Goldman needs to mark business model to market
Goldman Sachs has been at the vanguard of Wall Street firms in accepting the realities of the marketplace. During the crisis, Goldman chief Lloyd Blankfein noticeably stood out among his investment banking brethren arguing vociferously against an industry-wide push to relax mark-to-market accounting. But on matters relating to its image, Goldman has been stubbornly resistant. That may be about to change.
When it comes to public perception, Goldman has been to hell and back. Its financial success coming out of the 2008 panic and subsequent market rescue by governments made it a public whipping boy for all who detest Wall Street, and blame it for sinking America into an economic crisis. Goldman has been pilloried by politicians, labeled a blood-sucking cephalopod in the press and henpecked by regulators.
In the markets, wide shifts in sentiment are common, of course. In March of last year, investors hated all manner of financial assets, almost indiscriminately. Goldman executives didn’t think that was fair, but they accepted the realities of the market, wrote down the value of assets on the company’s books and took their lumps. In a mark-to-market world, you don’t fight the judgment, you roll with it and adapt.
That’s not the way Goldman handled its image, though. With few exceptions, Goldman dismissed the verdicts of its critics. That just created more of them, culminating in an ignominious Securities and Exchange Commission fraud charge and settlement. All of which conspired to tarnish the firm’s stated goal of unparalleled client focus.
But Goldman’s leaders seem at last to be acutely aware of all this. The firm is examining not just its business practices, but evaluating its business model more broadly. Some executives talk of a spiritual, introspective exercise taking place under the aegis of the Business Standards Committee established in May to “reinforce the firm’s client focus and improve upon the transparency of our activities.”
When Goldman examines itself, it does so with vigor, intensity and creativity. Indeed, the last time it undertook such analysis, it wound up going public. This time around could be equally revolutionary. There are already signs of what may come. The firm is, for example, considering a spinoff of its private equity businesses, something it doesn’t strictly have to do to comply with Volcker Rule provisions in U.S. financial reform.
Similarly, it may give the bulk of its proprietary traders their freedom. Since so many of them have taken it of their own volition over the years, seeding and starting some of the more successful names of the hedge fund firmament — Eric Mindich of Eton Park and Daniel Och of Och-Ziff Capital Management come to mind — this wouldn’t be so radical.
In both cases, of course, such changes would amount to Goldman giving up some of its golden geese. In the public’s eye, the firm can argue it’s doing so for compliance reasons. But the truth is, both businesses have created unseemly opportunities for conflict with core Goldman clients. This is something that many Goldman partners — particularly those on its Business Standards Committee — should be fully considering.
Nothing has been more hurtful to the firm than the notion that Goldman put its own interests as a principal investor ahead of clients. It’s a charge that Goldman has weathered for years, but which took on renewed energy amid its recent travails.
These aren’t the only innovations, however, that may result from Goldman’s spiritual journey. It has shareholders and a desire to grow, too. As it jettisons businesses, it will naturally look to new opportunities. The firm isn’t saying what those might be, but there are some logical, if potentially unexpected, avenues the firm could take.
How about retail? Goldman is unlikely to ever offer free toasters to bring in checking account customers. But one of the lessons learned from the crisis is that being a wholesale bank doesn’t provide immunity from the hoi-polloi. In fact, it might actually hurt.
The likes of Citigroup, JPMorgan, Wells Fargo and even Goldman’s primary investment banking rival, Morgan Stanley, have tens of millions of customers who interact with the bank, its employees and its brand every day. Provided they are happy clients, these are armies that can be subtly, even naturally, deployed in an institution’s defense.
It may be a stretch to think Goldman will go this far in its next iteration. And there’s always a risk the firm’s analysis takes it in a very different direction. But Goldman consists of smart, creative — and yes, highly paid — people. Expect surprises.