Why I Left Goldman Sachs: A Wall Street Story (20 page)

My mother, who always worried about how much money I was spending on the family, would have none of it. Nadine agreed. I was outvoted. So we schlepped their bags onto the subway and rode through the wilds of Brooklyn—where we had to make two more transfers, schlepping the suitcases up and down subway steps. It was madness. But we saved $120 that day.

Goldman didn’t go down. But the storm kept raging. Those who wanted to survive had to reinvent themselves. One way to do it, if you were a salesperson fortunate enough to still have a few great clients left, was to go into overdrive and simply do more bread-and-butter business than anyone else. This was tough, since clients were unwilling to take risks. They were frozen, sitting on their hands, waiting for the next shoe to drop. Another way was to try to convince your clients to buy structured derivative products (black boxes) that might temporarily give them some hope: “Look, the markets are really panicked, but if you buy our GoldDust2000 product, instead of losing ten percent, you’re only going to lose two percent.” Since these structured products were created by the bank that sold them and not widely traded, they came with the markup one expects from any bespoke product. These kinds of murky promises were legally okay, because in the twenty pages of disclaimers on the document, somewhere there would be a line that read, “This may or may not be accurate; we may or may not believe what we’re telling you; we may or may not have the opposite view…”

Throughout the 2000s, Wall Street structured complex derivatives to help European governments such as Greece and Italy mask their debt and make their budgets look healthier than they actually were. These deals generated hundreds of millions of dollars in fees for the banks, but ultimately helped these countries kick the can, and their problems, down the road. Failing to address these problems culminated in the European sovereign debt crisis that the world is trying to deal with today.

But it doesn’t end with state governments. Municipalities and cities also get pulled in. Goldman sold a derivative called a swap to the City of Oakland to help it protect itself against rising interest rates. The product ultimately backfired, and is now costing the city millions of dollars a year. In 2009, JPMorgan Chase was forced to pay the SEC $700 million to settle a probe into the sale of structured derivatives that pushed Jefferson County, the most populous in Alabama, to the brink of bankruptcy.

There was tremendous potential for short-term profit in structured derivative products—also tremendous potential for short-term loss. But when clients are scared, you’re not telling them about possible downsides. Those are buried in the fine print of the ten-page disclaimer at the end of the contract. Most clients pay as close attention to that as you do when you hit the Accept button before downloading music from iTunes.

Buying one of these structured derivative products is a bit like going into a store and buying a can of tuna. The can clearly says, “Bumble Bee Tuna,” and features a cute little logo. You go home, and most of the time you enjoy some delicious tuna. But let’s say you get home one day and find dog food inside the can.
How can this be?
you wonder.
They told me it was tuna.
But then you look at the back of the can. There, in print so tiny as to be almost unreadable, is printed something like “Contents may not be tuna. May contain dog food.” The governments of Greece and Italy, the Libyan Investment Authority, the City of Oakland, the State of Alabama, and countless other endowments and foundations have all opened their cans and found dog food.

And somewhere along the way, Goldman Sachs stopped being the market maker it used to be, a firm that stood up and took risk in order to help clients, no matter how tumultuous the environment. The firm became pickier about what business it did, and did not, want to facilitate. It was willing to take reputational hits, as long as it kept its profit and loss intact. This was a long way from the days, weeks, and months post-9/11, when the firm’s main priority had been to facilitate client positions and get the markets up and running again. Back then, it was not the time to exploit our clients’ and competitors’ weaknesses—as now should not have been.

Back then, we were saying, “Come to us. We’re ready to get our hands dirty. This is why we’re here.” Now a client would call in and ask us to help them (“Can I get a price on ten thousand Vodafone put options?”—a strategy to protect their Vodafone stock holdings), and we were saying, “No, I’m sorry. The markets are too tough. It’s too risky right now.” We had pulled in the drawbridge, leaving our clients to fend for themselves. (Remembering the crisis, one salesperson I knew said, “Clients would call in and we would effectively be telling them, with our unwillingness to facilitate their business, to go fuck themselves.”)

Finally, Goldman really had become more like a hedge fund, concerned more with helping itself than helping clients, with doing only the business we thought could make us a lot of money and ensure our survival. A perfect case in point was the lucrative fiefdom of Bobby Schwartz.

There was a whole segment of hedge funds that had the wrong trade on before Lehman Brothers went belly-up. These funds were almost always short volatility: in other words, they’d bet that, on average, markets would remain fairly calm, even though there might be some hiccups along the way. Academic studies had shown this strategy to work over prolonged historical periods. The problem was that these hedge funds were not anticipating “Black Swan” events, a term coined by Nassim Nicholas Taleb to explain once-in-a-thousand-year-type events that people do not expect and that models can’t predict.

What we saw in 2008 and 2009 was a series of Black Swan events that the statistical models would have told you were not possible, according to history. Instead of the S&P 500 Index having average daily percentage swings of 1 percent, for a sustained period the market was swinging back and forth more than 5 percent per day—five times what was normal. No computer model could have predicted this.

The markets exploded in volatility, and the funds got crushed. They were actually going out of business because the pain on their portfolios was so great. Suddenly they needed to unwind everything; they needed to get out of all their derivatives positions. This was where Bobby came in.

A client would call him and say, in a panicked voice, “I need to get out of this immediately. What’s your price?” And Bobby would quote them a substantial price. Goldman was taking significant fees on these clients. During one period in the midst of the crisis, Schwartz was bringing in $2 million a day on his trades. In a sense (a very cynical person would say), Goldman was hastening the rates at which the clients were going out of business, because of the amounts we were charging them. But then, the market was in turmoil; of course we had to charge high fees, because we were taking a big risk by facilitating this business. However, there is such a thing as a middle ground.

It was almost like a fire sale. And the firm rewarded Bobby for doing this business. At the end of 2008, a year when very few people were getting promoted, a year with the smallest MD class in a long time, Bobby’s name was on the list of new managing directors. One couldn’t begrudge him his monetary success: After all, he was just doing his job, and he was really good at it. But I remember thinking,
Welcome to the changing world of Goldman Sachs leadership.

Company culture and morale seemed to be bygone values. To paraphrase that great sage Puff Daddy, it was all about the Benjamins now. If you were in the right place at the right time, if you were the trader with the “hot pad” (credit-default swaps, for example), or if you were the salesperson with the clients who were running for the exits, and if you had the instincts to know how to capitalize on this, then—
boom!
—the firm promoted you and paid you well and you were now a leader of the firm. This was the new model of Goldman Sachs managing directorship from about 2008 onward.

Bobby gave a big figurative click of the heels at his bonus that December. There was a story that back in 2004, at our Derivatives team-building clambake in the Hamptons, Daffey had seen Bobby tossing a football around in the afternoon and joked, “Dude, you throw it like a girl. That’s gonna cost you ten grand this year,” the joke being that because Daffey determined everyone’s bonus, he could easily subtract $10,000 at the end of the year. Fast-forward four years, and ten grand had become a rounding error for Bobby. He was now playing in the big leagues. He used part of his 2008 bonus to buy an apartment on Park Avenue.

I was as scared as everyone else that fall. My solution was to embark on a self-reinvention plan of my own. During lulls in trading—there were a lot of lulls in trading—I began trying my hand at market commentary.

My idea was to jot down my thoughts about the markets—how I believed they might react to certain news items, what sort of patterns I was seeing, whether there was any hint of a recovery—and send out my short essays as Internal e-mails. I wanted to take an approach that was completely unbiased by what Goldman Sachs was saying. I decided to write down exactly what I thought, without fear of consequences. The worst that could happen was that people would disagree with me.

My models were two managing directors in Derivatives Sales who had been writing similar reports for years. These two guys were the gold standard as far as I was concerned: I admired their unbiased way of presenting content. They would always include a few charts to illustrate their concepts; they would cite public sources to ensure objectivity, as opposed to referencing Goldman’s internal information. And they would add humor, to make something as arcane and dry as derivatives sound interesting.

In October and November, I tried my first couple of pieces. I spent three or four days writing each, sometimes during those lulls but mostly at night, after work. After condensing the pieces, I got our Compliance department to sign off on them. Though I originally meant these commentaries for Goldman eyes only, there was no telling which clients they might be passed along to. The worst thing you could do would be to reveal a confidential client name or a specific trade, so I worked hard to make everything I wrote observational, using publicly available information, packaged in a way that formed a thesis.

Then I showed the pieces to my two MD mentors, asking for advice and constructive criticism. I said, “What do you think of the way I’m making this argument? Is there a way to strengthen it?” Or, “Can you help me spice this up a little bit?” I wrote in my own style, but I wanted to learn everything I could from them.

They both believed in me from the start, and both started sending my commentaries to their biggest clients, which was very gratifying. One of the MDs sent a piece of mine to Paul Tudor Jones and his team, saying, “This is from the real-money guru on my team—you’ll like this.” (
Real money
, a term I liked, referred to the category of long-term-oriented institutional investors I covered—asset managers, mutual funds, and pension funds—and to sovereign wealth funds. Some also called it
slow money
—as opposed to
fast money
, which referred to hedge funds, which dealt in more leveraged instruments and quicker ins and outs of positions.) Tudor Jones actually wrote back, saying only, “Thanks,” but indicating that he’d actually read the piece. Coming from a hedge fund icon, that felt cool. What was cooler, though, was that the MD had had enough confidence in me as a commentator to endorse my piece and send it to his most important client.

My ambition was to become the Real-Money Guy, the spokesperson for what the real-money clients were doing—in the same way that one of my MD mentors had become known for writing about what the macro hedge funds were doing and thinking. I tried to build a niche and become an internal expert at understanding flow of funds, a topic many people cared about. Who was buying and selling the market? Were retail investors adding money to mutual funds? Were pension funds reweighting their asset class distribution from fixed income to equities? Were hedge funds increasing their speculative short positions in E-mini futures? Could volumes or trends at certain times of day tell us anything about what direction the market might head in? I had found a way to consolidate these types of metrics into a thesis about what effect they could have on capital markets.

By nature, the macro hedge funds were very interested in what real money was doing: Even though hedge funds do a lot of turnover (trading in and out of positions often), they represent only about 5 percent of ownership in U.S. equity markets. The real whales in the market are the mutual funds, pension funds, and sovereign wealth funds, with trillions and trillions of dollars in assets under management.
The real money.
When real money starts moving over a period of time, the whole market starts moving with it. And in similar fashion, my clients were very interested in what the hedge funds were doing because of the funds’ ability to impact the market over minute-to-minute or day-to-day periods.

Then I struck gold. Writers everywhere will tell you they’re always surprised when something they’ve done catches on in a big way. This is especially true for someone who’s just a beginner, as I was. On December 11, 2008—my thirtieth birthday—I sent out my third piece of market commentary, and it got more attention both inside and outside Goldman than I ever would have imagined.

It was a month after Obama’s election, and despite his promises of hope and change—and his closeness to important Wall Street players such as JPMorgan Chase CEO Jamie Dimon and Robert Wolf, then UBS’s chairman in the Americas—the mood in the markets was still apocalyptic. I was looking for hope myself, and I had a solid idea about where to find it.

My piece focused on something that many people had an intuition about but didn’t fully understand: the concept of dry powder. During the crisis, the first thing all the mutual funds and pension funds started doing was selling—and they kept selling, deepening the crisis. As a result, the funds built up a huge cash base, also known as “a wall of money,” or “dry powder.” (The term is an old military one, from the days when it was important to keep gunpowder supplies safe from moisture.) Hundreds of billions of dollars were just sitting on the sidelines.