Losing Luster: Crunch time for Goldman Sachs
This is part one of a three-part examination of how Goldman Sachs has fallen from grace under the leadership of Lloyd Blankfein, a tale chronicled by a series of columns from Reuters Breakingviews. Parts two and three will be published later this week. The series is also available in downloadable book form here.
Nothing attracts public opprobrium for the financial industry more than Goldman Sachs and its boss Lloyd Blankfein. Rivals suffered far greater losses and required more government aid. Some even went belly up. But Blankfein and the firm he has run since June 2006 have become the personification of all that’s wrong with the system.
For one, he’s among the few bank bosses to keep his job. That makes him a more legitimate target for ire than those who have been parachuted into senior roles at weakened banks or ushered into obscurity. But it’s hardly the only reason Blankfein and Goldman have been so lambasted.
Goldman’s problems derive from its success. The Wall Street titan dominated investment banking league tables, raked in trading profits and generated the best returns on equity. It was phenomenally well regarded and connected. Blankfein’s predecessor, Hank Paulson, became U.S. Treasury Secretary. And no firm’s employees were so well rewarded; Blankfein’s 2007 bonus, at $68 million, outstripped all peers.
The firm earned envy and respect. Others benchmarked their own performance against Goldman’s. Its reputation seemed even more assured early in the housing slump as the firm sidestepped the embarrassing losses that so damaged others.
That changed as the crisis worsened. What previously counted as Goldman’s smart risk management morphed in the public consciousness into Goldman and its bankers cynically profiting at everyone else’s expense.
Dysfunction elsewhere occasionally stole the limelight. But the story always circled back to Goldman. Rolling Stone magazine branded the firm a “great vampire squid wrapped around the face of humanity,” a moniker destined to stick. Twitter accounts poke fun at Goldman’s top PR man and air select conversations overheard in the elevator of the firm’s shiny new, lower
A $550 million fine imposed by the Securities and Exchange Commission cemented Goldman’s fall from grace. The regulator charged the firm with misleading investors in Abacus, a now infamous mortgage-backed collateralized debt obligation, even though the buyers were seasoned mortgage experts.
The firm’s responses didn’t generally help. Blankfein’s offhanded joke about doing “God’s work” and the board’s decision to double his bonus in 2010 despite the firm’s slipping results came off as yet more arrogance. Uncomfortable appearances before Congress, regulatory changes and a couple of trading slip-ups added to the woe. And Goldman’s shares — at the time of writing — were trading ignominiously below book value.
The articles selected for this book chronicle Goldman’s bumpy ride under Blankfein over the last five years from virtually untouchable to basically unremarkable. It might even be a candidate for a breakup. Of course, Goldman has been here before. The question is not just whether Goldman can rise again, but whether in the face of a new regulatory regime it can do so without a change to its corporate structure — and perhaps its management.
BY ROB COX
Goldman Sachs boss Hank Paulson already has one of the best jobs in the world. So why would he trade leadership of Wall Street’s premier firm for a bit role in a dying regime?
Under President Bush, the Treasury Secretary’s job has been gutted like a bass at a fish market. Paulson’s predecessors failed to influence policy meaningfully. Deficits widened and the dollar dropped. Alan Greenspan’s flooding of the market with liquidity really kept the economy moving. What’s Paulson thinking?
In one respect, his departure from Wall Street looks timely. It is hard to imagine a more Goldmanlocks economic scenario: interest rates are still low by historical standards; companies, private equity firms and hedge funds are awash in cash; M&A is at a cyclical peak; and securities trading volumes are booming.
Goldman recently reported mind-blowing profits. The stock, while off its highs, is up 60 percent in a year and has tripled since Paulson led its IPO. So leaving now with about $700 million of stock under his belt seems sensible. That’s especially true given the dominance of the trading businesses to Goldman’s bottom line. It’s only natural that a former client banker like Paulson would now pass the baton to Lloyd Blankfein and his merry traders.
But it would be disingenuous to view this as a simple trade at the top. Patriotism undoubtedly plays a role. And Paulson must have felt some obligation given Goldman’s emerging role as a sort of “Team America” supplying the human capital to sort out the nation’s fiscal problems. Moreover, one suspects Paulson felt there is plenty of work needed to be done to prepare America’s finances for more difficult times.
The dollar’s recent decline reflects eroding confidence that America can keep spending profligately without consequence. With a greater percentage of government debt held by foreigners, it is imperative the nation has an articulate and persuasive chief financial officer. That Paulson is a known quantity in Beijing and other capitals that increasingly influence America’s financial destiny, only adds to his attraction as Treasury boss.
For the sake of the country, and its creditors, one can only hope the president lets his third Treasury boss do the job.
Published on May 30, 2006
LLOYD OF THE BOARD
BY ROB COX
Goldman Sachs has missed the chance to do something radical with Hank Paulson’s departure for the Treasury. On Friday, Lloyd Blankfein was appointed to succeed him as chairman and chief executive of the investment bank. Goldman should have split these roles. Not just to please corporate governance sticklers. It would have been good for business.
Goldman has come a long way since Paulson led it to public ownership in 1999. Since then the biggest growth in business has come in the bank’s clever use of its capital — both as a trader for its own account and in the service of clients.
The Goldman principle is that those who put up the biggest numbers call the shots. So it follows that Blankfein, the trader’s trader, should become chief executive. But Goldman must recognize there is a tension between the principal side of the business and the more traditional activities of the firm, where it helps customers raise money and do deals.
This tension has intensified recently after a series of leveraged takeover approaches in the UK ruffled feathers. That gave the impression the traders were running the business while those serving corporate clients play second fiddle.
As a highly regarded relationship banker, Paulson sought to defuse this tension by keeping the traders in check. He had the credibility and the authority for his voice to be heard. It is not entirely apparent that Blankfein can provide the same balance now that he occupies both roles. Appointing a chairman with the Paulson touch would have sent a clearer signal that Goldman’s top priority remains serving its clients.
Published on June 2, 2006
TRIPLE THREAT- Only three men have run Goldman Sachs since 1994 — from left to right Jon Corzine, Henry Paulson and Lloyd Blankfein, who took over in 2006. REUTERS/Tim Shaffer, REUTERS/Larry Downing, REUTERS/Chip East
GOLDMAN’S MANDARIN LESSON
BY HUGO DIXON
CHINESE TAKEAWAY – Goldman Sachs got a good deal on its investment in ICBC, which raised $19 billion in the world’s biggest IPO in 2006. REUTERS/Paul Young
Goldman Sachs certainly knows a good deal. Like buying a 7 percent stake in China’s largest bank for only 40 percent of what it is worth, effectively making a $4 billion profit in the process.
One can, of course, be sceptical about Chinese bank balance sheets. Have all those bad debts really been taken into account? On that view, even paying 1.2 times book – what Goldman is paying for its $2.6 billion stake in Industrial & Commercial Bank of China (ICBC) — is risky.
But look at another yardstick: the market. ICBC itself hasn’t yet gone public. But China Construction Bank (CCB), the country’s third largest, did go public last year — and is now trading on 3.1 times book. On that yardstick, Goldman’s $2.6 billion stake would be worth $6.6 billion. Hence, the $4 billion notional gain.
Goldman isn’t the only Western financial institution benefiting from investing in Chinese banks. Bank of America, for example, is already sitting on a $4 billion-plus paper profit on its original $2.5 billion investment in CCB — which it bought at roughly the same multiple of book that Goldman is now paying. But there is a difference. Bank of America came in before there was a public value for a big Chinese bank. Although Goldman’s deal has been brewing for some time, it has been finalised after the market has had its say.
Equally, Goldman isn’t the only Western financial institution getting good terms for buying into ICBC. Allianz is investing $1 billion and American Express $200 million. But again there is a difference. Not only has Goldman got the lion’s share of the deal; it is not nearly as obvious what it brings to the party.
Sure, the investment bank is going to teach the Chinese risk management and give guidance on internal controls and corporate governance. But that doesn’t look as strategic as Allianz teaching ICBC how to sell insurance to its 100 million customers or American Express giving guidance on how to hook them on charge cards.
So how has Goldman pulled it off? Probably because it has long been close to ICBC, although it isn’t officially its adviser. Maybe the Chinese should have sought an independent opinion.
Published on Jan. 27, 2006
BY HUGO DIXON
The big talking point in London is the backlash against Goldman Sachs among corporate clients. How can the investment bank be trusted as an adviser when it is seemingly on a rampage, making quasi-hostile bids for public companies? How much can it be relied upon to act in your interests when it is also acting for some of your most bitter rivals?
There has long been grumbling about Goldman’s multiple conflicts of interest. But, in general, companies have been impressed by the bank’s power and acumen. They have tended to conclude that they are better off having it working for them — albeit not in an exclusive fashion — than working against them. What is astonishing about the past week has been the willingness of chairmen and chief executives to make their displeasure known, albeit off the record. The result is the industry’s most envied corporate franchise is in danger of erosion in the UK.
The trigger has been Goldman’s involvement in no fewer than four quasi-hostile approaches for large British companies: ITV, the broadcaster; BAA, which owns Heathrow airport; Mitchells & Butlers, a pub chain; and ABP, the ports group. Goldman wasn’t simply advising on these approaches. It was proposing to invest as a principal.
With so many companies being assaulted simultaneously, corporate chieftains seem to have concluded there is safety in numbers and have made their displeasure known. So much so that Hank Paulson, Goldman’s longstanding boss, had to issue an edict telling his bankers to think carefully before engaging in activity that could be portrayed as hostile.
This intervention appears to have been a massive PR blunder. It has made the issue of Goldman’s behaviour a legitimate talking point. Paulson didn’t return requests to comment.
The issue isn’t just whether Goldman can be trusted as an adviser when it is making quasi-hostile approaches to other public companies. It has also been criticized for a curious “dual-track” approach. Take BAA. When the airports group faced a hostile approach from a Spanish construction company, Goldman asked to defend it. As part of its pitch, it also offered to buy the company.
One way of viewing this is as offering a full service to clients. Another is that Goldman was exposing itself to a conflict of interest. Could BAA rely on the firm to tell it what was in its interest when it potentially had so much to gain from buying the company? No wonder Goldman was shown the door. When it tried a similar dual-track approach a couple of years ago with Sainsbury, a big UK supermarket chain, it was fired as an adviser.
Then there is the separate issue of whether Goldman can be trusted when it is acting for rivals. This is one reason why BSkyB, the UK pay-TV company controlled by the Murdoch family, dismissed Goldman as its corporate broker just before Easter.
Why is all this happening? Probably because there is much more money to be made in the short term from doing deals than nurturing long-term relationships. This is also the philosophy of the super-charged traders, who increasingly dominate Goldman’s higher echelons just beneath Paulson, a former investment banker.
It is unclear how the internal struggle will play out. Paulson’s edict may have temporarily tilted the emphasis back to long-term relations. But there must be a chance that greed will put the traders back in the driver’s seat before long. Whichever way, Goldman’s ability to both parade as a trusted adviser and play the field aggressively itself is probably unsustainable.
Published on April 21, 2006
OCCASIONALLY GROUNDED-Conflicts of interest have always surrounded Goldman, as when, in 2006, it sought to defend airports operator BAA from a hostile takeover approach while also offering to buy it. REUTERS/Toby Melville
GOLDMAN’S GOLDEN RING
BY ROB COX
Goldman Sachs is the Google of Wall Street. In the same way that Google
recruits the best and brightest in Silicon Valley, Goldman is the financial
temple that excels best in attracting the most talented adherents to the
religion of money. One of the critical ways it has continued to do this
despite becoming a public company seven years ago is by keeping the inner
sanctum of its partnership intact.
Every two years the firm anoints its top producers to the title of partner.
It just named 115 of these lucky men and women to its 2006 crop.
This doesn’t just confer a new character on their Japanese business cards.
It allows them to fillet the tenderloin of the investment bank’s bonus pool.
As Goldman is on track to earn more than any other securities firm this
amounts to one of the greatest payouts in Wall Street history.
How big? The year’s not yet over and Goldman doesn’t reveal how it
sprinkles the gold dust around. But one can approximate. Last year, the
group’s 287 partners divvied up $2 billion. Assume the size of the bonus
pool relative to the company’s net income remains unchanged. Profits,
however, are expected to rise by 50 percent to $8.4 billion. On that basis,
the partners’ pool would expand to $3 billion.
This year’s list of new partners is the most ever at Goldman. In 2000,
another boom year, the firm added 114 partners. Relative to overall
employment, however, that represented an even larger slice of the firm
than today’s expansion. But the relationship that matters most is to profits.
And these have nearly tripled since 2000. To the victors of this latest round
of promotions go some extreme spoils.
Published on Oct. 26, 2006
BY ANTONY CURRIE
Wall Street crisis? What crisis? That would appear to be the message from Goldman Sachs’ record first-quarter earnings of $3.2 billion — which beat expectations by a quarter. The bank’s trading desks powered ahead, generating revenue growth of more than 50 percent from the fourth quarter. These more than offset declines in fees at the hedge funds it oversees. But as stellar a sign this might appear for Wall Street, Goldman’s bumper showing may not be a perfect guide for investors to follow.
For starters, Goldman closed its books for the first three months of its fiscal year on the last Friday in February — as rivals Bear Stearns, Lehman Brothers and Morgan Stanley may have done. They release earnings in the next few days. That means none of the current crop will reflect the mini-rout that hit global markets just a few days later.
True, it wouldn’t necessarily mean earnings would have been dented. Traders may well have profited from the increased volatility of the markets. The CBOE’s Vix Index, which measures swings in financial markets, nearly doubled in the week after Goldman closed its books. But investors looking for such proof must wait for JPMorgan, Citigroup and Merrill Lynch to report their results next month.
Moreover, Goldman doesn’t provide the best benchmark for the impact of the escalating woes of the U.S. subprime mortgage market. Unlike Morgan Stanley, Merrill Lynch and Bear Stearns, Goldman hasn’t been snapping up lenders. Nor does it appear to have as much exposure to struggling home-loan providers like New Century, which counted Morgan Stanley as one of its big financial backers.
Of course, it’s not just what Goldman didn’t do wrong, but what it did right, that determined its brilliant first quarter. Goldman’s fixed income, commodities and currency trading arm booked a record $4.6 billion in revenue. Equities trading revenue hit a record $2.1 billion, an increase of 75 percent from the preceding quarter. These helped defray a stinging decline in asset management fees, from $739 million to $90 million, largely a consequence of lacklustre performance at its $10 billion Global Alpha hedge fund.
Add it all up, then, and it would be a stretch to view Goldman’s latest results as a harbinger of even better times to come on Wall Street. More than likely, they may represent the high-water mark for the financial services industry.
Published on March 13, 2007
THE CURSE OF GOLDMAN ENVY
BY HUGO DIXON AND ANTONY CURRIE
Why did some banks get so badly scorched by the subprime debacle and others come through relatively untouched? What’s the difference between Citigroup and JPMorgan? Morgan Stanley and Goldman Sachs? UBS and Deutsche Bank? Merrill Lynch and Lehman Brothers?
On the face of things, these companies may look quite similar to those they’re paired together with. But Citi, Morgan Stanley, UBS and Merrill have among them written off $65 billion so far due to the credit crisis. Meanwhile, JPMorgan, Goldman, Deutsche and Lehman have only racked up write-downs totalling around $9 billion. The average share price performance of the first quartet last year was minus 36 percent. The latter group was only down 5.25 percent.
There are several reasons for this. One, undoubtedly, is luck. But something else explains a lot of the difference. The losers were infected by what one could call Goldman envy. The winners were more immune to the disease.
Goldman envy started to become a serious problem after the turn of the millennium, when that Wall Street firm started to pull away from the investment banking pack. Its profits per employee rose sharply as it deployed more of its own capital to big and sometimes complex bets — whether it was trading securities on its own account or investing in private equity.
Of course, it wasn’t just Goldman that had competitors turning green. They also were agog over the burgeoning hedge funds and private equity groups that have been raking it in over the last few years and making ordinary investment bankers seem like poor relations. And many yearned for the juicy returns of Lehman Brothers’ mortgage business.
One common response among those lagging behind has been to try to emulate the alpha males of the banking world — in particular by increasing their bets in the once-booming fixed income market.
Former Merrill boss Stan O’Neal would frequently berate his subordinates for not delivering Goldman-like results. Morgan Stanley’s ex-second-incommand Zoe Cruz was constantly using Goldman as the yardstick for her firm’s performance. And Citigroup executives described the megabank as a growth stock until just recently, putting its businesses under pressure to show commensurate earnings growth.
The snag is that mere desire doesn’t turn a chimpanzee into a gorilla. Building successful operations takes time. Part of Goldman’s success comes from the fact that its risk-taking approach — and the accompanying discipline of risk-management — derives in part from betting its employees’ own money.
But desire can drive reckless growth. Take Citi and Merrill. Five years ago, neither was a big player in underwriting subprime mortgage bonds and CDOs. But by 2006, they were at or near the top of the league tables for both markets.
The snag is that a bank is unlikely to manage things well when it’s expanding rapidly and doesn’t have experience. It may put the wrong people into place, not institute the right controls and implement the wrong incentive schemes.
The banks with the biggest problems seem to have made such mistakes. UBS, for example, quickly ramped up its residential mortgage business. But not because there was any strategic value in being in that market. Rather, it decided it wanted to bulk up in the hot securitization business, and trading and underwriting residential mortgages and CDOs was the easiest part of the market to enter.
So why were other banks relatively immune to Goldman envy? Well, Lehman had a big, lucrative mortgage lending and structuring business for almost a decade. So it didn’t need to engage in a break-neck game of catch-up. Deutsche arguably also had a more ingrained risk-taking culture.
Meanwhile, JPMorgan had more market-savvy leadership in Jamie Dimon than, say, Citi had in Chuck Prince.
All this suggests two lessons for the future. If you are a chimp, don’t try to kid yourself that you’re a gorilla. And, if you see a chimp pumping itself frantically with steroids, sell its stock.
Published on Jan. 19, 2008
SURVIVOR: WALL STREET -Lloyd Blankfein outlasted many of his counterparts through the financial crisis, including, from left to right, starting at top: Alan Schwartz of Bear Stearns; Marcel Ospel of UBS; Stan O’Neal of Merrill Lynch; Kerry Killinger of Washington Mutual; Ken Lewis of Bank of America; John Thain of Merrill Lynch; James Cayne of Bear Stearns; Chuck Prince of Citigroup; and Dick Fuld of Lehman Brothers. REUTERS