Two companies have been at the centre of storm of blame which followed the US economic downturn – investment bank Goldman Sachs and ratings agency Standard & Poor’s. The CEO of S&P recently resigned, and Goldman Sachs boss is preparing to fight. By SIPHO HLONGWANE.
Why did Goldman Sachs CEO and chairman Lloyd Blankfein have to hire a heavyweight criminal lawyer? The market seemed to believe that Reid Weingarten, a criminal defence attorney at Steptoe & Johnson, was hired because Blankfein is preparing for the fallout resulting in allegations that he misled clients prior to the 2008 financial crisis, and Congress after that. Immediately after the announcement on Monday, the Goldman’s stock fell 5% but then rallied again before the end of the day.
Not that the performance of Goldman stock is a good indicator of how much trouble the company is in at that moment. During the height of the Congressional hearings on the financial crisis, when its executives were called to explain themselves, and didn’t do so in convincing fashion, the ticker was hardly troubled.
According to the Wall Street Journal, GS expects to receive subpoenas from the Justice Department in the next few days. “Officials at the New York company believe the Justice Department will demand certain documents and other information, possibly within days, these people said. Spokesmen for Goldman and the Justice Department declined to comment Thursday. Subpoenas don’t necessarily mean criminal charges against Goldman or individuals at the firm are inevitable or even likely.”
Indeed, it could be nothing. If there’s one company that can afford to bring in a weepingly expensive lawyer just in case, it’s Goldmans.
Or it could be everything. The accusations levelled against the bank on Capitol Hill were pretty severe. They were mostly blamed for knowingly selling bad investment instruments to clients while betting against those very instruments. Goldman Sachs hotly denied everything. Now the talk is that Blankfein may be accused of perjury. Hence the need for the services of Weingarten.
If indeed GS is preparing for the worst, its reaction in the wake of fierce criticism can’t be any more different to that of ratings agency Standard & Poor’s. It recently announced that its CEO would resign from the company, some say in the wake of the uproar kicked up by the agency’s downgrade of US credit. Dev Sharma, the CEO and president of S&P is due to resign on 12 September and is going to be replaced by Citibank chief operating officer Douglas Peterson.
Even though S&P tried to downplay Sharma’s sudden exit, market watchers saw this is a reaction to the criticism of the agency’s decision to downgrade US credit. “It looks like he’s being helped out the door,” Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York, said to Bloomberg News. “If it was a planned retirement, it should have been handled in a different way.”
S&P’s downgrade of US credit is being seen in many quarters as an attempt for it to reinvent itself and salvage its reputation after the financial crisis. The ratings agency was one of the main cheerleaders of the investment vehicles that the likes of Goldman Sachs sold, which exacerbated the US credit bubble. It routinely gave the highest credit rating to investment packages that were based on complete junk.
It may be that S&P decided that new blood would be needed at the very top in order for its reinvention to be complete and credible. Not Goldman Sachs, however. The investment bank is sticking to its story and is hunkering down for a long, mean fight with Congress and the Justice Department.
Speaking to Charlie Rose in 2010, Blankfein made it very clear that he would step aside if he thought that it would be the clever strategy. “If you thought that your resignation as CEO would make a difference in terms of the future of the firm, is that something you would do,” Rose asked. Blankfein answered without hesitation: “Of course. Well, first of all it’s not a choice I would even have. I serve at the pleasure of a board of directors… I serve at the interest of my firm. The firm is not there for my benefit”.
For Blankfein to fight rather than to run is what is beneficial to Goldman Sachs, they may have decided already. It’s not insane for them to take their chances either – though it may be hubris on a magnificent scale – they have regularly taken on all challengers and beaten them. DM
Photo: Goldman Sachs CEO, Lloyd Blankfein