What next for Goldmans?
There is a self-righteous gene in the DNA of Goldman Sachs which may not be serving it well in the court of public opinion. As the investment banker has come under intense scrutiny from the media, from the all powerful Securities & Exchange Commission (SEC) - which has accused it of fraud - and the Senate, the bank has responded in aggressive fashion.
Chairman and chief executive Lloyds Blankfein and his lieutenants in London; the philanthropist Michael Sherwood and President Richard Gnodde, do not appear to take the punches lying down. The attacks on Goldman's trading practices began seemingly harmlessly enough last year in an article in Rolling Stone magazine by Matt Taibbi who memorably described Goldman as a 'great vampire squid wrapped around the face of humanity.'
Unfortunately, for Goldman it is an image which has stuck despite the anti-Semitic, blood libel tone of the metaphor. Silencing a media campaign is one thing and as part of the effort to reaffirm Goldman's claims of integrity and its prospectus promise that 'our clients interests always come first', the New York-based group launched an aggressive public relations response. Lloyd Blankfein even took the trouble to call in at my offices at the Daily Mail in West London to explain how the group was intendeing to reform its remuneration policy so it conforms with best practice on both sides of the Atlantic. The much famed bonuses would be paid in shares not cash. They would be hoarded for several years and the bank would be stepping up its charitable and community work. Among other things, it has set up a trust to help foster the future of 10,000 new businesses.
But while it was addressing its public image, behind the scenes the regulators were pursuing their own agenda. Everyone concedes that Goldman is cleverer than most financial houses. But the belief was that, in its exploitation of free markets and the capitalism espoused by the philosopher-novelist Ayn Rand, it overstepped the mark. In the pursuit of its own profits and survival the interests of clients were on occasion sacrificed to the interest of its own preservation. It is this which lies behind the enormous complexities of the 'Abacus' structured debt vehicle which is the centre of the SEC 'fraud' investigation. The SEC charges that Goldman Sachs, its trader Fabrice Tourre and hedge fund billionaire John Paulson colluded to cheat the investment banks clients have become a cause celebre.
The response from Goldman has been robust in the shape of the release of legal dossier and an aggressive attempt by its senior executives to convince clients that the bank is the subject of a conspiracy to punish Wall Street for being so profitable. By all accounts, the SEC's case is not watertight and Blankfein and his team have a good case for the defence. But in taking on the Democratic-controlled White House, the Senate and an unsympathetic media, it has committed something of an own goal. The impression has been given that there is something to hide.
Clients on the wrong side of Goldman deals have gleefully been adding to the perception that somehow the firm's profits have been unacceptably obtained. Instead of responding with humility, Goldman hit back with aggression and arrogance. But it is one thing challenging the media and the regulator and quite another taking on the Washington political establishment. A probe by the all powerful Senate sub-committee on investigations headed by Senator Carl Levin is a mountain to climb. Just how high was demonstrated when the committee began an avalanche of damaging leaks to the Washington Post casting Goldman in bad light. Despite the efforts by Goldman's king-of-spin Lucas Van Praag to deflect the charges the damage already had been done. In the end politics is the art of compromise a lesson which thus far Goldman Sachs has not comprehended. In the recent past it has felt protected by friends in high places. Barack Obama is taking on Wall Street delivering a blistering attack on bad practice in its own backyard.
The political tide has turned against the financiers. The sooner that Blankfein and his cohorts realise it is the interest of all stakeholders that is on the line, the better chance it has of surviving a crisis of reputation.
Alex Brummer is City Editor of the Daily Mail