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James Max: In defence of Goldman Sachs

16th Mar 12 8:33 am

You will have read the vitriolic resignation letter Greg Smith, formerly Executive Director of Goldman Sachs, published this week. The public disgust for the investment bank is at boiling point. James Max believes everyone has got it wrong about Goldman Sachs, and we should applaud its economic contribution. Do you agree?

If Greg Smith hadn’t resigned from Goldman Sachs and if I was his boss, I’d have fired him. He’s clearly not suited to a career in investment banking.

From the media firestorm generated from this individual’s resignation letter about his former employer you’d have thought he was telling the truth. A whistle-blower of true integrity that finally revealed what it’s really like to work for one of the world’s most impressive investment banks.

As usual, the court of public opinion reached a swift “guilty as charged” verdict. Before you finalise your thoughts, I’d suggest you look a little deeper.

Mr Smith had worked for Goldman Sachs for 12 years and he’s an Executive Director. You might think that’s a very senior role to have. But it isn’t. EDs, as they are known, are usually practitioners with 7 to 10 years’ experience. The next rung of the ladder is to become a Managing Director.

Was Mr Smith overlooked for promotion?  Did his bonus payment not amount to the level he thought it should have been?  There’s more to this than meets the eye.

Let me tell you a thing or two about how bankers are paid. Base salaries are kept low and the bonus element is highly elastic. Not low by comparison to average salaries of course, but in comparison to the total amount or “total compensation” paid to people in such high-flying jobs.

The reason for this is simple. As an operation that relies on talent going through the front door every day, its assets are the people who work at the company. If the firm makes profits, then payments can be made to shareholders, to invest in that company and to staff. If profits falter, staff costs are minimised. It’s a sensible business model, yet few seem to understand how it works.

It’s also worth mentioning how bonus payments are formulated. You don’t just get a dollop of money from the profits that come through the door. Every investment bank (although slightly different in its approach) will have a 360-degree review process. That means you are analysed by your peer group, the people who work for you, with you and the people you work for.

It’s an extremely complicated process. Firms invest huge sums to make them effective. The benchmarks of performance are not just fiscal. Your behaviour, approach and attainment of personal development goals will all be taken into account.

Don’t think your bonus will be paid to you immediately, or in cash. It won’t. Often you will receive shares that vest over a period of time.

I used to work for one of the world’s great investment banks, Morgan Stanley. I have been through this remuneration process. It is taken very seriously and rarely produces the wrong result.

What is even more important is the culture or franchise of the firm. While I may not have worked for Goldman Sachs, I have certainly conducted business in the past with many of their operatives. Without exception I have found them to be exceptionally talented, bright, engaging, and most importantly people who operate with integrity.

And that is the key to any business and its success. It is absolutely right that any company will, particularly in these difficult economic times, focus on the bottom line.

Focusing on how much clients are paying in fees is the right thing to do, if you are concerned about profitability. If you combine the analysis of fees, with costs of operation together with firm franchise, you’ll create a successful client oriented operation.

In his resignation letter, Mr Smith complained that his bosses referred to some clients as “Muppets”. What do people around you call their colleagues, clients or customers? Far worse than “Muppets”, I suspect.

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He talks of the vitriol that has been heaped on companies such as his former employers, and says they should change. As if to say that the financial crisis was entirely Goldman Sachs’ fault. When it wasn’t.

This strange world that we live in seems to think that it’s just your money that bailed out the banks, your money that’s lining bankers’ pockets and that the system nearly collapsed because of their actions.

While some banks and bankers have been utterly negligent, to blame the whole industry is wrong. Perhaps a little more in-depth analysis is required. Particularly from politicians who are ever so keen to be removed from any of the blame they should take for the creation of this unholy mess.

Companies sell products and services that clients need. No customers? No deal. Just look at the Woolworths’ business model for that. To sustain a business based on kids nicking stuff from the Pick n’ Mix was never going to be sustainable.

Mr Smith states that products and services that were not required were sold to clients. Counterparties to investment banks are supposed to be smart individuals. They are paid a lot of money to do their jobs. Some of the responsibility for the services they buy and the deals they execute should be down to them.

Of course, we expect firms to comply with the law and to have integrity. Don’t expect every product that comes onto the market to be something you require. Shops are filled with things we don’t need. From juicers that don’t juice very well to mobile phones that aren’t iPhones and pre-prepared dinners that are gloopy and virtually inedible.

It’s down to you as a consumer to be smart and savvy. Investment banks often deal in products that protect the downside. You don’t buy insurance because you expect to make a profit on your premiums. You buy insurance because you may just need it but hope you won’t.

A spoilt, arrogant child could have written Mr Smith’s resignation letter. Or a lover who has been jilted. He was given the opportunity to work for one of the world’s greatest firms, and he blew it.

Not only did he nuke his career at Goldman Sachs, but also his chances of being employed elsewhere. Personally, I’d fire anyone who employed him. I

f his CV were to arrive on your desk, would you really employ someone who lists as one of his personal achievements a bronze medal in table tennis? He’s not a winner, just a sore loser.

Lucky, then, that he has been paid so well in the past that he probably doesn’t have to work again.

Funny, also, that the “Greg Smith Charitable Foundation” has yet to be set up to make the world a better place from the spoils of his 12 year career at Goldman Sachs. Don’t hold your breath.

After a small blip, Goldman Sachs’ share price has bumped back up. Probably because it’s a great business.

Contrary to Mr Smith’s letter, my advice to any student who is considering a job with an investment bank is that: if you receive an offer, take it. If it’s an offer from Goldman Sachs? It’s the bes
t job offer you will ever receive.

Finally, while I am not here to blindly defend Goldman Sachs or indeed other investment banks, let’s not forget the positive contribution to our economy that they make: many billions in tax (through corporation tax, income tax, national insurance, transaction tax, stamp duty, VAT, Rates to name but a few), thousands of jobs, supply and support services and so on.

With any business employing 30,000 staff, there are bound to be a few bad apples. With any industry there are always products, services and practises that can improve. However the current public mentality is that all banks are bad (investment or retail) and the continual bashing will do some kind of good. It won’t.

The positives of these businesses outweigh any negatives by some considerable margin.

James Max presents Weekend Breakfast every Saturday and Sunday mornings on London’s Biggest Conversation, LBC 97.3 FM. He is a qualified surveyor and worked in property and finance for 15 years. After working for one of the country’s leading property advisory firms, he completed healthy stints in investment banking and private equity, before becoming a candidate on The Apprentice, which launched a career in broadcast media. Visit JamesMax.co.uk.

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