‘Muppet’ fury wipes $2bn off Goldman Sachs’ value

GOLDMAN Sachs Group has seen $2,15bn of its market value wiped out after a midlevel executive assailed CEO Lloyd Blankfein’s management and the firm’s treatment of clients, sparking debate across Wall Street.

The shares dropped 3,4% in New York trading on Wednesday, the third-biggest decline in the 81-company Standard & Poor’s 500 f inancials i ndex, after London-based Greg Smith made the accusations in a New York Times op-ed piece.

Mr Smith, born in SA, who also wrote that he was resigning after 12 years at the company, blamed Mr Blankfein and Goldman president Gary Cohn for a "decline in the firm’s moral fibre ".

They responded in a memo to current and former employees, saying that Mr Smith’s assertions did not reflect the firm’s values, culture or "how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients".

Former Federal Reserve chairman Paul Volcker, whose "Volcker rule" would limit banks such as New York-based Goldman Sachs from making bets with their own money, called Mr Smith’s article "a radical, strong" piece.

"I’m afraid it’s a business that leads to a lot of conflicts of interest," Mr Volcker said at a conference in Washington.

Goldman Sachs slid $4,17 to $120,37 on Wednesday. The shares are still up 33% this year.

Goldman Sachs spokesman David Wells declined to comment beyond the contents of the memo and an earlier statement that he disagreed with Mr Smith.

Executives at Goldman Sachs had not changed their behaviour even after the firm paid $550m to settle a fraud lawsuit with the Securities and Exchange Commission and had been accused by the US Senate’s p ermanent s ubcommittee on i nvestigations of misleading clients, Mr Smith wrote.

The company published a report in January last year with 39 recommendations on how to improve its business practices and client focus.

"Over the last 12 months I have seen five different MDs refer to their own clients as ‘muppets’, sometimes over internal e-mail," Mr Smith wrote. "It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you."

The article was e-mailed across Wall Street. One employee at Bank of America’s Merrill Lynch division, a competitor to Goldman Sachs, said his team was told not to send copies to clients.

Parodies such as "Why I am leaving the Empire, by Darth Vader" on thedailymash.co.uk and theborowitzreport.com’s "A Response from Goldman Sachs" also circulated.

"It does hurt them," said Stephane Rambosson, managing partner at executive search firm Veni Partners in London and a former Citigroup banker. "The perception of the firm has gone down, and a lot of the winners of tomorrow are sitting back and thinking, ‘Do I want to be with Goldman?’"

There is little evidence that the firm’s popularity had been hurt by the Securities and Exchange Commission lawsuit, the Senate’s criticism or a recent ruling by Delaware Chancery Court Judge Leo Strine, who faulted Goldman Sachs’s handling of a conflict of interest. The bank won more business than any other in advising firms on takeovers and equity offerings last year, data show.

Some clients of Goldman Sachs’s sales and trading department, the business in which Mr Smith worked, said they are always cautious in dealings with Wall Street banks.

Mr Smith was an executive director in London, a title equal to vice-president in New York. The firm employs almost 12000 vice-presidents, and most said in a recent internal survey that "the firm provides exceptional service" to clients, Mr Blankfein and Mr Cohn said in the memo.

Mr Smith did not respond to calls seeking comment.

Seven former Goldman Sachs partners and MDs, positions that are more senior than vicepresident, said that Mr Smith should not be taken seriously because he was a junior employee and may have been disgruntled about his pay or career. All asked not to be identified because they did not want to risk ruining their relationship with the firm.

Still, six of the seven said they agreed with Mr Smith’s criticism of how the firm has treated clients under Mr Blankfein and Mr Cohn and that current members of the management committee would, too. Even so, they said they did not expect the board to take action or that anything would change because the firm has made money and outperformed most rivals.

"He may have aired a few comments that are true, but he’s placed himself on a pedestal," said Jason Kennedy, CEO of the Kennedy Group, a London-based recruitment firm. "The reason he’s been at Goldman Sachs for 12 years is that he liked the name and probably liked the money."

Bloomberg