Goldman Sachs VP explains why he quit

The following is a script from "Resignation" which aired on Oct. 21, 2012. Anderson Cooper is the correspondent. Andy Court and Anya Bourg, producers.

Many of us have, at some point in our lives, dreamed of quitting our jobs very loudly and telling our bosses exactly what we really think. Very few of us ever do it. But seven months ago, a vice president at the legendary investment bank Goldman Sachs did just that, resigning in an article on the op-ed page of The New York Times. The article caused a sensation -- not just because its author Greg Smith was saying, three-and-a-half years after the financial crisis, that the bank was headed on the wrong ethical course, but also because it's so unusual to learn anything at all about the inner workings of Goldman Sachs.

When people leave Goldman, they tend to do it quietly. Though the firm's gold-plated reputation took a big hit after the 2008 financial crisis, it's still regarded as the smartest, most profitable and politically well-connected firm on Wall Street, and the toughest place to get a job. Now, on the eve of publishing a book about his experiences at Goldman, Greg Smith is talking for the first time about what led him to leave the firm, and to do it in such a public way.

Greg Smith: I literally wanted to hit the board of directors over the head, and say, Listen, I was proud of Goldman Sachs. I worked here for a long time.

Anderson Cooper: So an op-ed resignation, you hoped it would be a wake up call?

Greg Smith: I really did. Because there are a lotta people who acknowledge things internally. But no one is willing to say it publicly. And my view was the only way, you force people to change the system, is by saying something publicly.

At the time he left Goldman Sachs, Greg Smith was 33 years old, and making roughly half a million dollars a year as a vice president, a mid-level position in the division of Goldman Sachs that trades securities for hedge funds, pension funds, and other big investors. He'd been at the firm for about 12 years, and could hardly have scripted a more dramatic exit. "Integrity? It is eroding," he wrote in The New York Times. "The environment now is as toxic and destructive as I have ever seen it...it makes me ill how callously people talk about ripping their clients off."

Greg Smith: You know, this might be hard for people at Goldman Sachs to understand, but I loved the place. I put a lot of my heart and soul into it. I don't view it as a betrayal. I actually think the leaders of Goldman Sachs today don't have the long run interests of the institution at heart.

Anderson Cooper: Did anybody within the firm know you were going to be leaving?

Greg Smith: No.

Anderson Cooper: So, the first time many people within Goldman Sachs learned you were leaving was when they opened up The New York Times and saw this op-ed.

Greg Smith: Yeah, I mean the idea of the op-ed was not to do any destruction.

Anderson Cooper: I think some people are-- just aren't going to believe that, that-- to not give notice to a company you've worked for for 12 years, and in the most public way possible in the page of The New York Times, to say that they are going against all the values that they once held, how can that not be seen by-- as a betrayal?

Greg Smith: Well, it's true. I mean, I think the company is going against the values it once held.

[Goldman Sachs recruiting video: Join a culture of excellence, with a reputation for integrity...Goldman Sachs.]

For years Greg Smith was one of the company's true believers. He was selected to appear in this 2006 recruiting video, in which he talked about the business principles Goldman teaches to every new employee.

[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.

Greg Smith: I was flabbergasted. What I can tell you is that's not what the client is thinking. The teachers' retirement fund, who's coming to Goldman Sachs or Morgan Stanley, is thinking that Goldman Sachs is one of the biggest, smartest banks in the world. The reason I'm coming to them is to get their advice on what to do.

We wanted to hear what Goldman Sachs had to say, but after one off-camera meeting, we were told the firm wanted to see what was in Smith's book before giving an interview. So we spoke with Frank Partnoy, a highly respected professor of law and finance at the University of San Diego and a former derivatives salesman himself. He told us he didn't think it was fair to single out Goldman Sachs.

Frank Partnoy: If we look back at and we look at Wall Street firms that were responsible for the financial crisis, the firms that in 2007 had these huge exposures to subprime mortgages, it's not Goldman Sachs. If every bank had been like Goldman Sachs we would not have had a financial crisis.

Anderson Cooper: What about in terms of ethics?

Frank Partnoy: In terms of ethics I think Goldman Sachs is regarded as among the most ethical banks. I'm not sure that says a lot. On Wall Street-- Wall Street ethics is a sort of oxymoron. But Goldman Sachs, you can trust more than just about anyone else.

Anderson Cooper: Greg Smith was-- he was a vice president-- relatively junior position at Goldman Sachs. Why do you think it got so much attention what he did?

Frank Partnoy: Because people who work at Goldman Sachs don't talk about working at Goldman Sachs. There's--

Anderson Cooper: It's like Fight Club?

Frank Partnoy: It is a little bit, or maybe like the Mafia that people are reluctant to talk about what's happened there. It's a golden goose and you don't shoot the golden goose. People there make a lot of money and they don't want to talk about it.

Smith says he grew even more disillusioned after the Senate hearings, when he and a Goldman Sachs partner met in Asia with a major client, the head of one of the biggest funds in the world.

Greg Smith: And he looks me and a partner in the eye and says, "Let me be honest with you guys. We don't trust you at all. But don't worry. There's nothing to worry about. We're gonna keep doing business with you because you're the biggest bank. You're the smartest. And actually we have to do business with you." Now my jaw almost dropped because hearing from one of your biggest clients that they don't trust you when your whole mantra and reputation is built on trust, to me, it was the worst possible thing you can hear. And then I leave the meeting and the partner from Goldman Sachs who I was with is jubilant. "This is great news. The client is gonna keep doing business with us because they have to."

In 2011, Smith moved to Goldman's London office, the very month the company announced a wide-ranging effort to improve its business practices. Smith saw little change. He say's his coworkers in London repeatedly referred to their clients as "Muppets" and not in the kindhearted way their Sesame Street creators intended.

Greg Smith: In Europe, a Muppet is a term for someone you can manipulate, someone who is an idiot.

Anderson Cooper: So people at Goldman Sachs, who you worked with, used to call their clients idiots, essentially?

Greg Smith: All the time. Not to their face, but behind their back.

Anderson Cooper: You heard people you work with talk about overcharging clients, bragging about it?

Greg Smith: Within week one, I met a junior guy who was 24 or 25 years old and the first thing he told me was he'd just traded a sophisticated derivative with a Muppet client who paid the firm an extra million dollars because the client was so trusting that he didn't check the price with other banks. Now you could think to yourself, "Is this some rogue guy who's just talking callously about clients?" But his boss, who's a managing director, was sitting right next to him nodding and chuckling along. And--

Anderson Cooper: The boss was laughing about it?

Greg Smith: Absolutely. They were both laughing about it.

Off camera, Goldman executives told us they conducted an investigation after Smith's article came out and found no evidence of wrongdoing. The firm did show us one London email in which clients were referred to as Muppets, but pointed out there was no mention of ripping those Muppets off.

Anderson Cooper: Something that Goldman says is, "Look"-- they have-- there are procedures in place where if you have concerns, you can raise a red flag and you can even do it confidentially. And yet, they say you didn't do that.

Greg Smith: Well, I spoke to nine senior partners of the firm, people who had been partners since 2004. If anyone at Goldman Sachs says, "We were surprised by this," they shouldn't have been.

Anderson Cooper: Goldman says that you wanted a million dollars in compensation, that you wanted a promotion and you later learned that you were not going to get that and that's what's behind this.

Greg Smith: I think that would be a criticism I would expect to hear from Goldman Sachs.

Anderson Cooper: Had they given you a promotion, had they given you a million dollars in compensation, would you still have quit?

Greg Smith: Absolutely.

Anderson Cooper: I think a lotta people would find that hard to believe.

Greg Smith: Well, well, what I can say to you is-- and, this may seem stupid, but I didn't go to Wall Street purely to make lots of money.

Anderson Cooper: But I don't know anybody who's ever gone to Wall Street w-- and not had the idea of making money--

Greg Smith: Oh, no, I definitely wanted to make money. But I left because things had veered so far from what I actually believed was right that I could have just left and walked out and said nothing about it. But I would have felt that was not the right thing to do.

Anderson Cooper: [to Partnoy] How do you think what he's saying is going to be viewed on Wall Street?

Frank Partnoy: I think people at Goldman Sachs will breathe a huge sigh of relief.

Anderson Cooper: Relief?

Frank Partnoy: I think they'll read this book and they'll say, "I thought there were going to be significant allegations of fraud and there aren't."

Anderson Cooper: I guess one of the most troubling things that Smith is saying is that large pension funds, philanthropic institutions, they're being sold very complicated financial products that they don't even understand. Is that true?

Frank Partnoy: It is true. And it's a real problem right now, particularly in an environment where interest rates are so low. And these institutions call a Wall Street bank and say, "We need something that will juice up our return, we need to make more money." And they're vulnerable when they do that.

Now that his book "Why I left Goldman Sachs" is finished, Smith told us he's not sure exactly what he'll do next.

Anderson Cooper: Why would any Wall Street bank in the future ever hire you?

Greg Smith: I was not doing this in order to get hired at another Wall Street bank. I really thought this through and thought it would be a constructive thing to do. And while Wall Street doesn't like to be criticized, I think the criticism is warranted.