Goldman Facebook coup embarrasses rest of Wall St

By Rob Cox
January 6, 2011

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

Goldman Sachs’ rivals must be kicking themselves. The firm’s near $2 billion investment hook-up with Facebook is relatively small beans financially, but it’s a big win in franchise terms. After the lumps Goldman took last year, the deal shows the firm can still lead the way wrapping its tentacles around a key client for mutual benefit.

Goldman could still lose money on the deal for its shareholders, partners and clients. And questions remain as to whether its plan to invest $450 million of its own capital alongside $1.5 billion from others through a single investment entity violates the spirit of Securities Exchange Act disclosure rules. That means there’s still a chance the high-profile deal could backfire financially or in the realm of public opinion.

But taking calculated risks is what separates Goldman from run-of-the-mill competitors. The Facebook effort also involved stitching its sometimes conflicting strands of business into a fabric that suited a top priority customer. That’s a way both to fend off rivals and to mitigate the risk in the deal.

The Goldman coup surely started with an investment banking relationship with Facebook’s executives and its board, including early venture capital supporters Peter Thiel and Jim Breyer.

But other banks can do that. So something more was required: capital. Even without the backing of some of its in-house money managers, Goldman found the cash. Chief Executive Lloyd Blankfein carved out a slice of the balance sheet — a bold call given that many bank executives are paralyzed trying to figure out the impact of regulatory changes on proprietary investments.

Moreover, Goldman’s Silicon Valley bankers enlisted the private wealth management division to bring in the bank’s customers as investors. That doesn’t just generate fees — it allows Goldman to boast that it brings clients deals other banks can’t match. The firm’s powerful network of alumni also played a role. Digital Sky Technologies, a Facebook shareholder that’s investing at least $50 million more, counts former partners of the bank among its executives.

There are other tentacles standing by for the future, too. Goldman will probably take Facebook public eventually, for a juicy fee. And its private bank may be able to grab the founders and employees when that happens. The likes of Morgan Stanley and Credit Suisse should be wondering whether and how they can coordinate their various appendages so successfully.

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Given Goldman’s role in TARP and the mortgage meltdown derivatives I would consider this to be more of the same. They need to me thoroughly investigated. IMHO this deal will also be cooked to the US determinant and to Goldman’s advantage. Power corrupts and absolute power corrupts absolutely.

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