Goldman’s troubles will end when Blankfein goes

July 16, 2010

OBAMA/The following is a guest post by Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. You can also follow him on twitter. The opinions expressed are his own.

As Congress was approving financial reform legislation yesterday, Goldman Sachs agreed to pay $550 million to the SEC to settle a civil lawsuit that claimed Goldman had misled investors in a subprime mortgage product as the housing market began to collapse three years ago. The settlement marks the beginning of the end of Goldman’s public humiliation for its relatively small part in the subprime debacle, but the firm still has a great deal of work to do to satisfy the conditions of its settlement, repair its relationship with clients and mend its damaged public reputation.

I have had a “neutral” rating on the forward operating results of GS since Q1 of this year and will leave that rating in place for two reasons. First, the carry trade reflected in record net interest margins in the banking industry is going to slowly diminish at GS and many other banks. Unless the Fed allows interest rates to rise soon, all of the assets of banks and funds will gradually re-price to near-zero. When the media waxes euphoric over the “trading” results of firms like GS, they fail to realize that much of trading revenue comes from simple interest rate spreads over funding.

Second, despite the settlement, GS remains in the midst of a mini-crisis in terms of brand and reputation. As Felix Salmon noted in a post on blog post back in June, Goldman CEO Lloyd Blankfein and his lieutenants are playing customer relationship management in order to retain clients. While JPMorgan Chase is playing offense, looking outside the U.S. for growth, GS is still very much in a defensive posture. Indeed, JPM’s bankers have been aggressively trying to take business away from GS for months.

For GS, everything depends on how the firm manages the process of addressing the remaining financial and political risks that have erupted over the past year. Blankfein has done a reasonably good job in steering GS through the political minefield, but the firm still faces a lot of private litigation as well as the more daunting task of winning back the trust of the blue chip corporate clients. Part of the requirement is simply time, but I believe that GS will eventually need to replace Blankfein and other members of the GS management team to truly put this crisis behind them — but not for the reason most people might think.

Buy side investors don’t do business with GS or the other major sell side firms because they trust them; they do business with firms like GS because they believe that the firm has better access to information. The sad fact is that the trust that once made firms like GS and the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains a hideous, barbaric place bereft of honor — and a source of infinite operational risk to all participants.

The reputation of GS as a firm for being smarter and better informed than the larger firms on Wall Street goes back many decades, to the turn of the last century when Wall Street was run by the white shoe securities firms in Boston, Philadelphia and New York. In those days, firms like GS had to be smarter than everyone else as a basic matter of survival. And in those days, GS protected and nurtured each client relationship because the trust that these clients put in the firm were considered to be a precious asset.

In order for GS to complete at least the superficial process of dealing with the ill-effects of the crisis, I believe that they need to select a new CEO and CFO to not only placate key corporate and buy side investors, but also to satisfy the concerns of the SEC and, more importantly, the Fed. Not nearly enough attention is paid to the fact that GS is now a bank holding company and is subject to prudential supervision by the Fed, the State of New York Banking Department and the FDIC.


The ideal replacement for Blankfein will be an investment banker, not a trader. Think about a younger version of John Thain. I suspect that the board of GS will continue to support Blankfein in public and will allow him to oversee the remainder of the cleanup effort. But after a decent interval has passed, I expect that Blankfein and other key members of the management team will step down.

This will not be a concession of wrong-doing, but simply a reaffirmation of the mechanistic rule of succession that has made GS such a great firm over the past 150 years if its existence — namely pushing senior partners and managers up and out to make room for the next generation of masters of the universe. Then the crisis at GS will truly be ended.


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I think that Goldman has a culture and Blankfien is a part of that culture. I believe that Goldman will continue to do what they do, until they outsmart themselves and go down the drain. Someone better will come along. You cannot cheat people and not admit your guilt. There are other forces at work that will take you down.

Posted by fred5407 | Report as abusive

The self-righteousness of Lloyd Blankenship on behalf of GS is stomach-turning. His assertion that GS needed very little if any help from the bail-out is beyond the pale. That GS received their rescue package through the bailout funds given AIG allows Blankenship to make this obfuscating claim and merely serves to demonstrate, again, his, and his firm’s, lack of integrity.

Posted by rpharp | Report as abusive

Blankfein IS fine, and when a better candidate comes along, that’s when this matter becomes relevant. Meanwhile, the BIGGER problem isn’t with GS, it’s with DC.
Are we communicating? (Buffet wouldn’t have invested in GS if he thought Blankfein was a dodgy bet.) Fix the top, and the bottom will follow the leader.

Posted by mi5data | Report as abusive

I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.
—Andrew Jackson, 1834

Posted by DipuKurian | Report as abusive

I’ll say it here too: suppose I were a con man, and suppose I were arrested after swindling 10 people each out of $10,000. I have in my hands $100,000 in ill-gotten gains.

Now suppose I made a deal that I would pay a fine of $5,000, with $2,000 going to my victims and $3,000 to the court. How likely is it that I would go forth and swindle no more?

Quibble with my numbers all you want – the point is simple: until fraud is made illegal, the American economy has absolutely no hope of recovery.

Posted by JackMack | Report as abusive

Additionally, Congress must pass legislation to allow recoupment from unethical crooks like Paulson who still think of himself as smart. A guy such as Paulson took his loot scotch free and is ready to pound on the next opportunity JUST BEFORE it becomes illegal. If we keep reinforcing the idea that these guys did “nothing wrong”, another scam is going to happen. It was disturbing that Khuzami’s comments that Paulson “did not misrepresent” (to Goldman, that is), along with Warren Buffet’s defense for “smart investors”, has many still believing that Paulson did nothing “illegal”. The laws can’t and shouldn’t always be playing “catch up”, one step behind in calling the obvious— that the crooks’ actions are unethical and illegal.

There’s got to be a way to enact a law that says something like:
If evidence shows that this person deliberately commit an ethical act to deceive investors for huge financial gains, but carefully studied the law so as to be able to argue that it is “legal”, he will be judged as acting “illegally”.

That’s not yet in the financial reform bill, I believe.

Posted by jo5319 | Report as abusive

Focus on what matters now, fix things in the right order…

Everyone must call on Obama to act on his words: stop the wars and act on his foreign policy promises.

Bring our troops back before November election. We can’t sell democracy by means of wars. We need only to pinpoint our offensive to 9/11 culprits.

It is immoral to waste our taxes and troops to do foreign governments’ tasks. Stop it immediately; we’ll get new allies as fast as we stop the wars (with deep pockets with huge demand for “American made” goods, industry and services). High paying jobs will return immediately and real estate issues will vanish.

Obama knows what he must do, he needs to be reminded that we are still waiting for him to act, and November is the deadline. Obama’s cabinet and advisors must calm down and act rationally (we are still a super power and can always get into wars, we must use our brain now).

Posted by my_opinion | Report as abusive

No matter who’s at the helm, there will be no change in the behavior of the company unless there is a change in the way the individuals who make up that company relate to the rest of society.

We are all interdependent. It is useless to look to government or the “free markets” to solve anything. It will never happen. It’s only when we as individuals become aware of our interdependence, and act upon that awareness, that things will change for the better.
If our global situation really matters to you, then please take a minute to check out the link below. 60&feature=channel

Posted by Benny_Acosta | Report as abusive

Perfect quote DipuKurian.
America is screaming out for another Andrew Jackson.
Ron Paul is the only one that comes close.
I nearly busted a gut on this line…

“The settlement marks the beginning of the end of Goldman’s public humiliation for its relatively small part in the subprime debacle”.

Goldman has its tentacles throughout the Government and the Federal Reserve. They were just busted for Fraud and got off with a slap on the wrist without admitting any wrong doing. Does anyone believe that it was an isolated incident?
I’m guessing the reason they didn’t any admit wrong doing is because that’s how they do business.
The government and the Fed don’t sneeze without Goldmans approval. I’m guessing every financial bill that has passed congress in the last 20 years would have to have Goldmans approval. Who knows how many originated from them.
To say they have a relatively small part in the subprime debacle…funny funny stuff.

Posted by RandomName2 | Report as abusive


Posted by 123321A | Report as abusive

where is my comment?

Posted by 123321A | Report as abusive

[…] has done a reasonably good job in steering Goldman Sachs (GS) through the political minefield, but eventually he must leave for the firm to win back the trust of its blue-chip corporate clients, Chris Whalen writes. 6 […]

Posted by Lloyd Blankfein has done a reasonably good job in steering Goldman Sachs (GS) through the political minefield, but eventually he must leave for the firm to win back the trust of its blue-chip corporate clients, Chris Whalen writes. | Guide to Investing | Report as abusive

[…] (At the moment it’s third, behind AIG and the $750 million WorldCom settlement in 2003.) But Chris Whalen says that the real damage is yet to come: I suspect that the board of GS will continue to support […]

Posted by Fraud settlement datapoints of the day « Read NEWS | Report as abusive

Even after the SEC let-off, Goldman still face a number of class actions around the world. The ‘incomplete marketing material’ line isn’t going to wash when it comes to helping Greece hide debt.
I’m a capitalist who thinks there are too many people and not enough water on the planet. For me, the G20 hairies ruin the case for looking after our ecosphere better. And Goldman Sachs ruins the case for capitalism.
If you break down GS’s business profit lines, it’s now roughly 15% client fees and 85% direct/indirect investment gains. That’s a moral hazard wrapped in a conflict of interest, pure and simple.
Fascinating to note, by the way, the former occupation of the SEC’s head of prosecution… man-sachs-its-business-as-usual.html

Posted by nbywardslog | Report as abusive

Goldman’s troubles haven’t even begun. When every last one of the parasites who ever worked there has relinquished all worldly goods, maybe it’ll be over.

But only maybe.

Posted by HBC | Report as abusive

That’s right ppl. Financial firms fleeced you and and took all that hard earned money you ‘invested’ in that big second house you can’t afford. They conned you into spending on all those credit cards you didn’t wanted to use to buy that big home theater system that you didn’t really need.

Go on… blame them. It’ll make you feel better.

Posted by LLMCH | Report as abusive