“I can honestly say that the environment now is as toxic and destructive as I have ever seen it,” he wrote. “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Guess what, Greg? You didn’t do your homework about the firm where you worked for more than a decade and happily took home one bonus check after another. Goldman Sachs has been in and out of trouble throughout its 143 years — chiefly because it chose to put its own interests before those of its clients. What appeared to be a revelation to Smith was actually available to anyone who looked for it, buried deep within Securities and Exchange Commission and court records. Smith could have saved himself grief if he had only used his Stanford education to examine Goldman’s DNA before crossing its threshold.
There are numerous examples of Goldman putting its own interests first. But one will suffice: the June 1970 bankruptcy of Penn Central Transportation Company, the nation’s largest railroad.
At the time, Penn Central operated 20,530 miles of track in 16 states and two Canadian provinces and provided 35 percent of all railroad passenger service in the United States. The company also had substantial real estate holdings, including Grand Central Terminal in New York, along with much of the land on Park Avenue between Grand Central and the Waldorf-Astoria hotel. Nevertheless, Penn Central ended up defaulting on $87 million of its short-term unsecured debt — known in the industry as “commercial paper” — and Goldman was at the epicenter of its financial difficulties.
In 1968, after years of being shut out of doing business with many of the nation’s railroads — in large part because it was a Jewish-owned firm — Goldman won the opportunity to underwrite Penn Central’s commercial paper, widely seen as among the safest short-term investments. For large fees, Goldman sold the paper to its clients, including big companies such as American Express and Disney, and smaller ones such as Welch’s Foods, the grape-juice maker, and Younkers, a Des Moines-based retailer. Welch’s and Younkers, particularly, counted on the fact that Goldman told them that the Penn Central paper was safe and could be easily redeemed. Welch’s invested $1 million — some of it payroll cash — and Younkers invested $500,000, both at Goldman’s recommendation.
After Penn Central filed for bankruptcy, an SEC investigation discovered that Goldman had continued to sell the railroad’s debt to its clients at 100 cents on the dollar — even though, by the end of 1969, the firm knew that Penn Central’s finances were deteriorating rapidly. Not only was Goldman privy to Penn Central’s internal numbers, it also heard repeatedly from the railroad’s executives that it was rapidly running out of cash.