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The Greg Smith Goldman Sachs (NYSE: GS) Letter Led to $2.2 Billion Loss – More to Come?

The scathing op-ed piece by former Goldman Sachs Group Inc. (NYSE: GS) employee Greg Smith did more than draw attention to a "toxic and destructive" firm culture – it drove down Goldman's market value by $2.2 billion yesterday (Wednesday).

Goldman Sachs Stock Price History

Goldman shares fell 3.4% Wednesday, the third-biggest decline in the Standard & Poor's 500 Financials Index.

Smith pointed to Chief Executive Officer Lloyd Blankfein and company president Gary D. Cohn as responsible for letting the firm falter.

"I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival," wrote Smith.

Smith painted a picture of executives with zero respect for their clients, saying it makes him "ill how callously people talk about ripping their clients off," and that in the past year he's heard five different managing directors refer to their clients as "muppets."

Even though Smith's Goldman letter weighed on the bank's share price Wednesday, shares had almost made up the losses by midday trading today (Thursday).

So just how much will the Goldman letter actually weigh on GS stock and popularity?

"It does hurt them," Stephane Rambosson, managing partner at executive search firm Veni Partners and a former Citigroup Inc. banker, told Bloomberg News. "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?'

Aftermath of the Greg Smith Goldman Sachs (GS) Letter

Former American International Group (AIG) Chairman Maurice "Hank" Greenberg said Goldman's failure to focus on clients is due to a culture change that put traders in charge of the firm.

"You didn't have investment bankers running the firm, you had traders running the firm" after Goldman Sachs went public in 1999, Greenberg told Bloomberg Television Thursday. "And a trader has a short-term memory, and a short-term look at things, and that change really has changed the culture of Goldman Sachs. It is not the Goldman Sachs that represented companies as an investment banker."

For many Wall Street investors and clients, however, news that the profitable firm engages in questionable tactics, disrespectful language and client-unfriendly trades is hardly news. Goldman has come under scrutiny before and kept on profiting without significant business disruption.

GS is also not the only firm that can turn a profit for clients. Recognizing the letter's business threat, Goldman's public relations team launched a defensive strategy Wednesday.

In a memo to employees, Blankfein and Cohn referred to Smith as one "of nearly 12,000 vice presidents" among more than 30,000 employees at the company, minimizing the importance of his role. Smith in the op-ed piece was titled executive director and head of Goldman's equity derivatives business in Europe, the Middle East and Africa.

South African-born Smith worked for Goldman in London. He sold equity derivatives to European hedge funds, asset managers and other clients.

Business Insider published comments from a former Goldman intern who worked under Smith.

"I hold him in very high regard – he took care of us junior guys, gave us great pieces of advice, and in general came across as one of the more personable, friendly, and genuine guys on the floor," Avneesh Singh Saluja wrote to Business Insider.

Besides the letter's effect on Goldman, another question lies in Greg Smith's future.

It's rare to find an executive who will write – and sign his name to – such strong words against the biggest money-making machine on Wall Street. Now that the world knows how Smith can react, will someone be willing to give him a job?

"Who's going to hire someone who would do that?" Roy Smith, a former Goldman Sachs partner who's now a finance professor at New York University's Stern School of Business, told Bloomberg. "The industry will close ranks on such things as whistle- blowing in this context."

Goldman Sachs (GS) was up 2.20% to $123.02 in trading at 1 p.m. Thursday.

[See Money Morning investing expert Shah Gilani's full analysis on the Greg Smith Goldman Sachs letter tomorrow in Money Morning.]

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  1. Amy Brown | March 26, 2012

    How unfortunate that the man who told the truth and chose not to hide, perhaps cleansing his soul, is
    condemned by the very people who created such an atmosphere. He should be applauded for having the guts to come forth. Everyone in the world has read of the friendly connections between GS et al others. We were all warned by Jefferson, Eisenhower, and many others and yet the evil deeds of man continue in spite of the destruction these acts cause. This is a pathetic way to live and the outcome is frightening. Where are the human beings in this world? Is everyone a Gordon Gecko with a heartless soul ruining life for everyone? This is not progress, I assure you.

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