Rough Ride: Goldman during the meltdown
This is part two 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. Part one can be read here. The series is also available in downloadable book form here.
END OF AN ERA
BY JEFFREY GOLDFARB
The writing on the wall became all too clear for Goldman Sachs and Morgan Stanley. Surrender now, it read. And so they did. The last two big investment banks have traded in their Ferrari-like business models to become Buick-like bank holding companies. It’s a symbolic end to a Wall Street that was both envied and despised for the wealth at its core.
Following the collapse of Bear Stearns, the demise of Lehman Brothers and the fire-sale of Merrill Lynch, quivering markets had turned their feral eyes on Morgan Stanley and Goldman Sachs. Just last week, both firms expressed confidence in their structures. Investors remained suitably sceptical as the financial crisis deepened. Morgan Stanley began serious merger talks while Goldman began contemplating its own fate more seriously.
By electing to become bank holding companies, both institutions are inviting closer scrutiny. Instead of being overseen by the Securities and Exchange Commission, a watchdog whose credibility has deteriorated, Goldman and Morgan Stanley will be watched by the Federal Reserve and Treasury’s Office of the Comptroller of the Currency. The Federal Deposit Insurance Corp. will also have a say if both banks take on more customer deposits, as expected.
In return for agreeing to this greater oversight, Goldman and Morgan Stanley will be able to borrow short-term from the Fed on a permanent basis. The combination of more solid funding and stronger supervision should help boost short-term confidence, although some may fear the decisions were spurred by undisclosed but life-threatening liquidity problems.
Once the new regulation settles in, the former investment banks will probably have to rethink their balance sheets. The high Tier 1 capital ratios reported by U.S. brokers didn’t correspond with crude measures of leverage — about $30 of debt for each $1 of capital. The peak returns, in excess of 25 percent, support the case that these institutions have been too thinly capitalised.
The new bank holding companies can look forward to more solid capital bases, less risk and lower returns. How severe the transition and how long it will take are unclear. But in time, investors will also have to read the writing on the wall.
Published on Sept. 22, 2008
PAVED WITH GOLD, MAN
BY RICHARD BEALES
SWEET DEAL – More than 20 years after his investment in Salomon Brothers, Warren Buffett in the thick of the crisis bought $5 billion of Goldman Sachs preferred stock yielding 10 percent. REUTERS/Carlos Barria
In the credit boom, some said Warren Buffett had lost his touch. Now the Berkshire Hathaway boss has collected what looks like a canny investment in Goldman Sachs, Wall Street’s strongest name. The folksy Sage of Omaha looks right back on form.
It’s more than 20 years since Buffett dabbled with investing in Salomon Brothers, before being called on to run the struggling firm for a while. In the meantime, he has always had an eye for an investing bargain provided the operation concerned has what he calls a “moat” to keep competitors at bay. Despite being recently besieged, Goldman’s reputation is still the nearest thing Wall Street has to that kind of defence.
Buffett is getting $5 billion of Goldman preferred stock yielding 10 percent and warrants over $5 billion of common stock at a strike price of $115 a share, already in the money at Tuesday’s $125.05 close. Goldman also raised another $5 billion in a public offering of equity announced early on Wednesday. If exercised, Buffett’s warrants could convert into an 8.5 percent stake.
In hindsight, if Buffett was ever going to invest in Wall Street it had to be Goldman. Aside from the firm’s industry-leading franchise and one of the few management teams in finance that still looks competent, he has a soft spot for Byron Trott, a Goldman banker, whom he has described as “the rare investment banker who puts himself in his client’s shoes”.
Goldman, meanwhile, has snatched from the jaws of defeat something that almost looks like a victory. The firm’s shares were in free-fall for a time as the business model of Wall Street’s remaining independent investment banks came under attack. After being propped up by the U.S. Treasury’s rescue plan and then converting in a hurry to bank holding company status, it needed fresh capital. It’s now got some, from about the only investor around whose endorsement could be worth more than his cash.
Coming hot on the heels of another $5 billion Buffett deal last week — for Constellation Energy, which ran into financial-sector related trouble — it looks as if the legendary investor could finally be thinking things won’t get much worse. Goldman may be a one-off transaction, but the sight of one of the world’s canniest investors taking out his cheque book could well give a lift to other financial stocks, too.
Published on Sept. 24, 2008
A GIFT FROM GOLDMAN
BY ANTONY CURRIE
For once, rivals might be pleased Goldman Sachs took the lead. The Wall Street firm is the first bank to sell debt backed by the U.S. government under the Federal Deposit Insurance Corporation’s debt guarantee programme. The $5 billion deal — around twice what Goldman initially expected to raise — looks like a crowd pleaser. That’s just what the market needs, even if it is still effectively a bailout.
Goldman wasn’t facing a liquidity crisis any time soon, but should be glad to be able to tap the public bond market for the first time in seven months — and at a decent price, as the guarantee means the debt is rated triple-A. After adding in the one percentage point fee for using the programme, Goldman is paying 4.25 percent all-in — roughly half the yield its existing bonds are trading at in the secondary market. That’s a better deal than UK banks are getting. They have to pay their government their median credit default swap premium for the past year plus a 50 basis point fee for their guarantees.
True, most of Goldman’s regular bondholders won’t touch the new paper with such a low coupon. But the deal should give them some comfort that their debt is safe, and may even convince them to buy more of the older bonds. Over time, that may bring those spreads down.
But the new debt certainly looks a boon to investors who usually buy U.S. mortgage agency and government debt. Goldman priced the deal to yield more than Fannie Mae and Freddie Mac bonds, even though the FDIC programme offers users the explicit backing of the U.S. government, something the agencies still don’t have in writing.
Goldman appears to be overpaying by another metric, too: the deal is priced to yield 0.85 percentage points over mid-swaps, or the median rate at which double-A-rated banks lend to each other. Of Course, it’s not unusual to offer a sweetener for a new deal from a new programme. That it succeeded should encourage other banks to follow suit, and potentially at better rates — and then start lending the money to get the economy moving. U.S. banks shouldn’t get too cocky, though. After all, any success is down to Uncle Sam. Without
U.S. taxpayers propping them up, most would be in bond market hell.
Published on Nov. 25, 2008
BY ROB COX
The Panic of 2008 was notable for its absence of heroes. Unlike the crisis that hit American finance 101 years earlier with the collapse of the unregulated trust companies, there was no J.P. Morgan brandishing equal parts capital, moral suasion and authoritarian might to force the industry back on its feet.
In the current panic, villains have been identified in great abundance. That’s made it foolhardy — even dangerous — for any Wall Street leader to poke his head above the parapet to defend the financial industry while calling for the eradication of its excesses. Now, though, Lloyd Blankfein, the chief executive of Goldman Sachs, appears to be doing just that.
Along with Jamie Dimon – who now runs the company Morgan founded — and, across the Atlantic, Deutsche Bank’s Josef Ackermann, Blankfein is emerging as an influential voice shaping Wall Street’s future.
Look no further than the speech he gave on Tuesday in Washington. In the face of taxpaying hecklers unfurling a banner beside him calling for their money back, Blankfein exhibited the contrition much of his industry has arrogantly avoided. After his detractors were escorted away, Blankfein attempted to articulate their rage and even connect with it.
He acknowledged the shoddy risk management that had infected finance. He laid out the basic principles that should underpin bank compensation. He rightly criticised lawmakers’ efforts to restrict visas for skilled foreign workers. Not for the first time, he robustly defended mark-to-market accounting. And he accepted that hedge fund and private equity firms may need to be more heavily regulated.
Along the way, he sounded a good bit more statesmanlike than, say, Wells Fargo’s chairman, who called government attempts to help banks “asinine”.
Even so, Blankfein isn’t an obvious leader of the swaggering Wall Street class. He’s also extremely wealthy, making him a soft target for criticism from the hurting masses. Unlike the rotund Morgan, whose ever-present cane and a bad case of rosacea gave him a frightful visage, Blankfein is a jocular, unassuming man with a frame that suggests the high school chess club rather than varsity lacrosse.
Goldman, too, is an unlikely breeding ground for an industry figurehead. It eschews the star system, instead emphasising a collegiate approach. And its role as a conveyor belt of talent to the previous U.S. administration — and to the board of accident-prone Citigroup — would seem to give it reason to keep its head down.
So Blankfein’s tentative steps into the open may yet backfire. But as an experienced trader, he has surely calculated the risks and decided that it would be better to risk public embarrassment than hide in the bunker while his industry is dismantled.
Published on April 7, 2009
BY ANTONY CURRIE
Goldman Sachs has solidified its status as the winner of the credit crisis. The Wall Street firm had already demonstrated its relative success at managing risk ahead of and during the meltdown. Now it’s at the vanguard of those cranking out healthy earnings again.
Some of Goldman’s success was relatively easy to spot ahead of time: its fees as one of the lead underwriters in last quarter’s boom in equity deals jumped an eye-popping 1433 percent to $736 million. But most of the juice came from its trading desks. Both its equities and its fixed income, currency and commodities divisions posted record revenues — and, combined with principal investments, accounted for almost 80 percent of the firm’s top line.
But that’s not necessarily the result of Goldman ramping up its bets — aside from a jump in equities, the firm’s value-at-risk stayed pretty flat in the second quarter. Rather, it’s the fact that Goldman is one of the few firms left that is willing and able to put its own capital at stake, be it for clients or its own book. Rival Morgan Stanley, for example, nixed much of its risk-taking businesses at the end of last year.
That means Goldman is better placed to take advantage of the kind of activity that characterised the three months to the end of June: rallies in equity, debt and mortgage markets made perfect fodder for the Goldman money machine, especially with spreads in many instruments still wide compared to the days of the boom.
The question is whether Goldman can maintain such a heady performance. The firm is operating with leverage of 14.2 times shareholders’ equity — almost half its peak in the first quarter of 2008. That’s fine as long as spreads stay relatively wide. But as they narrow, Goldman is either going to have to win a lot more business, take a good deal more risk or ramp up its leverage. Otherwise, last quarter’s 23 percent return on equity is going to be hard to replicate.
Published on July 14, 2009
SACHS, DRUBS AND ROCK ‘N ROLL
BY ROB COX
The musician Dr. Hook once noted that there’s nothing more thrilling than appearing on the cover of Rolling Stone. Goldman Sachs begs to differ. Though the investment bank is pictorially gazumped by the Jonas Brothers, the glossy advertises a 12-page manifesto on the firm’s role in causing various plagues, from the housing crisis and oil price spikes to general famine.
At the risk of being branded by the screed’s author one of the “thousand hacks out there willing to pimp Goldman’s viewpoint”, the arguments for the firm’s evildoing aren’t really new, they’re porous and come in a package that diminishes their credibility.
But the investment bank is fair game. Goldman probably is a shade too influential; it does make tons of money — and its fair share of mistakes. Indeed, perhaps what’s most surprising about the brouhaha is Goldman’s dismissive response to it.
Goldman has often made money while others have suffered and it has benefited from decisions made by powerful people in high office, including its alumni. The stretch is in seeing the firm as some sort of organised cabal like the “Illuminati” of Da Vinci Code author Dan Brown’s imaginings.
Sure, it’s possible that beneath the Treasury there wends a secret passageway to a torch-lit altar where Hank Paulson, Bob Rubin, John Thain, Ed Liddy, Josh Bolten, Stephen Freidman, Bill Dudley, Mark Patterson, Gary Gensler, Neel Kashkari, Robert Steel and others don robes, drink bull’s blood and paddle each other silly.
But the real problem is one of excessive groupthink. Goldman is a highly successful franchise that pays generously. This attracts very bright people who are taught to embrace a shared business culture. They make money at an early age, which allows them to move on to less lucrative positions in government.
They take with them certain shared beliefs. Some may be benign: Capitalist economies are better than planned ones, etc. But others, such as the notion that markets can regulate themselves, have proven flawed.
Goldman’s chief Lloyd Blankfein has expressed contrition for the firm’s contributions to the bubble. The firm did not participate in the Rolling Stone article, and has since issued glib responses to it. But now that Goldman has made the cover, it may find addressing the issues head on — and acknowledging the downside of groupthink — is a more profitable and honest endeavour.
Published on July 1, 2009
FRIED CALAMARI — Rolling Stone magazine in 2009 branded Goldman Sachs a “great vampire squid wrapped around the face of humanity,” a moniker destined to stick. Pictured here is another type of cephalopod. REUTERS/Ho New
BY ROB COX AND ANTONY CURRIE
It would be easy for Goldman Sachs employees to forget there’s a financial crisis still going on. The Wall Street firm posted stunning second-quarter earnings and set aside a record amount of treasure to pay staff. But Goldman’s minions would be wise to tip their hats to the contributory role of the very visible hand of the taxpayer. Markets may still be rough, but the biggest remaining risk to Goldman’s franchise could be a political and public backlash against the group’s profits — and particularly its pay.
That’s because the compensation numbers are staggering from almost every perspective. During one of the worst six-month periods in the history of finance, Goldman squirreled away $11.36 billion in compensation and benefits — that’s more acorns than it put aside in the first half of boom years 2006 and 2007. True, the pay is mostly just accrued, rather than paid, at this stage. And even during those earlier boom years, the firm failed to replicate its first-half performance in the second six months.
It’s also true that on a per capita basis the numbers look a little less gilded than during the credit bubble. The first-half figures work out to around $386,000 for six months’ work averaged across every banker, trader, mailman and janitor at the firm. Since Goldman has 29,400 employees today, compensation per staffer is actually below the $433,000 at which it peaked in the first half of 2006.
Goldman’s corporate tax rate is running at a defensible 31 percent compared to last year’s single digits. On top of that, its employees should be poised to hand over income taxes of some $4 billion should their first-half accruals turn into hard cash. And with competition for people hotting up again on Wall Street — even from banks in much worse shape than Goldman — the firm does have to pay enough to keep the best and the brightest.
But the firm would be foolhardy to believe that these arguments will necessarily placate a restive public undergoing double-digit unemployment and politicians with ambitious and underfunded legislative priorities. And although Goldman showed a steely willingness to extend and manage risk through turbulent markets while many rivals did not or could not, it is hard to imagine the firm doing so well without the extraordinary lifelines extended by the government, at taxpayers’ expense, to Wall Street at large. Goldman boss Lloyd Blankfein has been notably contrite and appreciative in his public remarks on this matter. It remains to be seen whether that’s enough to head off Congressional ire.
Published on July 14, 2009
MANNA FROM OBAMA
BY ANTONY CURRIE
BENJAMIN BLANKFEIN — No firm’s employees were better rewarded in the good times than Goldman’s, including Lloyd Blankfein, who took home a $68 million bonus in 2007. REUTERS/Lee Jae Won
Goldman Sachs is showing some humility. In response to mounting pressure from the White House and Main Street for Wall Street to curb compensation, the firm has set aside 35.8 percent of revenue to pay its staff. That’s a record low ratio in a year of record earnings — the latter a feat the firm was at pains not to highlight. Though further financial reforms could sully things, Goldman’s shareholders are for the moment reaping most of the rewards from this populist movement.
That’s not to say employees are faring badly. They’re still pocketing an average of $500,000 each. That’s nearly a fifth less than they would have received had Goldman set compensation at the same level as its previous record year in 2007. But since the bulk of their bonuses are being paid in stock, what’s good for shareholders should ultimately be good for Goldman’s workers too.
The bigger loser, then, may be the taxman. Bonuses, in the United States at least, are taxed at as much as 38 percent, higher than the 32.5 percent that Goldman paid on its 2009 earnings. All in, that means something like $300 million less is going into state coffers — and possibly even less than that since bonus tax rates are higher in other countries, not least the UK, which has imposed a special levy on financial firms.
Charity gets a boost, of course: the firm donated $500 million of its bonus pool to its in-house fund Goldman Sachs Gives, with partners taking the greater proportional hit to their compensation. But shareholders are the big winners. Reducing compensation boosted earnings by some $2 billion after tax.
Granted, with no sign of either a dividend increase or a share buyback, the firm’s owners won’t get the extra cash in their hands. But, in theory, it’s good news for the stock price, which jumped 122 percent last year. And as a fillip to retained capital it further strengthens Goldman’s book value, its balance sheet and its wherewithal to grow the business — legislation allowing.
Of course, the White House’s latest proposals to rein in the financial sector may well undermine this. Details on President Obama’s desire to limit banks’ size and the scope of their businesses are exceptionally vague; deciphering whether a prop trading desk, hedge fund or private equity fund owned by a bank serves customers or not, for example, is no straightforward task. But even watered down, such a plan could whack Goldman’s earnings. Shareholders may want to indefinitely defer their thanks to Obama for the bonus break.
Published on Jan. 21, 2010
FILL IN THE BLANKFEIN
BY JEFFREY GOLDFARB
No one will ever mistake Lloyd Blankfein for a pauper. But compared to his equals on Wall Street, the Goldman Sachs chief executive is looking downright ascetic.
The fill-in-the-Blankfein bonus guessing game ended with a seven-digit figure instead of the $100 million rumored payout. Goldman’s board awarded Blankfein and his fellow top brass $9 million each in restricted stock units for their work in 2009. The units don’t start converting into regular shares until 2011 and can’t be sold until 2015. Just as significantly, there’s no cash in the mix.
While it’s a lot of money by any normal standard, the Goldman boss looks relatively underpaid by some measures. Add in his $600,000 salary and he’s still making less than many of his own employees, below the average pay of an S&P 500 company chief executive in 2008 (the latest year for which data are available) and seven times less than the 2007 version of himself when he delivered equally eye-popping shareholder returns and took home $68 million.
Slice it another way and the relative austerity remains. Jamie Dimon is receiving $16 million in stock and options — and the JPMorgan boss delivered an 8 percent return on equity last year compared to Goldman’s 23 percent. Morgan Stanley’s new chief James Gorman stands to get a nearly identical payday to Blankfein even though his firm lost money in 2009. Even the bosses of busted financial institutions like AIG and GMAC got approval from President Obama’s pay czar to be paid more than Blankfein.
The calculation in paying Blankfein less than he arguably deserved is that the board can deflect the criticism — accompanied by potentially punitive legislation — that its chief profited unduly on the back of taxpayer support. Yet Goldman itself doesn’t seem fully convinced its comparative parsimony will be sufficient to quell the torch and pitchfork crowd. It saved the most anticipated news on Wall Street for a Friday evening.
Published on Feb. 6, 2010
FIRST STEP: ADMISSION
BY CHRISTOPHER HUGHES
Even the mighty Goldman Sachs makes mistakes. The Wall Street bank’s decision to help Greece keep some of its debts hidden from public view in 2001 was one of them.
The transaction allowed the Greek government to present accounts which understated the state’s liabilities by 1.6 percent of GDP.
The arrangement was not illegal, not against any regulations and was approved by Europe’s statistical authorities. Still, helping a client lessen the transparency of its finances is ethically questionable. For its own sake, Goldman should just admit that the firm compromised the principles it is supposed to hold dear.
At the time, it may have seemed that the deal’s goal, comforting Greece’s fellow members of the euro zone, justified the means. In retrospect, though, it’s hard to reconcile such financial alchemy with Goldman’s expectation that its people comply fully with the “letter and spirit of the laws, rules and ethical principles that govern us”.
There are, to be sure, mitigating factors. Goldman, which carefully considers the ethical and reputational risks of individual transactions, wasn’t alone. Other banks helped governments take advantage of the European Union’s weak fiscal governance. But Goldman regards itself as the global standard setter, demanding “high” ethical standards of its people, and eschewing the practices of the crowd.
Similarly, it can be argued that Goldman followed its overarching business principle that client interests always come first. And it certainly remained faithful to another tenet: that the firm should strive for creativity. It’s also true there have been almost no complaints about this transaction until now.
Such considerations help explain why a senior Goldman executive said the Greek deal was not inappropriate — and why Goldman posted a dry explanation of the deal on its own website. That’s all in tune with Goldman’s general post-crisis message: We have done little wrong and many of the attacks directed at us are sour grapes.
But outsiders are much more critical — a fact that Goldman ignores at its peril. Even Ben Bernanke, the generally pro-Wall Street Federal Reserve chairman, has raised questions about Goldman’s role in the Greek pastichio.
Humility may not come easily to Goldman, but it can be the most creative, and effective, response to criticism. Goldman’s longer-term interests would be best served by admitting that on this occasion dedication to client service and creativity got the better of its judgment, something it won’t let happen again.
Such an admission wouldn’t reflect well on Goldman’s client, the Greek government. But the fact that Greece fudged its finances is hardly under debate. At the very least, Goldman could admit that it should, with hindsight, have advised against the deal.
Published on Feb. 26, 2010
BY ANTONY CURRIE
Just what Lloyd Blankfein would write in his annual letter to shareholders this year has been the source of almost as much market speculation as the size of his 2009 bonus. Would the Goldman Sachs boss adopt a contrite tone, or come out swinging? In fact, Blankfein seems to have pulled off a delicate balancing act between the two.
The Goldman boss could not afford to ignore the role the United States and other governments played in putting the financial markets back on their feet. So he credits them early and often — six times on the first page. Compare that to JPMorgan’s Jamie Dimon, whose first nod to Washington comes 26 pages into his substantial tome.
Blankfein also had to go on the defensive. He dedicates almost a third of his letter to rebutting accusations that Goldman acted improperly in its dealings with American International Group and in using short positions to reduce its mortgage risk as the crisis unfolded. And he spends another good chunk portraying Goldman as a financial force for good: that its trading division acts almost exclusively for clients, that it is a major financier for governments and non-profits alike and that its principal investments division helped raise capital for companies when other sources dried up in the crisis.
The letter is clearly aimed more at his critics in Washington and elsewhere than at his own investors. What it lacks, though, is the kind of chutzpah that Dimon brings to the table: even while thanking the government for its role in the crisis, the JPMorgan chief uses his letter to remind his shareholders that he didn’t like the backlash that ensued — and that his firm didn’t need the money anyway. He even devotes three pages to his suggestions for regulatory reform.
Of course, Goldman has become the proxy for all attacks on the role financial firms played in the crisis, so its boss does not enjoy the same latitude as Dimon. Nor are Blankfein’s words likely to silence his critics — short of closing the bank down, nothing will. His letter underscores the jam Goldman’s in. But it is, at least, a spirited defense.
Published on April 7, 2010
IT’S NOT EASY AT THE TOP
BY EDWARD HADAS
Lloyd Blankfein and Pope Benedict XVI have a few things in common these days. The chief executive of Goldman Sachs and the supreme pontiff of the Roman Catholic Church serve different masters — mammon and God respectively — but both are embattled leaders of institutions that used to be considered global leaders in their respective fields.
The two organisations’ recent failings are in no way comparable — Goldman’s being merely a matter of money while Rome’s involve the shocking abuse of children. But the two chiefs’ damage limitation exercises are taking similar paths. Both pope and banker have offered mea culpas for past errors and promised to enforce tough new standards. Friends say they have done more than enough.
Their enemies scoff. People at the top of such corrupt institutions are too entrenched to lead the necessary reforms. Didn’t Blankfein say he was doing “God’s work”? Didn’t the pope dismiss his critics as engaging in “idle chatter”? Resignations would be a start, but many opponents think only radical solutions will do: new dogma for Catholics and dismemberment for Goldman. The rhetorical heat makes it hard to separate legitimate grievances from simple hatred.
Still, investment banking has survived wars, depressions and forced dismantling. And the ancient Catholic Church is still going reasonably strong despite Galileo, indulgence scams and the disappearance of the Papal States. Goldman may end up with less proprietary trading and lower pay scales, but it will probably survive. And the Catholic Church is a pretty good emerging market play, even if it were to lose some clout in its traditional homelands.
Despite the serious lapses among his flock, the theologian in the Vatican probably still has more friends than the former trader on Wall Street. But both men seem stuck in unusually challenging valleys of tears. To get through with minimal damage to the institutions they head, they need to mix bold action with humility. Blankfein is probably more practiced at the first and Benedict at the second. With a bit of mix-and-match, each may well succeed in keeping even implacable enemies at bay.
Published on April 9, 2010
IN THE DOCK
BY ANTONY CURRIE
The Securities and Exchange Commission has lit a fire under all the smoke billowing around Goldman Sachs. The bank has become the popular totem for public anger over Wall Street greed. But so far Goldman has been embroiled in little more than a war of words. Now the SEC has accused Goldman and one of its employees of securities fraud related to how they structured and sold a synthetic collateralized debt obligation backed by subprime mortgages in 2007. The stakes couldn’t be higher.
After all, despite all the smoke about Goldman’s conflicts of interest, clients have hardly run from the building. The firm still sits atop, or near it, in many investment banking and stock sales businesses. And in 2009 it traded with 6,000 customers, a third more than three years before. That helped the firm make a whopping $13.4 billion last year.
It’s unlikely all those clients consider Goldman to be a paragon of virtue. Many probably even scoffed a bit at Chief Executive Lloyd Blankfein’s insistence in last week’s letter to shareholders that the firm only acts in the interests of its customers.
But the SEC allegations, which Goldman disputes, lay out a scenario customers may have feared: some clients are more important to Goldman than others, and those without the requisite status can be burned. The regulator also dragged in the most famous beneficiary of the mortgage meltdown, Paulson & Co. The hedge fund made $1 billion shorting the trade the SEC outlines, the same amount lost by investors who bought the bonds. Paulson isn’t charged with anything – but the case revolves around allegations that Goldman misrepresented the role Paulson played, and obscured it from investors.
The SEC’s flimsy reputation may be at stake over the case, but Goldman’s even more so. The charges alone spooked investors, who wiped out more than $10 billion of the bank’s equity on Friday morning. They could scare off some clients too. Some European authorities shunned working with Citigroup after its “Dr Evil” trade in government securities came to light in 2004. And Orange County, California, swore off working with Merrill Lynch — even years after the bank settled charges it sold the region’s treasurer too-risky investments.
Goldman may eventually be exonerated. But containing the fire lit by the SEC will be an exhausting endeavor. The bank will be hoping any damage can be contained to the offending product — which of course smoldered long ago.
Published on April 16, 2010
BOYS IN A BUBBLE
BY JEFFREY GOLDFARB
The performance of Goldman Sachs executives, past and present, in the U.S. Congress shows one bubble has yet to pop. That’s the bubble Wall Street and those close to it inhabit. Sure, the whole Senate subcommittee hearing on Tuesday was largely theater. But one thing seemed clear: Goldman is still out of touch with the world beyond its immediate orbit.
At least through the first five hours of the hearing, it was more about sound-bites than substance. The grandstanding from senators included an expletive-riddled grilling by the panel’s chairman, Carl Levin, quoting Goldman emails. But the bankers parsed their words carefully. They were well-prepared by lawyers, and each had a cinderblock-sized binder of documents in front of them that seemed at times as hard to navigate as a prospectus for a collateralized debt obligation.
Their cautious responses left Goldman still looking as though it cares more about itself than its customers or anyone else. While dodging some questions, the executives variously said they had no regrets or that they didn’t think they or their firm contributed to the collapse of the mortgage market or the wider financial system.
Goldman’s problem is this message simply won’t play on Main Street — and may seem inadequate these days even to some clients. Sure, it’s never easy to appreciate the perceptions of those looking in from the outside. And Goldman has a litany of reasons to think pretty highly of itself, from its profitability to its blue-chip reputation and its influential network of alumni.
In recent days, the firm has also seen Blackstone boss Steve Schwarzman pledge to remain a loyal client and Thomson Reuters Chief Executive Tom Glocer, who counts Goldman and others on Wall Street as customers, writing on his blog that it seemed “too easy and too politically expedient to jump on this bandwagon” of anti-Goldman sentiment.
Of course Goldman deserves the chance to defend itself. And the misleading presentation of information by legislators is no better than Goldman’s own self-serving spin. But the firm’s capable financial whizzes have capitalized on any number of bubbles popping. There may yet be value to be had by deflating the one in which they seem to remain enveloped.
Published on April 27, 2010
BY ROB COX
BLAME GAME — Goldman executives said during a 2010 congressional hearing they didn’t think they contributed to the collapse of the mortgage market or the wider financial system. Among those who testified were, from left to right: Daniel Sparks, Josh Birnbaum, Michael Swenson and Fabrice Tourre. REUTERS/Jim Young
Goldman Sachs could use a non-executive chairman right about now. Four years ago, the investment bank decided against separating the roles of chairman and chief executive and instead gave both jobs to Lloyd Blankfein. But now, as Goldman and its boss find themselves in the crosshairs of legislators, regulators and the public, that sure looks like a lost opportunity. It’s not too late, though, for the firm to make the change.
Not that putting Blankfein in charge was a mistake. There’s a reason Goldman shareholders, including Warren Buffett — who defended Blankfein at Berkshire Hathaway’s annual meeting at the weekend — want him in charge. Under his leadership Goldman earned record profits during the boom and avoided the missteps that brought down Bear Stearns and Lehman Brothers, and nearly ruined other rivals in the bust.
Of course, some of the ways in which Goldman did this are now the source of controversy and a Securities and Exchange Commission accusation of fraud.
The trouble is the qualities that make an excellent manager of a global securities firm do not necessarily work as effectively in the fishbowl of American, and global, public opinion. Blankfein has a good nose for money and talented traders and bankers. And in private he’s funny and surprisingly self-effacing for the leader of Wall Street’s richest firm.
But these attributes may be of little service in handling politicians and taxpayers in an economic downturn who have little inclination to understand the nuances of banker compensation or details of synthetic capital markets. Meantime, Blankfein’s sense of humor (“doing God’s work”) has come across as glib rather than thoughtful.
Here’s where having a non-executive chairman could help. For one, the chairman could ideally provide some air cover for the chief executive. A statesmanlike figure, with strong political and diplomatic skills, would also help deflect some of the glare that has been laser-focused on Blankfein, allowing him more time to run the company.
That, to some degree, has been the experience of Citi, whose chief executive Vikram Pandit struggled with his own public persona a year ago. Naming politically-savvy Richard Parsons as chairman just over a year ago helped take the heat off Pandit. Judging by his last appearance in Congress, Pandit used that time to hone his speaking skills.
There are other good, corporate governance arguments to separate the chairman and CEO roles. That’s why increasing numbers of U.S. companies are doing so, including Goldman rivals Bank of America and Morgan Stanley.
True, making a change now might give the impression that Goldman’s board had lost faith in its chief. But with the pressure increasing on the firm, it could also be the best way to keep Blankfein where he belongs: running Goldman Sachs.
Published on May 4, 2010
REPUTATION BY COMMITTEE
BY ANTONY CURRIE
There doesn’t seem to be much Goldman Sachs boss Lloyd Blankfein can do to silence his critics these days. The Wall Street firm’s decision to set up a business standards committee is a smart idea that could help shore up its reputation — and improve its relations with clients — but only if Blankfein gives the new watchdog real teeth.
The clearest way to do that is to ensure that the committee’s members have the power to say no to traders focused on making a fast buck that could damage the reputation of the franchise in the future. Blankfein reckons Goldman already does that, telling senators in April that the firm believes in rewarding “saying no as much as saying yes.”
To prove that, the committee will need to indulge in a modicum of transparency. That could mean appointing independent outsiders as members. At the very least it requires making public the standards by which the firm’s bankers and traders will be judged. That won’t be easy for Wall Street’s most cloistered parish. But without it, the committee will be little more than an empty PR exercise.
At stake is Goldman’s status as the trusted adviser that gets the first call from corporate chieftains, governments and investors the world over. Up to now, Blankfein says the business has held up well. But talk that AIG is dumping Goldman as its restructuring advisor is not a good sign – even if as a ward of the government it is easy to see why the insurer would be more sensitive to Goldman’s reputational issues than other firms.
The risk is that the longer Goldman remains under the microscope, the greater the chance that corporate clients will think like an AIG. A thoughtfully constructed committee tasked with “rigorous self-examination” of the firm’s business would be one way to ensure that Goldman’s legendary focus on what legendary senior partner Gus Levy called “long-term greedy” can continue to pay off.
Published on May 7, 2010
CONTENTS MAY SETTLE
BY ANTONY CURRIE
Neither Goldman Sachs nor the Securities and Exchange Commission comes out of their slugfest looking pretty. But in settling fraud charges without admitting guilt, the Wall Street firm has beaten the regulator on points, despite a record penalty. That doesn’t mean Goldman can leave the ring just yet, though. It has conceded that its disclosure on the mortgage collateralized debt obligation at the heart of the SEC’s case was inadequate. That’s something that could rebound on Goldman and the rest of the finance industry.
Right now, Goldman has to stump up $550 million, the hardest penalty punch the SEC has ever landed on a single Wall Street target. But the firm should be able to roll with it. The settlement represents just 3.4 percent of its compensation bill last year, or the equivalent of the average annual compensation for just 1,100 of its 32,500 employees. That aside, three months in the regulatory sin bin may have taken the edge off Goldman’s appeal with clients — but that’s not clear yet.
Meanwhile settling makes the SEC’s original crusading bombast look overdone. In making its initial accusation of securities fraud the regulator seemed to be targeting an even more punishing financial blow and at least the removal of Goldman’s chief executive, Lloyd Blankfein. But the watchdog has elicited only the admission that the investment bank’s marketing materials were incomplete, along with relatively modest internal changes, some of which were already in the works.
Announcing the settlement on the day the U.S. Senate finally passed the Dodd-Frank regulatory reform bill also looks a tad convenient, though the SEC denies any connection. Rightly or wrongly, the enforcement of the case now comes over as opportunistic all along — from throwing down the fraud charges just days before Goldman’s first-quarter earnings at a time when reform efforts needed a boost, to settling them days before the firm’s next quarterly report with reform legislation on its way to the president’s desk.
All that said, landing one well-placed blow on disclosure could leave a longer-lasting scar on Wall Street. Investors who feel they’re wrongly out of pocket from buying complex securities from Wall Street are bound to pounce on that admission and file lawsuits of their own. That could leave Goldman and its rivals under attack for some time to come.
Published on July 16, 2010