Finance: Upsetting the narrative

When Fabrice Tourre steps into a lower Manhattan courtroom on Monday, all of Goldman Sachs’s finely crafted public relations work of the past few months could count for little.

The case – brought by the Securities and Exchange Commission against the former Goldman employee over allegations of client “deception” – will serve as a reminder of the bank’s aggressive brand of dealmaking in the run-up to the financial crisis; and it comes as Goldman is working to present a softer image to the public.

Mr Tourre, who infamously referred to himself in an email exchange as “fabulous Fab …standing in the middle of [a system that] is about to collapse”, was a key figure in the bank’s “Abacus” transaction. Abacus has come to be seen as a touchstone for the kind of double-dealing that critics have accused Goldman in particular of engaging in.

The bank structured Abacus, a portfolio of mortgage-related assets, and sold it to investors but did not clearly disclose that a hedge fund, run by billionaire John Paulson, was planning to bet against the deal and helped pick the bond’s underlying securities.

The case is expected to be especially hard-fought by the SEC, which is desperate to rack up a victory in crisis-related enforcement actions against the titans of Wall Street. Goldman agreed to pay a fine of $550m – then the largest ever levied against a financial group – in relation to the Abacus affair three years ago, but it did not admit or deny guilt regarding the fraud allegations.

Whatever the ruling in the Tourre case, it will shine an unwelcome light on practices that have tarnished Goldman’s public image.

The bank, which until recently gave little thought to its image beyond Wall Street, has been attempting to change these perceptions – starting with Lloyd Blankfein, the bank’s chairman and chief executive, who has himself been enjoying something of an image makeover.

When Mr Blankfein’s beard materialised over Christmas, it was seen as a symbol of a broader change of style at the bank. Since then parsing the beard has become a pastime on Wall Street, with some interpreting it as a sign that after seven years in charge, Mr Blankfein was preparing to retire.

But the dominant view these days is that it is a signal that Mr Blankfein is comfortable with his position. “This is about Lloyd saying ‘I’m here and I’m staying’,” says a rival Wall Street boss. “‘I’m relaxed, I’m being myself and I’m staying’.”

From the height of the financial crisis in 2008 up to last year, Mr Blankfein and Goldman have been under attack from every angle. The bank’s outsized profits, its run-ins with regulators, its persistent characterisation in the media as a money-sucking “vampire squid” after the coinage in a 2009 Rolling Stone article, a damning attack on the bank’s culture by a disaffected employee, and the view that Goldman put its own profits before its clients’ interests (most infamously through that Abacus deal) combined to make it the most controversial of the Wall Street banks.

This year, the heat on Goldman has reduced, in large part because it shifted to its competitors. JPMorgan Chase has been hurt by the $6bn “London Whale” trading loss. Barclays, UBS and RBS have been engulfed by the Libor rate-rigging affair. Goldman’s arch-rival, Morgan Stanley, is struggling to make consistent profits. And Citigroup has been through a painful CEO succession process. An upbeat Mr Blankfein, by contrast, has consolidated his power.

Under the stewardship of Jake Siewert, the new PR chief Goldman recruited from the US Treasury, Mr Blankfein has begun courting the media for the first time in years. He has softened his tone and gone out of his way to burnish publicly the bank’s image, appearing at charity events and delivering graduation addresses.

“Could you imagine giving up all this?” Mr Blankfein, 58, said in a TV interview this year, when asked if he planned to remain chief executive.

This was a contrast to the shrunken but unapologetic figure that was lambasted at a Senate hearing three years ago, when lawmakers accused Goldman of profiting from the financial crisis and from “intolerable” conflicts of interest. A Department of Justice investigation requested by the Senate committee has since ended with neither Goldman nor any of its employees being charged.

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On a bitingly cold Friday in February, hundreds of Goldman partners gathered at an events centre on the edge of the East River. Over dinner and jazz, the bank’s elite and their dates mingled in Goldman’s first “partners’ prom” in more than seven years.

“There are times when you decide you want to do it, and it felt like the right time,” says a senior executive who attended. “It was nice to meet with the new partners.”

Notably absent was Jim O’Neill, economist and chairman of Goldman’s asset management business for the past two and a half years. His departure from the bank would be publicly announced the next week. David Viniar, Goldman’s chief financial officer for more than a decade and now a director on the board, was also absent, as was Yoël Zaoui, the former co-head of mergers and acquisitions.

Instead, Goldman’s partners grouped around a cluster of up-and-coming executives, according to two people who were there.

Among the fastest-rising stars of the new Goldman Sachs is Pablo Salame, co-head of the securities division. Emblematic of Goldman’s ruthlessly meritocratic approach, Mr Salame, 47, as quirky as he is influential, is at the heart of the bank’s post-crisis way of operating.

They’re playing by the rules but they are very good at navigating as close to the regulatory wind as possible

Originally from a small town in Ecuador, he is a Japanophile who makes regular trips to Tokyo and enjoys drinking sake and expensive green tea. His publicly viewable Twitter account – an extreme rarity among Goldman executives – is littered with pop culture references, including a link to quotes from cult film The Princess Bride and a mention of The Strokes’ debut album.

Mr Salame’s cerebral style, and his focus on working out how Goldman fits into the new regulatory regime, contrast sharply with the gung-ho approach of some of the traders who have dominated Goldman for years.

Goldman executives are convinced the bank’s business model will be largely unaffected by the financial crisis and the regulatory changes it spurred. This view of the world differs significantly from the wholesale overhauls undertaken by many competitors. Morgan Stanley, for example, is one of several global banks that have shrunk their capital-hungry fixed-income trading units.

But the Goldman model still needs improving – which is where the likes of Mr Salame come in.

Though the group’s giant equities and fixed-income units still generate close to a third of total revenue, other activities have been curtailed – notably casino-style proprietary trading, banned under incoming US rules, and techniques such as correlation trading, which exploits variations in the values of different assets, portfolios or indices. Part of Mr Salame’s job is to discover ways to get the most business out of each dollar of regulatory capital Goldman is required to hold under new rules.

There have been some changes in the broader make-up of Goldman, too. Advisory business, stemming from initial public offerings and mergers and acquisitions, is not what it was – partly because of downbeat market sentiment and partly because traders, led by Mr Blankfein, still dominate the bank. Even so, Goldman had the biggest market share in the lucrative business of advising on big deals in the first half of the year, according to data from Thomson Reuters.

Goldman has tried hard to find another low-risk business to offset the bank’s trading volatility. It has been building up its asset management business, which now boasts $900bn of funds under management – not a top-tier operation but it has been growing quickly. Goldman has also begun raising part of its funding needs from depositors, which is seen as less flighty than short-term bond finance.

So far, Goldman’s strategy seems to be paying off. The bank reported profits of $7.48bn last year – almost double the amount it made in 2011. Analysts expect it to post second-quarter profits of $1.5bn on Tuesday, up from the $962m it earned in the same period a year ago.

Yet the group is still trying to turn round another aspect of its business: its reputation. In recent months Goldman has gone out of its way to counter criticism – that it mistreats clients, is disconnected from society and generally puts profits ahead of ethics – with executives from Mr Blankfein down pushing the message to staff and the general public alike.

Mr Blankfein told a recent Aspen Institute event that if the bank is to generate genuine shareholder value, it must focus on “brand and reputation and the clients we have”, rather than pure short-term profit.

Another senior executive echoes that view. “We worry about reputational risk more than any financial risk these days,” he says. “We know we need to engage with the man and woman on the street even though these are not our clients. It’s about our broader reputation.”

Executives say 15,000 of the bank’s 30,000 staff have now been through a thorough reprogramming process, centred on three-hour training sessions, some led by Mr Blankfein himself, that focus on a series of ethical business dilemmas.

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The big question for staff and outside observers alike will be whether the overhaul can be taken seriously. Is this just a rebrand, a superficial makeover?

There are plenty of sceptics. They point out that convincing the world of its genuineness will be tough, given that the men in charge now are the same men who were in charge in the years before the financial crisis.

“To make a real break with the old ways of doing things, you need new leadership with new attitudes,” says one London-based chief executive of a leading international bank.

Some market participants question how deep the reinvention goes, especially in areas such as adherence to the ban on proprietary trading. “They just put an investment into a loan structure that otherwise might not have been a loan structure,” says one hedge fund manager who does business with the bank.

Fred Ponzo, managing partner of GreySpark Partners, a consultancy, says: “They’re obviously playing strictly by the rules, but they are also very good at navigating as close to the regulatory wind as possible.”

Mr Tourre’s trial may make the job of rebuilding the Goldman brand that much tougher. Mr Blankfein seems to have a fresh zeal to convince the world – or at least Goldman’s clients, regulators and investors – that the group’s new model has a touch of good honest banking.

This week may prove he has a way to go yet.

The executives in the frame to follow Blankfein

Goldman executives jokingly refer to it as the “bus plan”, Tracy Alloway and Daniel Schäfer write. If Lloyd Blankfein, the bank’s chairman and chief executive, were to have an unfortunate accident, Goldman would immediately implement a contingency plan to install a successor.

For years, that successor was assumed to be Gary Cohn, chief operating officer. But with Mr Blankfein’s apparent comfort in his position, some insiders have been speculating about Mr Cohn’s future.

“On the one hand Gary’s current job is basically to be deputy CEO. When he meets with clients he is representing the firm,” says a former Goldman partner. “But every day that Gary wakes up and Lloyd is still there he feels a little more squeezed.”

There are other Goldman up-and-comers quickly rising up the ranks. “Our succession plan is known only to our board, but we are fortunate to have a deep bench of talented leaders who can fill senior roles as needed and who have worked together for years,” says the bank.

In New York, attention has turned to Harvey Schwartz, the bank’s new chief financial officer, as well as dark-horse candidates such as David Solomon, co-head of investment banking.

A former partner says he had not expected even Mr Blankfein to survive at the top after the series of scandals that dogged the bank after the crisis.

Mr Cohn looked equally tainted given his reputation as a macho trader and his close ties to Mr Blankfein. That cosy relationship was epitomised by a glossy photo of the duo ensconced in the boardroom three years ago. Published in Vanity Fair, the picture’s whiff of personality cult caused a stir internally.

Back then, this raised the chances of other candidates, such as Mike Evans, the former Olympic rower who went on to chair Goldman’s Asian business.

Mr Cohn has been working to change the view that his trading background makes him a poor CEO candidate in the new banking environment, people familiar with his activities say.

Mr Schwartz, who worked as a bouncer when he was at college, is known as a problem-solver with an undercurrent of toughness. Goldman staff debate whether his promotion to CFO means he has been pigeonholed in that spot. People close to the CFO warn he shouldn’t be underestimated.

“He has been taking a softly, softly approach. But it will be the Harvey show soon enough.”

Additional reporting by Daniel Schäfer in London