed time horizon.)

Nevertheless, the deal shoves three times the amount of its existing debt burden onto the Dell operation and onto its balance sheet.  That is essentially the traditional impact of private equity--the rearrangement of a company's capital structure such that debt has a prominent role and operations must generate a consistent flow of cash to meet higher levels of interest and principal payments. Deal-doers and industry analysts had already determined the company is capable of generating a stable flow of cash from current operations from quarter to quarter to service debt. But more debt  requires the company to meet sometimes onerous financial covenants and requirements.

Michael Dell had likely decided the following:

a) Under a different ownership and capital structure, he could implement a different company strategy to achieve earnings growth and, therefore, a substantially higher company value to the new owners.

b) With the new structure, he can make changes more quickly and easily without having to encounter many constituents, including other major shareholders, the public markets, research analysts, a board of directors he has less control over, and a band of other naysayers.

c)  As a private company, he could take more risks with new ventures, ideas and products without the laborious task of vetting public markets, ratings agencies and research analysts.

d) And as private company, he won't have to present a quarterly scorecard of earnings projections, targets to meet, and overall performance and be routinely scolded or penalized for not meeting targets.

A typical private-equity investor has a goal of going private, stripping down the company to reduce costs, increasing cash flow and re-emerging as a more valuable public company. Founder Michael Dell has yet another fundamental objective. He must determine and then implement that relevant strategy. That strategy will likely rely less on a consumer client base and seek to tap into a corporate client base.  It wants to escape desktops and laptops and venture more deeply into corporate systems, data storage and cloud computing. Dell, its founder reasons, must become less like Apple or H-P, more like IBM.

It will be easier to engineer such a transformation beyond the sneering eyes of public markets. Reporting requirements will be less strenuous. Moreover, it will easier to digest a quarterly loss, while the new company funds new investments or a radically different structure. 

Not having to pay a dividend will help, too. Cash normally paid out in dividends will be diverted to meet interest and principal payments on the debt load. The burden of debt will seem to be more bearable than the burden of meeting research analysts' expectations four times a year.

There are still risks in a different approach and risks in implementing a substantially different strategy. But as Dell and Silver Lake see it, there are risks in the status quo.

There will also be the challenge in managing the expectations of three large stake-holders:  Silver Lake, Microsoft as lender, and the bank group.  Silver Lake will not want to be a permanent investor. It will want out and seek to enforce a five-year plan.  Banks will impose somewhat strict financial requirements, will require approval of certain business strategies, and might choose to be difficult in a downturn. 



The deal is not yet done, but will likely proceed as announced. Dell, Inc., the company, not Dell the founder, will be permitted to explore other offers and strategic options to be fair to current shareholders. (There could be another suitor interested in offering more than $24 billion.)

Michael Dell gets five years to prove going private was the best move for current shareholders, for Silver Lake, and for himself.

Tracy Williams

See also

CFN:  What Should Apple Do With Its Stash of Cash? 2012

Where Do You Want to Work in 2013?

Lists can be amusing. Sometimes they might be taken seriously.  Magazine and media companies like to produce them--even if they are flawed or biased, because they sell thousands of copies of issues or generate thousands of Internet clicks. They spawn discussion and banter and get people talking. Some lists should be shrugged off and dismissed. Some are worth examining, because they might offer helpful information about the topic being ranked.

Employees like good pay, good benefits and, yes, fitness centers

Fortune Magazine compiles many lists from year to year. One recent list in its latest issue is its "Best 100 Companies to Work For." To believe in the list and to ensure it's credible and useful, you must believe in its criteria. You must be assured that Fortune has amassed significant data and measured the information properly. Ask employees why their company is a favorite place to work, and you may get dozens of reasons, including especially compensation, benefits, vacation privileges, opportunities for promotion, and challenging assignments.  Some would contend a favorite place is one that is thriving, doing well and generating upward-trending, consistent stock-market returns.

For all the splash in a big cover story on top companies, Fortune's criteria was relatively simple:

a) Does the company plan to hire in substantial sums in the year ahead?
b) Are employees generally satisfied?
c) Can management be believed?
d) Is there camaraderie among colleagues--genuine collegiality?
e) Is turnover less than 5% annually?
f) Is compensation in the top quartile in the industry?
g) Do benefits apply also to same-sex couples?
h) And, yes, does the company offer free access to on-site fitness centers?

Did it miss anything? Of course, it did. It missed a lot.  It didn't address diversity and inclusion clearly. It didn't factor in long-term, sustained performance (Will the company be around 20 years from now?). And it didn't address whether a company is sufficiently managed and strong enough to survive downturns, market-related disasters, or unforeseen, colossal risks. All these factors might be important to at least a few prospective employees. Yet it knew it couldn't complete a list if it tried to capture too much, especially if the list relied on the completion of thousands of surveys.

Google is no. 1 on the list for the fourth time. BCG, the consulting giant, is in the top 10. Companies like Accenture, DreamWorks, Nordstrom, and Intel also made the top 100. Quite notable is a prominent lack of financial institutions.

Given:

a) what the industry has endured the past several years,
b) the topsy-turvy reorganization most large financial institutions must go through,
c) all the uncertainty financial institutions face in finding a way to generate revenues in the decade ahead,  and
d) the discouraging, frequent announcements of lay-offs and staff reductions...

Given all that, it's not a surprise that most of the best-known financial institutions don't find themselves on Fortune's list.

Strike one:  Many large banks, as we know, are not in aggressive hiring modes.  Check the business headlines weekly to see which ones have decided to rethink, re-situate and reduce staff in institutional trading and investment banking.

Financial institutions engage in some form of hiring every year. There is attrition all the time, and it makes economic sense to hire at entry levels annually to keep pipelines flowing and production efficient (and maintain long-term ties with top business schools). "Production" is efficient when junior bankers can do senior-level work at one-quarter the cost. And if you were to peek more closely, many institutions are indeed adding more staff in compliance, regulatory reporting and risk management. 

But for Fortune's benefit, not many plan to expand substantially on the front lines.   


Strike two:  Because of staff reduction, massive reorganizations and employee-related stress arising from uncertainty and confusion, employee turnover is bound to be more than Fortune's 5% benchmark.  If there is a corporate-banking unit with 100 professionals today, you can be assured a year from now, more than five (and as many 10-20 or more) won't be in the same slot a year later.

Strike three:  The culture, workplace and environment in many financial institutions are not the same as that of a Silicon Valley enterprise.  It's not likely the bank, insurance company or investment manager will support free access to a gym on the premises, free gourmet lunches or freedom to engage in playthings during work hours. Employees may wish for such privileges, and they would benefit from immediate access to a fitness center.  At many banks, still rebounding from the crisis, all that is not a priority.

That's not to say no financial institution made its list.  A few did. Many of the familiar names didn't.

St. Louis-based brokerage firms Edward Jones (No. 8) and Scottrade (53) fared well. And that may be no accident.  Both firms rely on the performance, contributions and production of a large, far-flung network of brokers, consultants and representatives. They obsess in making sure the brokerage force is happy, content and well-compensated.  They ensure the same force has ample administrative, securities-processing, and funding support.  Employees don't work under the haunting, continual threat of being laid off.

Another Midwest-based brokerage firm, Robert W. Baird, with similar privileges and values, appears on the list, too (14). The firm is applauded for rewarding employees with a significant ownership stake.

American Express is one of the few large, well-known financial companies on the list (at 51), despite its own restructuring hurdles the last few years. The company's business faces mammoth challenges in the years to come. It makes the list, nonetheless, because of its remarkable efforts in diversity and because of its widespread support of employee affinity groups (groups with common interests or shared backgrounds).  It also has fitness centers.

In pre-crisis years, on any list where MBAs in finance express where they want to work, Goldman Sachs always found itself at or near the top.  For MBAs from top schools, Goldman offered new associates prestige and compensation. It also offered MBAs a chance to learn and master all the nuances of finance, a chance to thrive in a highly charged environment, a chance to travel to all parts of the world, and a chance to exploit the strengths of the Goldman name to get deals done, make trades, invest on behalf of clients, and finance companies and municipalities.

Post-crisis, Goldman, too, would be vulnerable to the strikes above.  As a "bank holding company," it is re-inventing itself or reshaping itself to contend with regulation and profit-margin struggles.  Yet it squeezes its way onto Fortune's list (93), partly because of a commitment to reward employees exceptionally--via benefits and the resumption of huge payouts every January.  MBAs in finance still want to work there, perhaps for a handful of years, just enough to taste the experience, learn, earn and then move on to the next rung on the career ladder.

Of the Fortune 100, only about 10 are bonafide financial institutions (about half of which are insurance companies). The industry is not in the same turmoil as it was a few years ago. In fact, most have begun to report upward trends in earnings and share prices, while they spruce up balance sheets.

But much jockeying continues.  Much tweaking and twisting of old business models are occurring.  And for now, the maneuvering behind closed doors among the senior ranks, as they adapt to new rules and new markets, comes at the risk of neglecting to make themselves employers of choice. At least that's what Fortune's new list implies.


Tracy Williams

See also:

CFN: The Best Places to Work, 2010
CFN:  The Best Places to Work, 2011
CFN:  Affinity Groups in the Workplace, 2011
CFN:  Time to Make that Move? 2010