Goldman Sachs protestors

From a telescope on the 10th floor of its Washington office at 101 Constitution Avenue, Goldman Sachs staff can look straight into the dome of the Capitol, legislative hub of the US government.

This privileged perch of the most powerful player in global finance is decorated in neutral tones, enlivened by a couple of ornamental weather vanes. But if Goldman executives wanted to know which way the wind was blowing this week, they would have had to look earthward – to the gaggle of protesters gathered outside.

Organised by the SEIU trade union, the demonstrators attacked Goldman for its unusually close ties to government – its alumni include former Treasury secretaries, senior White House staff and regulators around the world – and for reaping huge profits and doling out billions of dollars in pay at a time when more than one in 10 Americans is unemployed.

The event was only the latest salvo in the barrage of criticism that has hit Goldman in the past few months. As the bank made the most of government assistance and stormed back to the top of Wall Street, it was branded a “vampire squid” by Rolling Stone, ridiculed by Saturday Night Live for receiving a priority batch of swine flu vaccine and criticised by religious leaders after Lloyd Blankfein, chief executive, quipped that it did “God’s work”. The blogs are now abuzz with a spoof “Lloyd’s Prayer”.

When even Midwest media such as Ohio’s Dayton Daily News this month lampooned the bank’s alleged greed in a cartoon and The Villager, a New York paper, accused it of not footing veterinary bills for kittens born near its property (Goldman later said it had paid), a new reality became clear: after working out of the public eye with investors, governments and blue-chip companies for nearly two centuries, Goldman finds itself the object of a storm of abuse.

Goldman declined to comment for this article – a sign, perhaps, that the negative publicity is fostering a siege mentality. Insiders talk of being shell-shocked at the reversal in its standing and of fearing for their safety if details of their pay are leaked to an increasingly angry public.

An apology this week by Mr Blankfein for Goldman’s role in the crisis and the bank’s decision to pledge $500m over five years to help small US businesses did little to assuage its critics. With its top brass poised to allocate a rich bonus pot – Goldman has already earmarked $16.7bn (€11.2bn, £9.9bn) for compensation in the first nine months of 2009 – the question is whether the bank can survive the backlash without undermining its ability to make money.

The fear inside Goldman’s headquarters on Broad Street in downtown Manhattan is that regulators, politicians and even investors might chip away at two cornerstones of its success: a tightly knit, if ruthless, culture bound by high compensation; and aggressive trading strategies.

As Guy Moszkowski, a Bank of America analyst, asked Mr Blankfein recently: “How does the company defuse the press scrutiny and downright anger? How does Goldman make sure that it retains key people given controversies over compensation?” Mr Blankfein replied that his staff were Wall Street’s most productive and the company’s ethos was to help its clients do business.

In some ways, Goldman is a victim of its own rapid rebound from a crisis that had threatened its very existence. After the Lehman Brothers bankruptcy in September last year, Goldman and arch-rival Morgan Stanley saw their share prices plummet as investors worried about their reliance on flighty capital markets, rather than deposits, for funding. Within days, the authorities had allowed Goldman and Morgan Stanley to become bank holding companies. That move enabled them to receive billions of dollars in government aid and placed them under the regulatory aegis of the Federal Reserve.

The conversion to a bank also laid the foundation for Goldman’s renaissance. Some 15 months after staring into the abyss, Goldman has raised billions of dollars from investors including Warren Buffett; received, and repaid, $10bn in government aid; and raked in $12.5bn in profits for the first nine months of 2009. Its shares trade at more than double their lows of a year ago and many of its 30,000 employees expect a bumper payday to wrap up the year.

Goldman’s stellar performance has been built on two main strengths: a long-standing commitment to making money as a firm rather than a collection of individuals; and a daring boldness in trading and regulatory matters.

On modern-day Wall Street, where services are often commoditised, Goldman has something few can replicate: a cohesive internal culture devoted to maximising profits. “One thing has stayed the same for the past 50 years or so: the cultural worship of commercial success and a revulsion at losing money,” says a former executive. An envious competitor says that when talking about God’s work, Mr Blankfein should have added that in Goldman’s religion God and Mammon are one and the same.

The tenets of Goldman’s faith were honed during 130 years as a partnership – from the day it was founded in 1869, by the German immigrant Marcus Goldman, to 1999 when after years of agonising it became a public company. Goldman’s top executives, still called partners, are anointed in a biannual process that is the focus of endless machinations and causes huge rifts with those who miss out or are summarily “de-partnered” because they fail to pass muster.

Those who do make it to partner are expected to behave more like owners than employees – for example, not selling their Goldman shares until retirement. The belief that partners are personally responsible for the company’s profits and losses gives Goldman a laser focus on the risks and rewards of its business.

The theory is simple: unlike other banks, where star traders routinely overrule lowly compliance officers, at Goldman the two roles have equal status. “The risk management side is just as powerful as the risk-taking side,” says a former executive. “If a trading desk makes $35m in a week, the attitude at other firms is to let these guys do whatever they want. At Goldman it is: ‘What am I missing?’ ”.

This discipline stems from having the risk function and the information technology operations – “the federation” in Goldman-speak – ruled by Goldman’s chief financial officer, currently David Viniar who, unlike his Wall Street counterparts, doubles as chief risk officer.

Goldman also rigorously marks its positions to market every day, logging its holdings at the prevailing price – a practice that enables it quickly to spot changes in value. “A keen and comprehensive appreciation of risk is at the centre of everything we do” is how Mr Blankfein, the Bronx-born son of a postal worker who made his way to the top from Goldman’s cut-throat trading rooms, puts it.

The worth of this structure became apparent in December 2006. With the cheap credit boom in full flow, Mr Viniar’s colleagues noted that Goldman had been losing money in its mortgage portfolio over the latest 10 days. Mr Viniar told Goldman’s traders to “stay closer to home”: rein in risk, sell down holdings and buy protection against their positions. Over the next three quarters, as banks such as Lehman and Citigroup doubled up on their mortgage bets, Goldman accumulated a small short position on the mortgage market.

Its executives admit they did not know they were making the right call and say parts of the group kept on selling and investing in mortgage-related securities. But Mr Viniar’s order turned out to be crucial: although Goldman still incurred losses of $1.7bn in its residential mortgage portfolio, they were a fraction of those amassed by the likes of Citi.

Yet Goldman’s trading prowess is not just about avoiding losses. By cultivating trading and advisory relationships with thousands of companies and investors, Goldman gains knowledge it uses to inform its own trading.

Banks are banned from “front-running” – using specific information provided by clients to trade on their own account before they act on behalf of customers. But they can, and do, use aggregate information, “market colour” gleaned from their interactions with investors, hedge funds and companies. By virtue of being the world’s largest and best-connected trader, Goldman has turned this into an art that has raised rivals’ eyebrows but not sparked regulators’ attention.

Goldman’s advantage is evident not so much in proprietary trading – the bets it places with its money, which account for less than one-tenth of its profits – but in principal trading, where it uses its capital to underwrite clients’ trades. This has been particularly true since the crisis, when governments injected billions of dollars of liquidity into the system and, by keeping interest rates ultra-low, made it easier for the banks that were still standing to make money. Goldman took full advantage of what George Soros, the hedge fund manager, called governments’ “hidden gifts” – as well as the implicit guarantee that it and some rivals were too big too fail.

Trading has been a big driver of Goldman’s profits this year as credit markets thawed and the reduced competition enabled it to charge more for its capital. Its fixed-income, currency and commodities business had net revenues of $19.3bn in the first nine months, accounting for more than half of total net revenues. Critics say that such glittering results lead some clients – sensing potential conflicts of interest – to be more reluctant to part with information that Goldman can aggregate and use. Goldman has said it deals with these and other conflicts.

The reality is that, in the words of a fund manager, investors “trade with Goldman not because they want to but because they have to”. That person adds: “The information Goldman provides is as valuable as the information we give away, they piss off clients all the time and yet most of them come back time and time again.”

A high-wire act such as that is possible only if investors know they are dealing with the best. That is where high compensation comes in. Goldman believes that unless it pays bankers extremely well – albeit by linking bonuses to the company’s success rather than individual performance – it will not be able to recruit and retain the best people. “Compensation is not the glue that binds everything at Goldman: it is everything,” says a former partner.

But the repeated criticism of “Government Sachs”, the network of relationships with former executives such as Hank Paulson, the crisis-time Treasury secretary, adds to the perception that Goldman’s famed model – hire the best, pay them accordingly and keep in touch with those who, as part of the ethos, move into public service – is under threat.

Some critics blame the very same partnership culture that drives Goldman’s success – the corporate pride, the strong belief in “doing right” by itself and its clients, the intellectual arrogance that comes with being seen as the best – for the bank’s predicament. When opponents such as Andy Stern, SEIU president, say Goldman should choose “between selfish enrichment for the company or trying to be helpful in assisting the country”, their words have an impact both inside and outside Broad Street and Constitution Avenue.

“Goldman staff are in psychologically uncharted territory,” says an insider. “They went to the best schools, they married the best-looking people, they thought they had the best jobs and all of a sudden they are in the eye of the storm.”

Even if Goldman continues to make money and can cushion the impact of upcoming rules on higher capital requirements and lower debt, the backlash is endangering one of its most prized possessions: its brand.

When asked how they plan to defuse the hostile reaction to this year’s bonuses, its executives merely talk about the taxes that staff will pay and point to this week’s initiative to help small businesses. In the words of a former executive of the bank: “It is a remarkable turnround: all of Goldman’s virtues – its profitability, its discretion and its closeness to government – have turned into perceived vices.”


When, years ago, a European regulator asked Goldman Sachs to list potential conflicts of interests it encountered in its business, the result surprised even the bank’s executives, write Henny Sender and Francesco Guerrera. “We ended up with a chart that was 6ft by 6ft; it listed something like 500 potential conflict points,” one said.

Goldman has always had a love-hate relationship with many of its counterparts, partly because its role as adviser, marketmaker and co-investor in private equity deals means many of its clients are also its rivals – none more so than buy-out funds. During the pre-crisis takeover boom, as private equity scoured the corporate landscape for deals, its senior executives needed Goldman as the bank’s ties with global companies meant it generally knew what was for sale.

The goal for buy-out firms was to get the first call from Goldman when a company was on the block and – more importantly – the last call. At the same time, though, Goldman competed as a co-investor through its own private equity funds – and refused to stop doing so as other banks, such as Credit Suisse, did.

To preserve its relationships with these firms (which doled out more commissions to Goldman than any of its corporate clients at the peak), the bank had to strike a delicate, and not always successful, balance among rival clients. For example, in 2006 it invited buy-out firm Carlyle and its affiliate, Riverstone, into a deal to take energy company Kinder Morgan private. The transaction was born when founder Richard Kinder contacted the bank to discuss his company’s future, and Goldman suggested he take it private – with the help of its own private equity arm, according to Kinder’s regulatory filings.

When the owners come to realise the value of their investment, that deal is likely to rank among the era’s most lucrative. While Goldman executives say they showed the deal to other private equity firms, those who did not get a call say they were furious. Carlyle was invited in, at least partly, because of longstanding ties between Kinder and a Riverstone executive who was also formerly at Goldman. The bank’s invitation to Carlyle strengthened the relationship between the two.

Similarly, Goldman sold complicated transactions to the Libyan Investment Authority that went badly wrong last year, leaving the sovereign wealth fund carrying losses and vowing never to work with the bank again. “They did not understand Goldman always makes it up to important clients,” says one Goldman staffer who dealt closely with the LIA.

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