LONDON/NEW YORK Goldman Sachs faced an unprecedented assault from one of its own on Wednesday after a banker published a withering resignation letter in the New York Times, calling the Wall Street titan a "toxic" place where managing directors referred to their own clients as "muppets."
It was the latest blow for the investment bank. The company -- dubbed a "great vampire squid" in a 2009 article in Rolling Stone magazine -- has been embroiled in the biggest-ever insider trading scandal on Wall Street. And just weeks ago, a top judge criticized Goldman for big conflicts of interest in an energy deal.
In an opinion column in Wednesday's Times, Greg Smith, who worked in equity derivatives, said Goldman had become "as toxic and destructive as I have ever seen it.
"It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as 'muppets,'" Smith said.
In the United States "muppet" brings to mind lovable puppets like Kermit the Frog, but in Britain, "muppet" is slang for a stupid person. (Goldman, as it happens, was at one time also the bank for the family of Muppets creator Jim Henson.)
Goldman Sachs issued a short statement in response:
"We disagree with the views expressed, which we don't think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves."
In a memo to staff, Goldman Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn said Smith's views were in the minority among his 12,000 fellow vice presidents.
"And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that the firm provides exceptional service to them," they said in the memo, a copy of which was reviewed by Reuters.
Congressman Barney Frank, an architect of the 2010 Dodd-Frank financial reform law, said Smith's piece would have "a big impact" on the banking industry's efforts to push back against financial reform.
"It puts the burden on Goldman Sachs and others to show us how what they do benefits the clients and therefore the broader economy," he told Reuters.
Goldman shares closed 3.3 percent lower, on a day when broader markets were up slightly. At least one bank wasted no time in trying to take advantage of the situation.
"In my experience ... client success and firm success can peacefully coexist; in fact thrive," Harris Private Bank Chief Investment Officer Jack Ablin said in an open letter.
"Having served clients for nearly 30 years I can tell you that the long-term success of any institution, whether in the financial field or not, depends on the long-term success and satisfaction of its clients," said Ablin, who oversees $60 billion of investments for individuals and families.
But the company, which sometimes lacks for defenders, garnered at least some public support in response to Smith.
"The many people we have dealt with there have all been exceptionally talented and high-grade, and never once have we had a negative experience in which we felt that they took advantage of us or didn't do what they said they would do," well-known fund manager Whitney Tilson said in a note.
FRIENDLY AND GENUINE?
Smith, who did not return voice mails on his cellphone, carried the title of executive director, but it was not nearly as illustrious as it might sound. Goldman's roughly 12,000 vice presidents and executive directors compare with 450 managing directors -- the next rung up in the Goldman hierarchy and a job classification that Smith didn't achieve. Overall, the company has about 33,000 employees, meaning that 36 percent of Goldman's workforce carried a title similar to Smith's.
South African David Berman, founder of hedge fund Durban Capital and friends with Smith, called him "a very understated, humble type of guy who would tell the truth as truth is important to him.
"But he never struck me as the Goldman-type as he isn't aggressive nor (the) salesman type one expects," Berman said, adding, "I am convinced this is for real with no selfish intent here."
According to the British Financial Services Authority's register, Smith joined Goldman's UK unit a year ago.
Johannesburg-born Smith attended universities in his home country and in the United States, where he received a degree in economics from Stanford University in 2001. He also interviewed to be a Rhodes Scholar in South Africa in 2002.
While at student at Stanford he had a summer internship at Paine Webber in 1999 and a summer internship at Goldman in 2000. Upon graduating from Stanford in 2001, he landed at Goldman.
Internally, Smith's op-ed piece was not necessarily well received. A trader, who knew Smith in passing, said the company is telling staff that Smith is a disgruntled employee who is leaving because he didn't make managing director.
This trader, who did not want to be named, says former Goldman colleagues are saying that Smith "wasn't very commercial," which means he wasn't producing the kind of sales the company wanted.
PAST MEDIA STORMS
Goldman Sachs -- fourth among investment banks last year based on fee-income rankings compiled by Thomson Reuters and Freeman Consulting -- has a history of tension with client interests, experts say.
"Greg Smith refers to the last 12 years, but in fact Goldman has been doing this kind of thing since going back to the Great Depression," author William Cohan told Reuters Insider.
"It's not just the last 12 years; unfortunately it's part of the firm's DNA," said Cohan, author of the Goldman profile "Money and Power" and a former Wall Street banker himself.
In recent years the company has faced other high-profile incidents damaging to its image after the near-collapse of the global banking system in 2008.
Earlier this month it was accused of a major conflict of interest for advising El Paso Corp on its sale to Kinder Morgan, while being a significant shareholder in Kinder.
A lawyer representing an Australian fund in a lawsuit against Goldman over mortgage-backed securities, filed in New York last year and alleging fraud and breach of contract, said he may seek Smith's deposition to help bolster his case.
"Part of Goldman's defense is everybody is sophisticated and everybody knew as much as we knew did," the lawyer, Eric Lewis, said. "But if you're calling your clients muppets -- most muppets don't have the cranial capacity of Goldman."
Paul Volcker, a former Federal Reserve chairman, called the Smith piece a "reflection of the change in market mentality over the last 15, over the last 20 years" at an economics summit in Washington hosted by the Atlantic magazine.
Unsurprisingly, Smith's resignation letter captured the imagination of Twitter users. "Greg Smith" was a worldwide trending topic early Wednesday, meaning it had suddenly spiked in interest, while both that and "Goldman Sachs" were trending in the United States.
Many of the commentators expressed surprise about the allegations in the piece, while others called for Smith to shed light on why he left the bank, or pointed out that he seemed to have been employed in a comparatively junior role.
As happens on the Internet in cases like this, near-instant parodies of Smith's letter cropped up. The most popular by far had Darth Vader of "Star Wars" fame resigning from the Empire via a letter similar to Smith's.
"To put the problem in the simplest terms, throttling people with your mind continues to be sidelined in the way the firm operates and thinks about making people dead," the film franchise's dark lord wrote.
(Additional reporting by Kirstin Ridley, Laurence Fletcher and Naomi O'Leary in London, Pascal Fletcher and Marius Bosch in South Africa, Matthew Goldstein, Katya Wachtel, Sam Forgione, Jennifer Ablan and Fred Katayama in New York and Alexandra Alper in Washington; Writing by Douwe Miedema in London and Ben Berkowitz in Boston; Editing by Edward Tobin, Andrew Callus, Alexander Smith and Steve Orlofsky)