This (slightly tweaked) bit of the Victorian heroic doggerel summarises Goldman Sachs’ current predicament. Goldman Sachs CEO Lloyd Blankfein and the other masters of the universe reigning from their art-infested tower in Manhattan have been selling themselves as blameless, indeed, as the paragons and exemplars of contemporary business and finance. But this story is not being taken on by ordinary people, by investors, legislators, federal regulators or, if the reports are accurate, by US prosecutors either.
The Daily Maverick’s mental image of Goldman Sachs’ leadership cadre is morphing from the picture of them as the masters of the universe and more like the scene where the police chief on the “Orca”, in “Jaws”, is throwing chum (we’re the chum) overboard when he spots the Great White Shark, aka Goldman Sachs and its ilk. He looks up and says “You’re gonna need a bigger boat!”
And it seems the feds are out there now, trying out that bigger boat. Actually, the biggest challenge right now (besides figuring out what exactly Goldman Sachs did, how they did it and other such questions) is that the search for the overarching, clarifying narrative and metaphor of Goldman Sachs’ current circumstances.
Maybe we’re too close to these still-unfolding events to see them fully in focus and in their global context. Or, maybe, perhaps, a truly effective description of Goldman Sachs’ current agonies (and ours) demands a writer who can draw on the talents of a William Makepeace Thackeray, Anthony Trollope, Charles Dickens, Mark Twain, Edith Wharton, Theodore Dreiser, Sinclair Lewis and Tom Wolfe – all authors who mined the rich vein of the business class’s carryings on and those who would ape them.
What with the looming civil suit by the US securities exchange commission, the growing chance of criminal charges on the near horizon, some appalling, arrogant testimony by Goldman Sachs top executives that helped turn them into poster children for a need for Congressional action on new, more stringent financial sector regulation legislation; one would think Goldman Sachs is entering a Wall Street version of the perfect storm. Goldman Sachs may be turning into the representative of the sum of all the excesses of the whole financial crisis of a decade and more.
Maybe we should just christen this the great Wall-Street-Goldman-Sachs-Great-Recession-Bernie-Madoff-Greed-Moment (or WSGSGRBMGM). As The Daily Maverick readers undoubtedly already know, Goldman Sachs has been charged with colluding with a bond trader to create a financial instrument based on suspect mortgages that was essentially designed to tank, marketing this instrument to some in-the-know so they could sell it short (i.e. bet against its success) and then selling it to yet others not-in-the-know so they could be the investment version of chum. Twenty-million emails gathered from Goldman Sachs later, the cyber-paper trail is actually coming into better focus, even if criminal culpability is not yet proved.
So how much trouble is Goldman Sachs really in? Well, the tumbrels are not yet rolling down Wall Street and Madame Defarge is not yet on her stool, knitting in front of the Goldman Sachs office tower, but the market is starting to provide one kind of answer – it is in $21 billion worth of trouble. That’s how much Goldman Sachs had lost in market valuation by last week, since fraud accusations washed over the firm.
Counting the impact of reports that federal prosecutors have opened a criminal investigation of the firm, a development that prompted analysts to downgrade their ratings of the firm’s stock, its share price fell nearly 10% in a torrent of selling, closing at $145.20, a nine-month low. Goldman employees themselves took a direct hit in this. (Collectively they are the company’s second-biggest shareholder group at around 4%.) This sell-off had an impact on the broader market as well with the Dow Jones average closing down 1.4% for the week.
Wall Street analysts are beginning to acknowledge the company’s potential liabilities as a result of the SEC’s fraud accusations and possible criminal charges by federal prosecutors. As a result, a number of investment analysts switched their recommendation on Goldman Sachs’ stock from “buy” to “neutral” because of the financial risks associated with this uncertain legal and political outlook. One of these analysts wrote: “Most such probes end inconclusively, with no charges filed; and we continue to believe that GS has long-term earnings power beyond what is discounted in the share price. However, it is very difficult to see the shares making further progress until the matter has been resolved.” In other words, watch your wallet and your back.
Of course, investment guru Warren Buffett’s positive comments about Goldman Sachs at the annual Berkshire Hathaway meeting over the weekend may steady investors this week, provided there aren’t any new disclosures. Buffett strongly defended CEO Lloyd Blankfein, saying, “If Lloyd had a twin brother, I would vote for him”. And, using some of the very same points Goldman Sachs is using to defend itself, Buffett said investors in Goldman Sachs’ controversial bond offering should have undertaken better due diligence of their own. Or, as he said, “It’s hard for me to get terribly sympathetic when a bank makes a dumb credit bet”.
Even so, other investors and analysts are beginning to get sufficiently nervous about the potential for damage to Goldman Sachs’ heretofore gilt-edged reputation that they may drive potential clients elsewhere for their investment banking services. Further out on the horizon is the potentially hefty cost of fighting or settling the civil fraud suit from the SEC. Then, there is the even more distasteful possibility of criminal charges and the really bad publicity this brings, the time it takes to deal with them, and the cost from losing such a suit (although proving a criminal charge is tougher than winning a civil suit and so prosecutors may wait to see the lay of the land from the SEC’s suit before they file their charges formally) and the effects on future business opportunities.
As a Standard and Poor’s analyst who downgraded Goldman Sachs’ rating to “sell” (read this as “Fire! Fire!”) said to the media: “The risks are kind of piling up”. Of course, all of this doesn’t even include the growing threat of more stringent regulations as Congress continues to debate the financial reform package. The contrarian’s position, of course, is buy Goldman Sachs now because its price is lower. The bank remains very profitable and it is a rare investor who has won betting against Goldman Sachs over the years.
In response to all this, Goldman Sachs has been buying up more legal talent for the battle that is coming, although it probably will be getting fewer public relations flak-catchers on its payroll, even given its public embarrassment. Why? Well according to Roger Martin in The New York Times (and it is worth it to quote him at length), PR help just won’t help. Or as he wrote last week:
“The better job Goldman Sachs does in explaining exactly what its business is, the more outraged regulators and the public will be. The only reason that Goldman has avoided negative publicity for so long is that the public has had no idea how far its business model has changed from one that the public could reasonably understand. Even the regulators are largely flummoxed.
“Goldman Sachs, not that long ago, was a firm that raised capital for companies who wished to grow and advised companies that wanted to buy another company or sell themselves to another company. These are now minor sidelines for Goldman. The overwhelmingly large portion of its revenues and profits come from trading. And to be clear, this is not brokerage whereby a firm executes trades on behalf of someone else. This is trading on its own account for its own benefit.
“Goldman should no longer be thought of as a professional service firm, providing professional services to a clientele. It is now (principally) a trader that lives to find people who are dumber than it is and take advantage of its intelligence advantage to enrich itself and impoverish its trading partners. So it is hard to argue that it serves a particularly useful purpose for society. It exists to serve its own interests which can only be served by causing a disservice to its trading partners.
“If the public really understood that business model, Goldman would have a much bigger problem than it has now….the public would quickly go to the current Goldman-Paulson scandal and say: ‘Oh, I get it. That is how. You rig the trade before making it. Yup, that works’.”
By J Brooks Spector
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Eton College once provided free education to poor boys. Now it quite literally does the opposite.