Update: March 15, 2012, Calling Goldman Sachs’ culture toxic and still focused on making money over clients’ best interests, Greg Smith– an executive director and head of U.S. equity derivatives in Europe, Middle East and Africa — left the firm yesterday. His message was that the SEC investigation, Congressional hearings, the firm’s “rigorous self examination” and efforts to restore reputation and trust, all of which I’ve written about in several previous columns have not moved the firm away from the attitudes that helped create the climate for the economic meltdown in 2008.
Goldman Sachs, who just a few months ago sparked outrage over the size of bonuses it intended to pay out, saw new relevance to T.S. Eliot’s line “April is the cruelest month.”
On April 16, 2010, the SEC charged Goldman with fraud. Its stock price immediately dropped nearly 13 percent. International media coverage has been unrelentingly negative. The first shareholder suits against Chairman and CEO Lloyd Blankfein, VP Fabrice Tourre, its board of directors and others were filed at the end of last week. And, as the month ends, April 27, Blankfein and Tourre join other Goldman Sachs executives called to testify before the U.S. Senate Permanent Subcommittee on Investigations.
The Subcommittee is looking into the role of investment banks on the financial crisis. Saturday, April 24, the Subcommittee released selected internal Goldman Sachs emails about instruments (residential mortgage backed securities and collateralized debt obligations – CDOs) that the Subcommittee said were culprits in the financial crisis. The Goldman emails talk about money the firm stood to make by taking short positions or essentially betting against its own investors.
Tourre, a 31-year old trader, is named in the SEC suit as being principally responsible for structuring and marketing the CDO that hedge fund billionaire John Paulson wanted that Paulson’s fund could bet against. Paulson, who paid Goldman approximately $15 million for the product, also approached Bear Stearns. However, Bear Stearns passed, saying it didn’t pass its ethics standards. “It was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other end,” Scott Eichel a senior Bear Stearns trader told Gregory Zuckerman for his book on Paulson, The Greatest Trade Ever.
Goldman Sachs has denied any wrong doing saying that their clients were sophisticated investors and were given the information they needed.
Goldman has prided itself on its Tiffany reputation. “Clients First” it proclaims on its website: “Our success depends on one thing: our clients’ success.” Whether fraud is proved, Goldman will have to live down the ethical failure of being accused of betting against its own clients, a repudiation of what Goldman has said it stands for.
The impact on Goldman’s reputation and credibility is huge. That tidal wave also splashes its mud on its A-list Board of Directors. They must answer to investors on May 7 at Goldman’s Annual Shareholder meeting.
There are unsavory characters in this debacle. Tourre is currently on indefinite paid leave. Paulson has insisted to his clients he acted in “good faith.” Good faith, used in that context, is an oxymoron. This is a tale of hubris and another example of why the widening gap in Main Street’s trust of Wall Street.
Who would have thought the hero in this story, if there can be one, is much maligned Bear Stearns?
Gael O’Brien, April 25, 2010