[Greg Smith in video: One of the principles I really like is about reputation and how important our reputation is. And that really comes to integrity and how important integrity is within the firm.]
Born and raised in South Africa, Smith was an economics major at Stanford University when Goldman recruited him as a summer intern in 2000 and hired him the following year. Smith rose through the ranks at a time when Goldman's revenues from trading increased five-fold in five years. It was the result of a boom in complex financial products and a loosening of financial regulations that enabled Goldman and other banks to vastly increase profits by doing transactions for their clients while trading with their own money as well.
Greg Smith: Goldman Sachs, and other firms on Wall Street, started learning how to use the information they were getting from their clients, in order to bet with their own money. At times, betting against their clients. And you know, that's a real changed mentality from how do we do what our client wants to do? Not how do we take advantage of what the client's doing to make money for ourselves?
Smith's job was to sell derivatives not the complicated bets that nearly blew up the financial system in the collapse of 2008, but more straightforward, openly traded products like options to buy stock or commodities. The problem, he says, is that inside Goldman's offices the promotions and big money went to people who sold complex products with unseen risks and hidden fees.
Greg Smith: So what Wall Street will do is, they will approach one of these philanthropies, or endowments, or teachers' retirement pensions funds, in Alabama, or Virginia, or Oregon, and they'll say to them, "We have this great product that is gonna serve your needs." And it looks very alluring to these investors. But what they don't realize is that up front, they're immediately paying the bank two million dollars or three million dollars because of their lack of sophistication.
Anderson Cooper: So they don't say to the client: the price you're paying for us to execute this trade is a million dollars?"
Greg Smith: That's a huge part of the problem. Not at all.
Anderson Cooper: How can it be that the client doesn't understand what the bank is making?
Greg Smith: These are very complicated derivative securities which takes a Ph.D. in physics or in engineering to understand. And there are pension funds and mutual funds that represent people's 401(k)s and retirement savings that are trading the most complex instruments out there without fully understanding them.
Anderson Cooper: So, did the people you work with want unsophisticated clients?
Greg Smith: Getting an unsophisticated client was the golden prize. The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.
Smith says he first heard of a very sophisticated product called "Abacus," in 2010 when the SEC accused Goldman of misleading investors who bought it. Goldman paid a record $550 million fine to settle the charges.
Goldman Chairman Lloyd Blankfein was grilled about that deal and others by the Senate Subcommittee on Investigations. Committee Chairman Carl Levin wanted to know why clients should trust Goldman if it was recommending they buy securities that the company was betting against.
[Carl Levin: You are betting against the very product you are selling & you're just not troubled by it?
Blankfein: I'm sorry, I can't endorse your characterization...]
CEO Blankfein and other Goldman executives testified that when the firm does certain types of transactions with institutional investors, it's understood that the company doesn't have the same responsibility it does when it's acting as a financial adviser.