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from Breakingviews:

Goldman renewable energy dash more than greenwash

By Christopher Swann The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs is making a dash to invest in renewable energy projects. It says it will invest $40 billion of its own and clients’ money over a decade. The Wall Street firm isn’t above self-serving spin, but it’s also never far from the money. With solar and wind power nearing cost levels that are competitive with fossil fuels, clean energy could burnish Goldman’s bottom line as well as its green credentials.

A degree of cynicism over Thursday’s announcement is warranted. The firm helped funnel $4.8 billion to clean energy firms in 2011, so its latest pledge, averaged over 10 years, would actually represent a drop in investment in the sector. But in fact Goldman has a record of being better than its word on environmental investments. A $1 billion commitment in 2005 turned into the deployment of $24 billion of financing by the end of 2011.

And, of course, money talks. Goldman’s timing looks spot on. Solar and wind power seem close to a tipping point in many parts of the world, including the firm’s home market. In sunny U.S. states like California, for instance, the price of solar electricity under long-term contracts has plunged from about 17 cents per kilowatt-hour in 2010 to around 8 cents now, according to Green Tech Media. It would cost a couple of cents more without government incentives, but it’s now within striking distance of electricity generated from natural gas. At today’s low gas prices, that runs around 6 cents per kilowatt-hour.

Technological improvements have also driven the cost of wind generation down by about a fifth over the past decade, again to within easy range of gas-fired generation even in parts of the United States where the winds aren’t especially reliable, according to the Department of Energy.

An added major selling point is that once generation equipment is installed, these prices are locked in for decades since the sun and wind are free. The same cannot be said of America’s gas or even coal, let alone oil. With renewable energy looking like it will soon hold its own competitively, Goldman’s latest $40 billion promise is one it should have little trouble keeping.

from Breakingviews:

China throws a juicy bone to foreign brokers

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Wall Street may be the winner from this year’s bilateral talks between the United States and China. Foreign banks who run Chinese securities joint ventures, including Morgan Stanley and Goldman Sachs, will soon be allowed to raise their stakes to 49 percent, according to a U.S. official in Beijing. It still doesn’t match the heavy lifting they do, but it is a breakthrough in an important market.

Global banks can own 33 percent of their joint ventures today. Most ventures can only underwrite stocks and bonds, and are not allowed to buy and sell securities on clients’ behalf. There are exceptions for those who got in early. Goldman has managed to effectively control its venture through a special arrangement with its partner, while UBS enjoys wider trading powers than its peers.

The new rules will give the foreigners more influence relative to their demanding Chinese partners. Domestic firms, which put in two thirds of the money, often chase short-term profits. Global players should care more about building a lasting franchise and avoiding reputational risks.

All this is in China’s interest. If global banks are better compensated for their work they will work harder to bring in global best practice in corporate governance. With a fairer share of the returns, they may also put more effort into the joint ventures, instead of trying to use their platforms to channel deals to their offshore investment banks.

In a further sign of opening, foreign ventures will be able to trade financial and commodities futures, though it remains to be seen whether all will be able to participate. The number of commodity transactions in China hit 3 billion in 2010, three times as many as the volume in the United States. Meanwhile the financial derivatives market has a long way to go.

from Breakingviews:

Temasek tinkering could put StanChart in play

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Could Temasek’s tinkering put Standard Chartered in play? The Singaporean fund’s recent reshuffle of its bank assets has revived talk about its 18 percent stake in the UK-based emerging markets lender. Now might be a good time to find a new owner.

Rival banks have long eyed StanChart. It spans Asia and Africa, but lacks exposure to slow-growing European markets or U.S. subprime mortgages. It’s conservatively run, too: loans were equivalent to just 76 percent of deposits in 2011. Moreover, there are signs Temasek is open to offers. It issued a bond exchangeable into StanChart shares last year. And an old idea of guiding StanChart into a merger with Singapore’s DBS seems to have fizzled; DBS is now chasing other deals, with Temasek’s blessing.

Potential buyers are many. U.S. banks like JPMorgan or Wells Fargo should be attracted to StanChart’s exposure to emerging market trade. Australia’s ANZ and Japan’s Mitsubishi UFJ are aggressively targeting new markets. Even a Latin American aspirant like Brazil’s Banco Itau may take a look.

Leaving aside the potential clash of cultures, not many could pull it off. StanChart’s attractive portfolio - and some bid speculation - mean its shares trade on a higher multiple of book value than most prospective suitors.

Second, local regulators may be chary of allowing already-big banks to expand further. And while StanChart isn’t yet labelled as a globally significant bank, or “G-Sifi”, as part of a bigger lender it probably would be, which would see its return on equity crimped by an additional capital buffer.

from Breakingviews:

Goldman Sachs now treats shareholders like muppets

By Rob Cox 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Say what you like about Goldman Sachs, but it sure is a clever negotiator. The Wall Street firm, which was publicly criticized a few weeks ago by one of its own for running roughshod over the interests of clients - dubbed “muppets” in internal speak - in the pursuit of profit, has now pulled off what looks like the trade of the year. But this one comes at the expense of its own shareholders.

The bank managed to persuade the American Federation of State, County and Municipal Employees (AFSCME) labor union to withdraw a motion that shareholders vote at the annual meeting in May to separate the chairman and chief executive roles. Similar motions failed to gain majority support in the past. But after the publication of executive director Greg Smith’s resignation letter in the New York Times, this year could have been different.

To win AFSCME over, Goldman agreed to appoint a so-called lead director to take on some of the duties a non-executive chairman might be expected to assume. These include presiding over board gatherings when the chairman is absent; facilitating communication between independent directors, the chairman and chief executive; overseeing the board’s governance processes; evaluating the chief and reviewing and approving the agenda.

That all may sound like a nice sop to shareholders. But Goldman has in the past argued that one reason it was opposed to splitting the chairman and chief executive roles was that it had a presiding director, John Bryan, who effectively performed these duties already. The former Sara Lee boss has been on Goldman’s board since 1999.

So, effectively Goldman appears to be doing little beyond changing the name of the role to appease AFSCME and perhaps embellishing it with a few extra duties. True, it will hand the position to a new director. But Bryan was on his way out anyway, as he bumps up against Goldman’s retirement age of 75 for directors.

from Alison Frankel:

In Gupta case, U.S. must disclose Blankfein deposition prep

Jed Rakoff has bounced back quite nicely, thank you, from his appellate smackdown in the Securities and Exchange Commission's collateralized debt obligation case against Citigroup. In the unlikely event you've forgotten, earlier this month the 2nd Circuit Court of Appeals stayed the SEC's case before Rakoff, finding a strong likelihood that the government and Citi would prevail in their argument that the judge overstepped his bounds when he rejected their proposed $285 million settlement. Despite the notably critical language in the three-judge panel's per curiam ruling in the Citi case, Rakoff, a U.S. Senior District Judge in federal court in Manhattan, seems undaunted in his determination to hold the SEC accountable. On Tuesday, he ruled that the agency must disclose documents used to prepare Goldman CEO Lloyd Blankfein for his deposition in the Rajat Gupta insider trading case.

Rakoff's 10-page ruling, issued on the same day that he said the government can use wiretap evidence in the parallel Gupta criminal case, rejects the SEC's argument that work-product privilege protects its preparation of Blankfein. The judge pointed to a 1993 case from the 2nd Circuit, In re Steinhardt Partners, and a 2003 ruling from the same appeals court, In re Grand Jury Subpoenas, in holding that the government waived its privilege claim when it voluntarily shared materials with Blankfein, a third-party witness. Rakoff said that Blankfein doesn't have a "common interest" with the government in the Gupta case, so disclosures to him amount to "'deliberate, affirmative, and selective' use of work product [that] waives the SEC's ability to now assert the privilege against the defendants."

Here's the fascinating backstory. At Blankfein's deposition on Feb. 24, Gupta's lawyers at Kramer Levin Naftalis & Frankel asked him standard questions about how he prepared to testify. Blankfein, according to Kramer Levin's March 1 brief, revealed that on two occasions leading up to the deposition, he met with SEC lawyers, an agent from the Federal Bureau of Investigation, and prosecutors from the Manhattan U.S. Attorney's office. At those two sessions, he said, prosecutors asked him 75 percent of the prep questions; the SEC asked the other 25 percent of the questions. Blankfein's own lawyers at Sullivan & Cromwell, according to Kramer Levin, didn't ask him questions at the two prep sessions with government lawyers. Blankfein also disclosed that government lawyers showed him 10 or 12 documents in advance of his deposition testimony.

The SEC cut off Kramer Levin's questioning when Gupta's lawyers tried to follow up with more questions about Blankfein's preparation, claiming privilege. According to Kramer Levin's brief, Blankfein's S&C lawyer, who was also at the deposition, "made plain that the objections were the SEC's alone and were not being asserted by the witness or Goldman." Kramer Levin then took the matter to Rakoff, who asked for briefs after a joint phone call on the issue.

In Tuesday's decision, the judge ruled that Kramer Levin may ask Blankfein follow-up questions about the government-led deposition prep sessions -- and that the government must turn over to the defense any documents Blankfein was shown. (Interestingly, Rakoff disregarded one of his own old rulings, Morales v. United States, a 1994 case in which he upheld a privilege claim by prosecutors. The judge said he hadn't considered Steinhardt when he ruled in Morales.)

Here's what Rakoff wrote:

To allow the invocation of work product protection to succeed in such circumstances would leave the party taking a deposition with no remedy to determine how, if at all, a witness's testimony was influenced, not by advice from the witness's own counsel, but by suggestions from the questioner's adversary, who, especially if possessing governmental power, was in a position to unfairly pressure the witness...

By asking Blankfein what topics he recalls were discussed, what questions he was asked and what documents he was shown, defendants seek to discover how the preparation sessions affected Blankfein's testimony, and do not demonstrate a mere naked attempt to obtain the SEC's and the USAO's legal opinions and strategy.

from The Great Debate:

These days, we’re all disgruntled workers

The average Goldman Sachs employee earns in excess of $350,000 per year, and we’re assured Greg Smith, who most visibly quit his job there last week, was paid substantially more.

And, in leaving his long-time employer, Smith didn’t abandon just a fat salary. To regain his career freedom, he knowingly forfeited a considerable sum in deferred compensation as well.

Most people in the world, of course, can only dream of being so highly paid for their work, so it’s a good assumption that a very large percentage of the working population has summarily judged Smith’s resignation as an act of complete insanity.

If they could coach him, they would say: “Go back to Goldman, Greg! You have a terrific deal! Subordinate your concerns about a declining corporate culture and profit-at-any-cost leadership. You have a penthouse to go home to at night!”

But this scenario is a complete fantasy. Regardless how little or much they are making, U.S. workers have begun to quit their jobs – in droves – to go in search of organizations, and leaders, they feel will better support their needs. As Smith’s actions show us, pay no longer is the driver of engagement or job satisfaction it once was.

Last year, a MetLife study published in USA Today showed that at least one in three U.S. workers was quietly planning their departure and already had begun looking for a new job. Stunningly, the report noted that most bosses were oblivious to how unhappy and inherently disengaged their employees had become, and would be caught flat-footed when their workers walked out.

Right after Thanksgiving, Time Magazine reported the first evidence that MetLife’s predictions might be right: “With 14 million people still unable to find work and job prospects seemingly bleak … in September, 2 million people gave notice.” Extreme unhappiness on the job was cited as the reason so many workers would take such a risk. Inherently clear was that a lot of people had lost faith in the leaders for whom they worked.

from Jack and Suzy Welch:

Goldman and the culture-killing lesson being ignored

In the great, collective gasp that followed Greg Smith’s blistering public resignation from Goldman Sachs, one reaction struck us as particularly prophetic. It was a comment from James Gorman, CEO of Morgan Stanley. Don’t exploit Goldman’s woes, he said a few days after Smith’s letter ran in the New York Times: “There but for the grace of God go us.”

Some took Gorman’s remark as an admission of sorts – as if he were saying, “Hey, Smith’s criticisms could’ve been leveled at any firm on Wall Street.” Others took Gorman at his word when he explained that he meant all companies are vulnerable to a disgruntled employee who joins forces with a simpatico media outlet.

But we have a third interpretation that, to our minds, is far scarier than either of those takes. The Greg Smith case is a harsh reminder that most companies don’t face up to one of the most immutable rules of business: Your soft culture matters as much as your hard numbers, and if your company’s culture is to mean anything, you have to hang – publicly – those in your midst who would destroy it. It’s a grim image, we know. But the fact is, creating a healthy, high-integrity organizational culture is not puppies and rainbows. And yet for some reason, too many leaders think a company’s values can be relegated to a five-minute conversation between HR and a new employee. Or they think culture is about picking which words – do we “honor” our customers or “respect” them? -- to engrave on a plaque in the lobby. What nonsense.

An organization’s culture is not about words at all. It’s about behavior – and consequences.

It’s about every single individual who manages people knowing that his or her key role is that of Chief Values Officer, with Sarbanes-Oxley-like enforcement powers to match. It’s about knowing that at every performance review, employees are evaluated for both their numbers and their values, and that only four outcomes exist.

First, for employees with good numbers and good values – onward and upward.

For those with bad numbers and bad values – you’re outta here.

from Alison Frankel:

Forget Greg Smith. For Goldman exposé, read Hudson CDO ruling

Goldman's sweep for internal emails containing client insults like "muppet," a scoop by my Reuters colleague Lauren LaCapra, got lots of well-deserved snark as the bank's latest too-little-too-late response to Greg Smith's "Why I Am Leaving Goldman Sachs" op-ed. In case you're just returning from a vacation in Antarctica, which is pretty much the only way you could have avoided the financial world's equivalent of Kim Kardashian's divorce, Smith, a London-based Goldman executive director, said he was sick and tired of the bank's callous treatment of its clients. "It's purely about how we can make the most possible money off of them," Smith wrote in the New York Times. "If you were an alien from Mars and sat in on one of these meetings, you would believe that a client's success or progress was not part of the thought process at all."

Why Smith's piece was considered a revelation is mystifying, given Goldman's starring role in last April's 635-page Senate report on Wall Street and the financial crisis. We all know about the Securities and Exchange Commission scrutiny of the Abacus deal, in which Goldman permitted hedge fund manager John Paulson to pick underlying mortgages that doomed the collateralized debt obligation it was hawking to clients, and the famous "one shitty deal" otherwise known as the Timberwolf mortgage-backed CDO. As the Senate report explains, both were part of Goldman's institutional effort to secretly reverse its own long position in residential mortgage-backed securities even as it marketed MBS investments to clients.

That's the campaign U.S. District Judge Victor Marrero of federal court in Manhattan detailed in a 64-page ruling Wednesday that greenlights most securities and common law fraud claims by investors in two other rigged-to-fail CDOs, Hudson 1 and Hudson 2. (Here's Jon Stempel's Reuters story on the ruling.) Marrero's decision doesn't have the freewheeling rhetorical flair (or 1980s pop references) of Delaware Chancellor Leo Strine's much-discussed opinion on Goldman's conflicts in Kinder Morgan's proposed acquisition of El Paso Corporation, but in a way it's a much more devastating ruling. Marrero portrays a sweeping, months-long effort, initiated by Goldman CFO David Viniar, to shed the bank's exposure to subprime mortgages in mortgage-backed securities -- and simultaneously to take advantage of clients who were slower to perceive the looming MBS market collapse.

As I read through Marrero's decision, I kept thinking of the movie Margin Call, in which Kevin Spacey suffers a crisis of conscience as he oversees a sell-off of his bank's MBS portfolio, at the expense of the clients buying the securities. Goldman, like the unnamed investment bank in the movie, came to a sudden realization that it had to shed MBS exposure. But its bankers were much smarter than their counterparts in Margin Call. They didn't just sell off their portfolio, according to the Marrero ruling. They created doomed CDOs, hedged against the (inevitable) failure of their own instruments, and gladly accepted fees from the clients they allegedly duped into buying the securities. It was a breathtakingly brilliant campaign, if you're of a ruthless bent. Goldman's secret MBS short, as Marrero depicts it, tricked not just its own clients but the entire MBS marketplace.

I should note here that Marrero's ruling is preliminary. To decide whether to dismiss the case at this stage, the judge must assume all of the allegations in the Hudson investors' complaint are true. (The investors, represented by Berger & Montague, relied heavily on evidence from the Senate subcommittee report.) There hasn't been additional discovery in the Hudson case, and Goldman's lawyers at Sullivan & Cromwell have argued that the bank fully disclosed its hedge against the CDO to the sophisticated investors who purchased Hudson instruments; other federal judges who've considered securities fraud class actions based on similar allegations regarding other controversial Goldman CDOs have agreed with the bank's argument. (Goldman declined a Reuters request to comment on the ruling.)

With those caveats, Marrero portrays a scheme he describes as "not only reckless, but bordering on cynical." As early as 2005, he said, Goldman began to understand through its own underwriting and its relationship with the outside mortgage appraiser Clayton Holdings that mortgage lending standards were deteriorating. Goldman Sachs had bet heavily on the continued success of mortgage-backed securities, and by the summer of 2006, knew that was a bad bet. The problem, according to the co-manager of the bank's structured products unit (quotes in Marrero's ruling), was that there were "few opportunities" to shed Goldman's MBS risk. The market believed the bank was "very long for the foreseeable future," according to another Goldman official Marrero cited.

Nevertheless, in December 2006, CFO Viniar directed the structured finance group to begin aggressively ridding the bank of subprime risk and positioning Goldman to take advantage of "very good opportunities as the market goes into what is likely to be even greater distress." Thus was born the program of shorting Goldman-devised (and Goldman-sold) CDOs based on mortgage-backed securities. The program was so successful that according to filings Marrero cited, Goldman had a net short position of $2.1 billion in credit default swaps on mortgage-backed instruments by March 2007. By August 2007, Goldman told the SEC, it had reduced its overall exposure to subprime mortgage backed securities from $7.2 billion to $2.4 billion. Through what Marrero called "the fine art of financial transubstantiation," Goldman (in the words of one of its bankers) managed "to make some lemonade from some big old lemons."

from Breakingviews:

Judges’ words can speak as loudly as actions

By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Judges may not need a big stick. Delaware Chancellor Leo Strine and U.S. District Judge Jed Rakoff have become known for tough and snarky rulings, including recent ones that thumped Goldman Sachs and Citigroup. They weren’t just venting, though. When ordinary legal constraints fall short, jurists can use the bully pulpit to right some wrongs.

Strine’s recent conflicts of interest opinion has become an instant classic. It railed against Goldman and others involved in the $21 billion sale of El Paso to Kinder Morgan. Though his decision went viral on Wall Street, the judge also took some heat for not actually blocking the deal after being so critical of the conduct.

As he pointed out, though, an injunction probably would have hurt El Paso shareholders more than it helped. By calling out the dubious behavior on the transaction, however, Strine already has helped to restart a serious conversation about how bankers deal with conflicts.

Other Delaware judges have used public shaming to similar effect. In 2005, for example, Strine’s predecessor had little choice under the law but to uphold Disney’s $140 million severance payment to Michael Ovitz for his one year of service. But the judge’s opinion excoriating the company’s chairman, Michael Eisner, and the Disney board, caught the attention of compensation committees nationwide.

Few judges have mastered the art quite like Rakoff. He rejected separate settlements between the Securities and Exchange Commission and Citi and Bank of America as too soft on the banks. In BofA’s case, his lambasting resulted in a harsher deal. When Citi and the SEC fought back, a federal appeals court accused Rakoff of going too far.

Though his order may now come undone, Rakoff has still achieved plenty. His harsh criticism of Citi’s behavior and the watchdog’s controversial practice of settling cases without admissions of fault has resonated throughout banking and legal circles. He also has succeeded in part where prosecutors have failed, giving voice to the moral outrage at perceived perpetrators of the financial crisis. Jurists are proving their words can speak as loudly as actions. It’s a useful precedent being set.

from Breakingviews:

Goldman Sachs history shows resignation naivete

By Rob Cox This column appears in the March 26 edition of Newsweek. The author is a Reuters Breakingviews columnist. The opinions expressed are his own. In a sententious harrumph, a midlevel Goldman Sachs banker stormed out of Wall Street’s leading investment bank last week by publishing a critique in the New York Times of his now former employer. Greg Smith accused Goldman Chief Executive Lloyd Blankfein and President Gary Cohn of fomenting a corporate culture where the pursuit of making money “sidelined” the interests of clients, whom Smith said were referred to as “muppets” by superiors. “Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence,” he wrote.

Smith has been called brave for speaking out against the apparent wickedness of the bank that lavished him with a decade of bonuses. But there’s also a glaring naivete to his appraisal that is as short-sighted as the supposed decisions of Goldman’s masters to chase profits today over the interests of clients tomorrow. Money is and forever will be the lifeblood of global finance. The only changing dynamic is the degree to which other goals compete with this pursuit.

Goldman did not suddenly become greedy when Smith trotted in with his Stanford degree and table tennis trophy 12 years ago. For 143 years Goldman has tried to strike a balance between serving the needs of its customers and creating lucre for its partners. It has often failed. Goldman executives wincing at being the butt of late-night talk show jokes may be as historically myopic as Smith. In 1932, after the stunning collapse of Goldman Sachs Trading Corp, an investment fund that crippled the firm and singed its clients, vaudevillian comic Eddie Cantor made Goldman his regular whipping boy.

It took decades for Goldman to repair its reputation as a trustworthy broker under the leadership of consummate relationship banker Sidney Weinberg. But it wasn’t too long before the desire to mint money returned with a vengeance under Goldman partner Gus Levy in the 1950s and 1960s. Rather than simply dispensing advice to clients like Ford Motor, Levy pioneered the deployment of Goldman’s capital to generate returns in ways that set the firm, and indeed the whole financial industry, on its current trajectory.

Levy championed two businesses - block trading and risk arbitrage - which both essentially boiled down to Goldman taking risks in the stock market with its own money in the same way hedge funds do today. True, Goldman depended on the willingness of clients to trade with the firm, but its profits were primarily a function of an ability to get the better of them. “Something well bought is half sold,” Levy once remarked.

In 1969, empowered by these gold-spinners - and three years after hiring the future Treasury Secretary Robert Rubin as a trader - Levy displaced Weinberg to run Goldman. So the present-day Smith’s supposed revelation that money-making will get you everywhere at Goldman was already obvious more than four decades ago.

The activities Levy championed may sound quaint to derivative whiz-kids like Smith today, but they were the forerunners of the trading operations that have made Goldman the bulk of its 21st-century coin and led the firm to its current predicament. The really important tipping point came in 1999, when Goldman converted from a partnership.