Has Goldman Lost Its Swagger?
Once the premier firm on Wall Street—and the finishing school for future Treasury secretaries and other D.C. power brokers—Goldman Sachs no longer has its pull in Washington. Charlie Gasparino analyzes the firm’s midlife crisis.
It's been a pretty tough year for Goldman Sachs, the perennial gold standard of Wall Street. Its stock price is down dramatically from the $200 a share it traded at last spring. Even more frightening is that Goldman nearly went the way of Bear Stearns, Lehman and Merrill Lynch—fighting off a near meltdown that was threatening to bring the firm to its knees.
Rumors continue to swirl that Goldman may somehow team up with Citigroup in some type of reverse merger that gives Goldman access to Citi’s massive balance sheet.
Changes in regulations last year allowed the firm to convert itself into the regulatory equivalent of a commercial bank and $10 billion in federal bailout money helped stave off disaster—but just barely. Goldman recorded a massive loss during the fourth quarter of 2008—so large in fact, that its normally well-paid CEO, Lloyd Blankfein, who received a $68 million the year before, took no pay for 2008. Goldman's share price has improved (before Tuesday’s rout) since the beginning of the year, and the firm—even according to the Goldman haters (and they are legion on Wall Street)—employs some of the smartest minds in the financial business who will eventually figure out a long-term strategy to return the firm to profitability.
As a consequence of the financial crisis, Goldman has been forced to ditch its long-held business model of making huge bets in the securities markets and pocketing the billions of dollars made on betting right, which it did more often than not. Now the big swinging dicks at Goldman will have to act more like the investment bankers at Lazard Frères, and spend their time focusing on advising clients on mergers and, shockingly, gathering deposits on its way to becoming a full-fledged commercial bank. It's unclear if Goldman will be opening branch offices and ATMs any time soon, but I hope they do just so I can be first in line to get a Goldman-monogrammed toaster.
But the trouble in Goldman-land, is not just of the financial, or balance-sheet variety. It’s more like a crisis in confidence. To be sure, Goldman Sachs isn't going out of business any time soon—or even ever; in fact, I expect the firm to expand in the coming months. (The firm's CFO, David Viniar, recently stated that he feels so confident about the future that he's now looking for ways in which Goldman could give back the government funding it took last year.) And rumors continue to swirl that Goldman may somehow team up with Citigroup in some type of reverse merger that gives Goldman access to Citi's massive balance sheet. The government would simply love that to happen: pairing the smartest guys on the street, with a large, unwieldy bank where the management can't seem to get its act together.
All of which could seriously help Goldman with its midlife crisis, which goes beyond the recent losses, layoffs, and cutbacks in compensation to its top executives. It runs deeper because it threatens to displace the firm as a breeding ground for government policy makers, as has been the case for as long as I've been covering the Street, and may soon make Goldman no different from any other financial firm, God forbid.
For my money, there was always something unctuous about so many former Goldman CEOs and partners influencing economic and even national public policy by getting so many high-level jobs in federal government, particularly in places that can have direct impact on how Wall Street makes money.
Former Goldman CEO Robert Rubin, President Clinton's Treasury secretary, is considered a savior by some for his economic policies that led to smaller deficits, but let's not forget that Rubin was an advocate of dismantling Glass-Steagall, the Depression-era law that separated investment banking and commercial banking activities. Abolishing Glass-Steagall was not just ill-advised; it was downright dumb. But in the short run, Wall Street made huge profits off Glass-Steagall's demise as a wave of bank-brokerage mergers swept the financial business and the newly constituted firms were able to cross-sell various products and leverage banking deposits to trade in the securities markets. But it also paved the way for the creation of Citigroup, the current problem child of Wall Street and its second cousin, Bank of America. Both of which have recorded such huge trading losses (much of BofA’s losses were inherited by the securities firm it bought, Merrill Lynch) that these banks have little money left over to lend to Main Street. Ironically, Rubin would go to work for Citigroup and shoulder much of the blame for its demise.
And Goldman's fingerprints were all over the recent spate of government bailouts. Most of Wall Street believes Goldman received favorable treatment last year from another alumnus who made it big at Treasury, Hank Paulson. The former CEO of Goldman and President George W. Bush's last Treasury secretary, was the point man in the government efforts to stabilize the financial sector during the dark days of last year. It was Paulson's decision to let Lehman Brothers implode without government assistance, and it was also his decision to help prop up the rest of Wall Street, including Goldman, after Lehman's demise. As noted in a New York Times exposé, Goldman CEO Blankfein was deeply involved in talks to save giant insurer AIG just after Lehman's demise. According to the report, the government bailout of AIG saved Goldman countless billions of dollars. The firm came out swinging after the Times report, saying it had no material exposure to AIG, but no one I speak to believes that Goldman wasn't worried about its own hide as AIG’s demise looked increasingly likely, and that Blankfein took the appropriate steps to protect his turf.
But those days, people at Goldman acknowledge, are over. How much power has the firm lost in Washington? Consider what happened with the amendment slipped into the stimulus package by Senator Chris Dodd that severely restricts bonuses paid to top Wall Street talent. In many ways, the amendment hurts Goldman more than other firms because it made so much of its money trading, and it compensated top talent well in the good years and less well during down times. In the past, Goldman would have turned on the charm and hit Dodd and the firm's friends in Congress with a lobbying blitz to kill the amendment. Not only wasn't the amendment killed, it was signed into law with the rest of the stimulus package Tuesday. Not that Goldman is going away altogether. "They have their minions," said one seasoned Wall Street executive who often deals with legislative matters. "They have lobbyists and people in high places in government. They're like mice; they're everywhere." One of those mice is Treasury Secretary Tim Geithner's chief of staff, Mark Patterson, the former Goldman Sachs lobbyist who recently left the firm to work with the latest point man on the banking industry's bailout.
So even if its influence is waning and its executives are sweating just how much stroke they still have, it doesn't take much digging to realize that Goldman is still a presence in Washington. Last week, I reported on CNBC that Goldman held a secret meeting with top clients to discuss the current financial mess, and Geithner's tepid response, which sent the markets into turmoil. The meeting was held just hours after Geithner's speech. First, the good people at Goldman, through the firm's veteran spokesman, denied that such a meeting took place; then he issued an all-points bulletin to the press denying that the meeting was "secret" or in any way in reaction to Geithner's speech. In fact the firm said it was scheduled weeks in advance.
What the spokesman forgot to add was that the vast majority of the meeting concerned Geithner's speech—and how Wall Street could come up with a solution that the Treasury secretary obviously hasn't. The Goldman spokesman also failed to point out that if the meeting wasn't a secret, where were the invites to the firm’s other clients? Around 20 showed up to the event I am told. Where was my invite?
What’s interesting about all of this drama was the firm's reaction—it was so over-the-top precisely because Goldman knows now is not to time to be holding secret meetings about Washington power brokers the firm is looking to influence even as its influence is fading.
Charles Gasparino appears as a daily member of CNBC's ensemble. He is also a columnist for Trader Monthly Magazine, and a freelance writer for the New York Post, Forbes and other publications.