Who are the muppets in Greg Smith's Goldman Sachs letter?

Two weeks ago today, former Goldman Sachs employee Greg Smith published a scathing open letter in the New York Times. The "executive director and head of equity derivatives sales" lashed out at senior leadership for creating what he claimed was a "toxic" and "destructive" culture that put the interests of the investment bank ahead of those of its clients – who he said were routinely referred to in emails as "muppets" to be "ripped off".

Now the media storm has died down, Goldman Sachs is going through its internal emails and Greg Smith is planning his next career move. But the obvious question remains: just who are those muppets?

For an answer to that, you'd need to know what an "executive director and head of equity derivatives sales" actually does. But while the media storm spawned dozens of highly-opinionated pieces on Goldman Sachs or Smith's motives, none that I could find actually explained the niche Greg Smith was operating in. Equity derivatives are contracts that give you the right or the obligation to buy, sell or exchange equity (shares) at some point in the future. So what does an executive director sales in equity derivatives do, and who does he deal with?

Regulars here will know that investment banks explicitly bar employees from speaking to journalists, while former employees sign attractive severance packages in exchange for a non-disclosure agreement. Yet over the past fortnight half a dozen current and former bankers in equity derivatives volunteered for an in depth interview about their work.

Each interviewee chuckled at the suggestion that "executive director" with Goldman Sachs meant Smith was very senior. "Don't be taken in by the titles," said one former equity derivatives structurer at a big bank. "I was always the head of something. Looks great on your business card." Indeed, executive director is a mid-level rank, usually with maybe a handful of people working for you. Most other big banks use "vice-president" for this position – an equally misleading term.

Greg Smith was in sales, again a term that means something else in banking than in, say, your local electrical store. One interviewee was more or less Smith's opposite number at another big bank, making £350k-£400k a year: "I've got a portfolio of clients. They may call me because there's something they want to buy. I'll go to our trader and ask: what's your price? I take that to the client, who will have a few other banks on the line. The client will compare, try to get a better price out of the trader through me." It can be stressful he explained, as "my long-term relationship is with the client, but my performance is measured by the trades the trader makes on my client's behalf."

Perhaps this was what caused Smith's crisis of conscience? His letter mentions the practice of filling axes, where a trader has bought a certain product – or in the parlance, "taken a position in the market" – that he wants to get rid of. In such a scenario, salespeople are leaned on to push that product with their clients. "Obviously that generates tensions," said the salesperson. "A salesman will be building a relationship of trust with a client, and now you are trying to flog something that is in the interest of the trader."

But here's the mystery: Greg Smith was in so-called "flow trading". In the words of one counterpart: "[In flow] the contracts are completely standardised and transparent – publicly traded on the exchange. Clients can get the product from 10, 15 market makers at a bank or brokerage firm, so they play us off against each other. You are making money from commissions on the trades you do for clients. Right now it's very hard to make any money in this, let alone rip off clients."

So who were the muppets then? All interviewees said that the term is common on investment banking desks and trading floors. A former salesman with a major bank said: "If one client always calls in with an order 10 minutes after markets close, you will call him a muppet. It's London slang for idiot."

But there seems to be a second category of muppets, and they are found in a second area in equity derivatives, called structured products. These are complex, bespoke contracts for individual clients designed by "structurers". One insider likened them to holiday packages: "You can shop around yourself for the best deals for a hotel, ticket, tour, etcetera. But just as most tourists leave that to a specialist travel agency, most clients will leave it to their bank to find and put together the right combination of financial instruments."

And this, interviewees agreed, is where mischief, or worse, is possible. In the words of one such former structurer: "There are very sophisticated parties out there. But there are also smaller players who basically have no idea what they're doing. Some small savings bank perhaps, or some municipality. What got to me after a while is how I'd be lying in the faces of these less sophisticated parties. And I'd be thinking, wow, this is my parents' pension money down the drain. Some guy working for a small bank in Belgium would be called 'muppet', that's very likely."

The former salesman concurred: "It's an open secret that there is this group of less sophisticated institutional investors, mainly from southern Europe, who would buy things they didn't understand."

Interviewees stressed that all banks are ripping these players off, not just Goldman Sachs. And they have been doing this for years. Moreover, it's not just clients who get eaten in the shark tank called finance. The flow trader said: "You get absolutely fed up with people's attitudes, clients and traders. Add to that your boss. He can be a sociopath, or a money-obsessed person, or a genuinely nice guy. You have no control over that, but he has control over you as he will be the one to put your name on the list when there's a new round of redundancies."

A second former structurer said: "I loved doing what I did. In the end I left for two reasons. One was internal politics – I was tired of fighting colleagues sitting next to me who were trying to steal the business I originated. The other was personal values – I felt just making large returns for your shareholders was not all there was to life."

The first former structurer quoted earlier made £800k in the year before he left his bank. He described himself as "smart, poor and hungry". He was the first in his family to go to university.

So why did he get out? "It was like the story of Dr Faustus, where you sell your soul to the devil. I sold my soul for worldly riches. The price the devil demanded was my moral bankruptcy. For a long time I was OK with that, until I wasn't."

That is the universe Greg Smith broke with. The New York Times reported this week that he has hired an agent to negotiate a book deal for him. Let's just hope the agent doesn't think he's a muppet.