April 7, 2010 8:38 pm

Goldman on trial

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Investment bank enters a public relations plea bargain

Goldman Sachs – a totem of Wall Street – is on trial in the court of public opinion. It has become popularly known as a greedy bailed-out bank that pays megabonuses. This matters. As the bank itself has said, a dented reputation could “adversely affect [its] businesses and results of operations”. To mitigate that risk, the bank has entered a plea bargain.

Lloyd Blankfein, chief executive, and Gary Cohn, president, this week wrote a letter notionally addressed to shareholders, but in reality aimed at legislators. In it, they confessed that Goldman had benefited from the bail-outs and acknowledged the gratitude of “our firm and our shareholders” to the American state for its “indispensable” help.

While not an admission that the bank was saved by Uncle Sam, this strikes a humbler note than Goldman has previously. The bank’s past line was that it did not need state support and it should be left alone to pursue its noble “social purpose” – helping companies to grow. This public relations strategy has clearly not worked.

Little wonder. Goldman clearly benefited from the bail-out. Even now, having repaid the US government for the support it received from the Tarp, its funding costs are lower because it enjoys an implicit state guarantee. A share of its profits are thus generated on the back of the US government’s balance sheet.

The other side of the new PR strategy, however, is to attack some of the charges that it now faces. Mr Blankfein and Mr Cohn are also seeking an acquittal on the charge that Goldman was “betting against” its clients. This is reasonable. Banks should balance and hedge the risks and exposures that they take on. No one wants banks that stake everything on black.

Goldman insists it should be cleared of having benefited directly from the AIG rescue. Here, its case is weaker. The bank says it was fully hedged against the insurance giant collapsing and would have suffered no “material economic loss” if it failed. But AIG would have pulled other institutions down with it. No banks – including Goldman – can say their hedges would have survived the ensuing maelstrom. That is precisely why AIG was saved.

So Goldman is wise to give belated thanks to the taxpayer and it is in the right on the charge of betting against its client. But it should drop the pretence that it did not benefit from the AIG rescue. Angry taxpayers will not be mollified by partial gratitude.

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