Goldman Execs Destroy Bank's Reputation in Congressional Hearing

As show trials go, the testimony of some of Goldman Sach's executives before the US Senate's Permanent Subcommittee on Investigations yesterday wasn't as grand as those of Stalin, or even as grand as the impeachment of President Clinton. It looks like the bankers put forward a tolerable case that they didn't do anything illegal, and it looks like the senators got to embarrass the bankers enough to get some good campaign ad footage from the exercise. However, what Goldman's executives also did was destroy the bank's reputation for putting clients first. It may never recover.

This morning's business news reports are keen to point out that Goldman's stock rose as its top managers and ex-managers were grilled. Indeed, the bank gained $549 million in value. These gains are, of course, short-term effects. With Greece wobbling and financial services reform up for filibuster in the senate, the future beyond the next trading session or two is unclear. Longer-term, it's clear Goldman has trouble.

The reputation Goldman Sachs carefully created over the last 150 years convinced even the newest of the new to finance that Goldman's clients were in the safest of hands. "Our assets are our people, capital and reputation. If any of these is ever diminished, the last is most difficult to restore," is how Goldman Sachs Business Principle No. 2 reads. In an e-mail to staff April 18, 2010 (a Sunday), Chairman and CEO Lloyd C. Blankfein wrote, "I want to remind all of you of the fundamental values that have served Goldman Sachs throughout our history: teamwork, excellence, and service to our clients."

That focus on the client seems to have died somewhere along the line. What has emerged from the Abacus and Timberwolf transactions (the latter described in an internal Goldman e-mail as "a shitty dea" -- it lost 80% of its value in the first 5 months after it was issued) to name but two, is that Goldman Sachs stopped being the servant of its clients. Instead, it viewed them as marks, mooches, easy targets, and Goldman moved on them like carnies with loaded dice ready to fleece the rubes at the county fair.

Typical of the Goldman myopia on this matter was the performance of Daniel Sparks, former top mortgage guy at Goldman. After a June 22, 2007, e-mail that described Timberwolf as "a shitty deal," Mr. Sparks kept pressing his sales team to sell it. A July 1 e-mail from him says the "top priority is Timberwolf," -- that is, the top priority is selling a shitty deal. When Senator Carl Levin (D-MI) asked "How much of that shitty deal did you sell your clients? Does that bother you at all?", Mr. Sparks replied like a Reagan administration aide caught in iran-Contra, "I don't recall." Senator Susan Collins (R-ME) asked, "Do you have a duty to act in the best interests of your clients?" Sparks tried evasion a few times before responding, "I believe we have a duty to serve our clients well." In other words, "No, not exactly, Senator."

Or consider the tone-deafness of CFO David Viniar. Quoting again from e-mail messages, Senator Levin asked Mr. Viniar if Goldman's clients were right to think that Goldman wouldn't sell them garbage, that "you don't think it's 'junk,' that you don't think it's 'crap'." Mr. Viniar said, "that's very unfortunate to have on e-mail." Rather like the criminal who apologizes by saying, "I'm sorry I got caught."

S&P, the rating agency that hasn't exactly covered itself with glory in the last couple of years, wrote in a report this month, "Notwithstanding Goldman Sachs' exceptional financial performance, we are concerned about the potential impact of the fraud complaint the SEC has made against Goldman Sachs' principal US broker/dealer subsidiary, as well as other recent criticisms of Goldman Sachs' businesses practices. Given the extent to which Goldman Sachs' business franchise and funding rely on the confidence of its clients, counterparties, and creditors, reputation is an important rating consideration. As a result, we cannot rule out the possibility that potential reputational damage ultimately could adversely affect the rating."

Yes, the bloom is of the Goldman rose. Senator Levin put it best in grilling Mr. Blankfein, "They're buying something from you -- and you are betting against it. And you want people to trust you. I wouldn't trust you." Whether what Goldman did was illegal is rather beside the point. They have proved themselves to be untrustworthy in a business that is built on trust. Something about a house built upon sand comes to mind.

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