Deeb Salem, the former Goldman Sachs trader who helped devise the firm’s brilliant and highly profitable proprietary bet against the mortgage market, has never been shy about trumpeting his accomplishments. Mr. Salem no longer works at Goldman — he decamped to GoldenTree Asset Management, a New York hedge fund, in 2012 — but his continuing lawsuit, which contends the firm shortchanged him about $21 million in bonus and deferred compensation during the years after the financial crisis, raises fresh questions about the fairness of Wall Street’s compensation practices, its willingness to make scapegoats out of former employees and the arbitration system — run by the Financial Industry Regulatory Authority — that everyone who deals with Wall Street is forced to use to resolve monetary disputes.
(In the interest of full disclosure, nearly 10 years ago I lost a Finra arbitration case regarding my employment at JPMorgan Chase and am still involved in litigation with the bank.)
First, a quick recap: In 2006, Mr. Salem, in his late 20s at the time, was part of a small group of mortgage traders at Goldman that included Josh Birnbaum, Jeremy Primer and Mike Swenson, who concluded that serious trouble was brewing in the market for esoteric securities tied to the mortgage market. By December 2006, they had decided that there was serious money to be made betting against the mortgage market. In a now-infamous meeting, the group convinced David Viniar, Goldman’s chief financial officer at the time, that the trade should be established. When prices of securities tied to the mortgage market started to fall precipitously throughout 2007, Goldman made a fortune: $3.75 billion in profit, which more than offset losses in other parts of the firm’s mortgage business. While the rest of Wall Street was imploding, Goldman’s smart bet against the mortgage market helped it earn $17 billion in pretax profit in 2007. The top five executives at Goldman were rewarded with $350 million in compensation.
In his 2007 self-evaluation, Mr. Salem made no secret of the role he played in creating the “Big Short,” as Mr. Viniar later referred to the firm’s bet against the mortgage market. Although Mr. Salem would later disavow his immodesty, he described how he and his colleagues had devised the winning strategy. In May, while they remained “as negative as ever on the fundamentals in subprime, the market was trading VERY SHORT, and susceptible to a squeeze. We began to encourage this squeeze, with plans of getting very short again” after the short squeeze caused capitulation of these shorts, he wrote. “The strategy seemed doable and brilliant, but once the negative fundamental news kept coming in at a tremendous rate, we stopped waiting for the shorts to capitulate, and instead just reinitiated shorts ourselves immediately.” Mr. Salem probably received about $10 million in compensation in 2007 — in line with Mr. Birnbaum, who soon left Goldman to start Tilden Park, a hedge fund.
Although Mr. Salem was being actively recruited by other firms, he decided to stay at Goldman. He was promoted to managing director, one step down from the ranks of partner, known at the firm as participating managing directors, the highly compensated group of 400 or so executives who run Goldman. Given Mr. Salem’s relative youth, his chances of joining them looked extremely promising. In 2009, Goldman paid Mr. Salem $15 million. “Let’s be very clear: I was one of the most sought-after investment professionals in the mortgage industry,” Mr. Salem said during an arbitration hearing in February, according to Bloomberg News, which saw a transcript of the hearing before it was later sealed. “I had the opportunity throughout the course of my career and throughout — from that day, from almost every month that I was at Goldman — to leave for other opportunities.”
Things started going off the rails for Mr. Salem at Goldman around April 2010, when Senator Carl Levin, Democrat of Michigan, was completing his investigation into Goldman’s trading practices leading up to the financial crisis in 2008, a behavior that Mr. Levin described repeatedly, without nuance, as Goldman “betting against its clients.” Adding to Goldman’s woes was a lawsuit filed by the Securities and Exchange Commission that contended that the firm had misled the sophisticated investors who had participated in a squirrelly security known as a synthetic collateralized debt obligation. Goldman would later settle with the S.E.C. for $550 million, at the time the largest single payment by a Wall Street firm in the settlement of an S.E.C. civil suit.
In the treasure trove of documents that Mr. Levin released just before his all-day hearing about Goldman were portions of Mr. Salem’s self-evaluation form. The documents that Mr. Levin released publicly proved highly embarrassing to Goldman, which was trying to maintain the fiction that the “Big Short” was just a simple hedge, not a huge proprietary bet. Unfortunately for Goldman, documents like Mr. Salem’s self-evaluation form made that argument far less credible. According to Mr. Salem’s arbitration claim — a copy of which has been sealed by a New York State court at Goldman’s request and is no longer publicly available — after the release of his self-evaluation, Harvey Schwartz, who is now Goldman’s chief financial officer, told Mr. Salem that he had caused the firm “reputational harm” and that until “the executive office made the decision to impact your compensation you were going to be one of the very, very top-paid non-partners in the division.” Mr. Salem contended that Mr. Schwartz added, “We’ve all put things in writing that we should not have. Yours just got unlucky. We’ll make it up to you.” Goldman’s lawyer disputes Mr. Salem’s recollection of his conversation with Mr. Schwartz.
But Goldman did not “make it up” to Mr. Salem. In his arbitration claim, Mr. Salem was seeking an additional $8.25 million in compensation he thought he was due in 2010, an additional $1.75 million in 2011 and $5 million in 2012. He also asked for $6.15 million in deferred compensation. At the arbitration hearing, according to the Bloomberg report of the transcript, Goldman’s lawyer, Andrew Frackman of O’Melveny & Meyers, said that Mr. Salem had been paid more than $30 million in compensation in the decade he had spent at Goldman after college. Mr. Frackman’s message was that Mr. Salem should be satisfied with what Goldman paid him under its sole discretion.
“What we have here is a young trader who believes he should have been paid more under discretionary policies,” Mr. Frackman said at the hearing. “He made a ton of money,” he added. “He’s not entitled to more simply because he would like to have been paid more. If that were the case, you’d have traders and bankers in here every day of the week.”
Given the fact that Finra and its arbitration process are controlled by Wall Street, it is not the least bit surprising that, in March, Mr. Salem lost his arbitration. Indeed, the chairman of the three-person arbitration panel, Martin H. Zern — a professor of accounting at Pace University — used an expletive to describe his view of Mr. Salem’s case at one point during the panel’s deliberations.
Last month, Mr. Salem and his lawyer, Jonathan Sack, appealed the arbitration decision to the New York State Supreme Court. The state courts rarely overturn arbitration decisions, and there is little hope that it will overturn Mr. Salem’s. It is hard to feel sorry for Mr. Salem, but the fact remains that Goldman reaped billions of dollars in profits thanks to him and his colleagues while paying him — and them — only a fraction of those profits. On the one hand, Wall Street seeks to attract the best and the brightest the world over by dangling the possibility of huge compensation. But then it often fails to pay its superstars in line with what they deserve when they orchestrate a windfall. It’s not a surprise, then, when these superstars depart for hedge funds that do allow them to receive gargantuan payouts.
All Mr. Salem has been trying to do — so far unsuccessfully — is to force Goldman to pay him fairly for the absurd profits he helped to generate at a time when the firm could well have gone down the tubes, as its brethren did. Unfortunately for him — and everyone else with a monetary dispute with Wall Street — he has been forced into an arbitration system that exists solely to benefit Wall Street’s mighty firms, not the people who work at them.
Last month, in a sign that it may be starting to realize how biased its forced arbitration system is, Finra proposed a new rule that would bar former Wall Street professionals from serving as arbitrators. The S.E.C. has to approve the change, and it should do so as soon as possible. But hoping that Finra’s arbitration system will ever be anything other than a rubber stamp for Wall Street remains a fantasy. When I called Mr. Sack last week to discuss Mr. Salem’s appeal, he let me know instantly he could not discuss it. But he did not seem the slightest bit sanguine about his client’s chances of victory.
“There are very, very powerful people at Goldman Sachs,” he said, before hanging up the phone.