Wednesday, March 14, 2012

Goldman's Muppet Clients

Goldman Sachs is in the news again, this time because a now former executive by the name of Greg Smith wrote a scathing resignation letter published in the New York Times titled Why I Am Leaving Goldman Sachs. In his article, Mr. Smith (who no doubt will be going to Washington when Congress calls for another investigation), accuses his former employer of putting its own interests ahead of its clients'. That may come as a shock to some people, but I would bet that most clients suspected as much anyway.

Mr. Smith says that Goldman's stock in trade for 143 years has been trust. However, he says that today a new culture has taken over, one which stresses "ripping eyeballs out" and "getting paid." Perhaps most interesting was Mr. Smith's claim that during the past 12 months he heard five different directors refer to their clients as "muppets."

Anyone familiar with the real Muppets would know that Misters Statler and Waldorf (pictured above) are the only ones who are wealthy enough to be Goldman clients. Interestingly (and this is no joke), Goldman Sachs has actually arranged financing deals for movie studios trying to raise money from hedge funds and private equity firms. I could find no evidence, however, that Goldman was involved in any of the Muppet movie deals.

In all seriousness, this is just another incident that tarnishes the reputation of Warren Buffett's favorite investment bank. Buffett, who has long been critical of investment bankers, has praised Goldman Sachs on a number of occasions. Berkshire Hathaway still holds a sizable financial interest in Goldman in the form of warrants, an investment that came about during the financial crisis when Buffett was approached by a former Goldman banker named Byron Trott.

One has to wonder what purpose Mr. Smith's public letter of resignation serves. He must have been very angry or fed up to do what he did. It certainly was one of the greatest displays of publicly burning ones bridges. His actions make it all but certain that no other bank will hire him. Yet Mr. Smith is probably wealthy enough to live comfortably for the rest of his life without having to work. I have no doubt, however, that a number of investment firms would be happy to have him on their staff. Yet criticizing Goldman so publicly for unethical behavior will also bring a certain degree of scrutiny on how exactly Mr. Smith has been earning his living over the past 12 years. Because he must know this, he must also be quite confident that he can withstand the scrutiny.