Some Nuts and Bolts About Goldman Sachs

The following article makes some interesting comments and criticisms about the leadership of Lloyd Blankfein and the Goldman Sachs business model. It quietly quotes those who present unfavourble opinions about those areas and offers some small suggestions on how to mend the failures of Goldman Sachs. "Conflicts of interest" are especially prominently discussed.

When Goldman Sachs is described as having difficulty in deciding whether a client is "a customer" or "prey" the whole discussion becomes twisted with Goldman's greed and weak ethics. One needs to read Matt Taibbi's Rolling Stone piece on Goldman Sachs in order to clean out one's palate from all the fluff by reading about the real Goldman Sachs's business model and how it sought to destroy the wealth of the many in order to redeploy it to those in the banking business.

Goldman Model Championed by Blankfein Planted Seeds of Distress
By Christine Harper - Bloomberg Businessweek

The firm’s management shows “resistance to change” and is “doing business in a bubble,” one of the three student teams explained in a PowerPoint presentation. Another recommended creating an “ethics role” within Goldman Sachs’s securities division. Kessler, who teaches management at Pace University’s Lubin School of Business, peppered the students with questions. Could cohesive culture be a weakness as well as a strength?

Such critiques have been rare in Goldman Sachs’s 142-year history. The company’s status as Wall Street’s most powerful and profitable securities firm -- with a leadership that produced two U.S. Treasury secretaries -- has lured top students from Ivy League business schools. After financial markets collapsed in 2008, driving Goldman Sachs and rivals to accept taxpayer aid, the investment bank became the most vilified on Wall Street.

Bungled public relations and a thirst to find a scapegoat for the worst U.S. economic crisis since the Great Depression may explain some of the shift in the firm’s reputation under Chairman and Chief Executive Officer Lloyd C. Blankfein. The mistrust and waning investor faith in the company’s prospects are rooted in something more fundamental: Blankfein’s reliance on trading and investing the bank’s own capital to reap profits, even if that meant sometimes competing with clients.

‘Significant Challenges’

“The idea that you can manage what is a tremendously conflicted array of relationships is ridiculous,” said Michael C. Aronstein, a 32-year Wall Street veteran and president of New York-based Marketfield Asset Management LLC. “That’s exactly at the heart of it.”

Blankfein’s business model was ideal for a period of high leverage and low regulation, producing average annual profits more than double those achieved under his predecessor, Henry M. Paulson. As new capital rules and limits on proprietary trading take effect, those profits will be harder to achieve, said analysts including Fiona Swaffield of RBC Capital Markets.

“Goldman Sachs’s business model faces significant challenges in a post-crisis world,” according to a June 13 investor note by RBC analysts led by Swaffield, who’s based in London and rates the stock “underperform.”

David Wells, a spokesman for Goldman Sachs, declined to comment or make Blankfein available for an interview.

Return on Equity

In the first half of 2011, as trading revenue dropped 25 percent, Goldman Sachs’s return on equity slumped to 8 percent, or 10 percent excluding the cost of repurchasing preferred stock from Warren Buffett’s Berkshire Hathaway Inc. That’s down from 13 percent in the first half of last year.

“Our normal desire is to get to 20 percent; I think it’s going to be very tough in this environment,” Chief Financial Officer David Viniar said on July 19 after the firm reported second-quarter net income that fell short of analysts’ estimates. “I’d be surprised if we did that this year.”

With its business practices under scrutiny by the U.S. Securities and Exchange Commission and the Senate Permanent Subcommittee on Investigations, Goldman Sachs is fighting to maintain the trust of clients. The firm paid $550 million last year to settle an SEC lawsuit alleging it duped buyers of a 2007 mortgage-linked investment. The Senate subcommittee’s bipartisan report on the crisis, under review by the SEC and Department of Justice, accused the bank of misleading customers.

While Goldman Sachs didn’t admit or deny wrongdoing under the SEC settlement, the largest ever by a Wall Street firm, the company said it made a “mistake” in its marketing materials about the investment.

‘Wall Street Shark’

After writing a history of Goldman Sachs that was published in April, William D. Cohan described the firm in a Bloomberg Television interview as “the perfect embodiment, the ultimate evolution, of the Wall Street shark.” A poll of Bloomberg subscribers in May found 54 percent had an unfavorable view of Goldman Sachs, more than any other major Wall Street firm.

Jay W. Lorsch, a Harvard Business School professor, said the bank’s focus has shifted toward “more immediate greed” from long-term gains because Blankfein and many of his deputies come from a trading background instead of investment banking. Lorsch, who helped run an education program for new Goldman Sachs partners in the late 1980s, is “probably the world’s expert on governance,” said his Harvard colleague and Goldman Sachs board member William W. George.

“Goldman now needs to be more thoughtful about how they are perceived,” Lorsch said. “Lloyd needs to be careful in public pronouncements and testifying before Congress. Lloyd is coming across looking pretty greedy himself.”

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