Goldman’s image problem

By Felix Salmon
October 5, 2009
Bloomberg and the FT have almost-identical headlines this morning, saying that Goldman Sachs stands to make $1 billion if CIT declares bankruptcy. Neither of them is long on specifics, and both seem to be based on information from a single anonymous source, which is then promptly denied by Goldman itself. Here's Bloomberg:

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Bloomberg and the FT have almost-identical headlines this morning, saying that Goldman Sachs stands to make $1 billion if CIT declares bankruptcy. Neither of them is long on specifics, and both seem to be based on information from a single anonymous source, which is then promptly denied by Goldman itself. Here’s Bloomberg:

Goldman Sachs Group Inc. is set to earn about $1 billion should CIT Group Inc. enter bankruptcy or otherwise end a $3 billion financing agreement, according to a person familiar with the matter, who declined to be identified because the payout hasn’t been disclosed…

“This would not be a windfall payment,” Goldman Sachs said in a statement today. “The make-whole payment, which was publicly disclosed at the time of the financing, is simply the present value of the spread to be earned over the life of the facility.”

In the lede we’re told that there will be a windfall of $1 billion for Goldman and that it hasn’t been disclosed, and shortly thereafter Goldman says that it won’t be a windfall and that it has been disclosed. What is a poor reader of such material to think? (The FT story is, if anything, even more confusing, since it conflates the deal with side-bets that Goldman has made in the CDS market to manage its CIT credit risk.)

The easy way out is to simply decide, as Peter Cohan does, that Goldman Is Evil:

Goldman has engineered the world so it wins no matter what…

Goldman’s 0.01 percent of the population is on track to average about $772,858 in total compensation this year, thanks to its ability to engineer the U.S. government and the rest of the business world so it wins while 99.99 percent of America loses.

One thing’s for sure: Goldman isn’t good at playing the press. I don’t know who the source for these stories was, but I’d wager it was the same source for both, someone on the CIT side of the debt renegotiation who knows that Goldman is very concerned with optics these days.

The stories come as Simon Johnson weighs in to the Goldman debate along similar lines, asserting that “US banks or bank holding companies would not generally be allowed” to use private-equity arms to invest in an industrial company like Geely Automotive. I don’t know where Simon got this idea, but generally there seems to have been very little resistance indeed to bank holding companies owning private-equity subsidiaries. (There has been much more resistance to the converse situation, where private-equity shops look to buy banks.) If the Geely deal had been with any bank other than Goldman, this blog entry might well have never appeared.

It’s interesting to me that no one is giving Goldman the benefit of the doubt, and that even in the face of flat-out denials both Bloomberg and the FT are happy to run with aggressive headlines. That says to me that no one trusts Goldman’s flacks to be telling the truth, and that the Goldman image problem remains as bad as it’s ever been.

Given the choice between making lots of money and having a good public reputation, Goldman will always choose the former. But the bank always used to have a reasonably large number of defenders in the press; that number seems to be shrinking daily. Even during the depths of the crisis, when extreme measures got taken every day, Goldman’s “Government Sachs” reputation was bad enough to singlehandedly derail the proposed merger with Wachovia. Since then — and especially since Matt Taibbi’s screed appeared — Goldman’s reputation has only deteriorated further.

Goldman has seconded its president’s chief of staff, Samuel Robinson, to the PR department in recent weeks, in what is surely an attempt to reverse this decline. Judging by today’s headlines, he still has his work cut out for him.

Comments
10 comments so far

You reap what you sow.

Well, the endgame becomes a little clearer in its murkiness when we realize that very few people and companies and government spokesclowns have any credibility.

Can you name anyone or anything, at this juncture, on which you can build a reasonably perfect trust?

Isn’t this a technique of war? Sew chaos and confusion? We’re getting clobbered. Who’s being groomed as the trustworthy one to lead us out of this mess? Either an unknown, or someone/something with an intact reputation. Is there anything or anyone out there that meets this criterion currently?

Umm, correct me if I’m wrong, but the only push back offered by Goldman is that the $1B is the present value of the obligation and they may have to wait for a while to receive payment. I would assume they will be compensated for the time-value of this amount so what makes it not a windfall?

While not particularly giddy at the thought of another transfer of wealth from us to GS, the fault lies not with them, but with whatever lunkhead in the Treasury or at the Fed that either did not know of, or conveniently ignored, the clause allowing GS to step to the front of the line in bankruptcy and gave CIT a lifeline. So, by given GS the benefit of the doubt all that I’m left with is more data that the Treasury is full of incompetents or just enjoys making deals that are quite friendly to GS.

A suggested by Uncle Billy above, better PR is more about finding less transparently obvious lies than revealing truth.

Posted by framed | Report as abusive

The FFIECs definition of an FHC states explicitly that an FHC is “required to sell any non-financial (commercial) businesses within ten years.” Furthermore, the law (12 U.S.C. § 1843(k)(4)(H)) creating FHCs states that the affiliate that holds the investment must do so as part of a bona fide merchant banking activity (e.g. profitable resale of shares).

While enforcement may have been lax over the last decade, it seems clear that Gramm Leach Bliley did not intend to allow financial holding companies to run commercial (i.e. non-financial) businesses either directly or indirectly.

http://www.ffiec.gov/nicpubweb/Content/H ELP/Institution%20Type%20Description.htm

http://www4.law.cornell.edu/uscode/html/ uscode12/usc_sec_12_00001843—-000-.html

Posted by anonymous | Report as abusive

With Goldman’s size, market expertise and influence should come statesmanship and concern for the economy as a whole and a willingness to help provide leadership, even if it means leaving something on the table.

Here’s what I see from some of the other successful financial leaders that just isn’t happening with Goldman.

Pimco — Tips hand constantly with many forcasts on website and in print and broadcast media. This certainly gives it competition in its trades and may cost it some returns but this builds trust.
“Well, despite skeptics who are suspicious of ulterior motives, we at PIMCO keep very few secrets. I like to think of us as the Ohio State Buckeyes of yesteryear, boasting a well advertised “three yards and a cloud of dust” ”
(Bill Gross, Investment Outlook, 12/2005)

Berkshire Hathaway — Buffett’s herculean efforts to financially educate a world misinformed by efficient market hypothesis are well known. When he decides to buy, he commits for years and often decades, with nary a greater fool in his sights. While many in the financial world consider the spoils to be their well-deserved reward, he considers himself really lucky and arranges to give almost all of it back.

JP Morgan — Took leadership step of buying Bear Stearns and Wamu amid crisis. Admittedly the prices were good but was there a better offer? Goldman goes it alone and paranoia and insularity prevent moves like this. It is impossible to know in a weekend what such complex organizations are worth and substantially negative net worth was possible.

Posted by Dan | Report as abusive

Berkshire owned 20% of Moody’s (reduced to “only” 17% recently).

Moody’s is one of the chief enablers of our little predicament. Ratings… the raters seem to have had a some trifling involvement with a global meltdown. Let’s concentrate on what they *do* rather than what they say, yes?

Uncle Billy — Berkshire’s stake in Moody’s goes back a generation. Buffett has described his investmest philosophy as ‘lethargy bordering on sloth.’ In this case, the man was well into realm of sloth, as he would surely admit. Maybe not willful evil, but one of the seven deadly sins nonetheless!

Posted by Dan | Report as abusive

Dan, that’s the PR version of Warren Buffett.

The key to this entire global scam was being the arbiter of value. This is his secret, not being an avuncular old owl with a penchant for burgers and coke. Plus he’s made the right friends.

You want evil? Enter the world of Buffett & Matty Maroun (used to be Central Trucking. Now “Centra” I think. Matty was good buddies with Jimmy Hoffa and reportedly helped him build up the unions. Check out the history of the Ambassador Bridge and environs. Is the picture getting clearer?

Read his Wikipedia entry with an eye for tobacco companies and Darfur.

A screed? Taibbi’s piece is not a screed, it’s a bit of truth-telling. God bless him, I hope he is only warming up.

Posted by K | Report as abusive

K: Doubtfull. His big article was probably meant to be a “limited hangout,” that hands us a villain and takes the heat of the bigger villains.

Btw… Felix, did you know that “squid” was Italian slang for mafia?

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