Goldman's Lloyd Blankfein meet with shareholders Friday morning for an annual meeting that turned hostile at times. Before Blankfein's Senate testimony last week, Charlie Gasparino reported current and former Goldman Sachs partners are wondering if it’s time for the CEO to go.
Goldman Sachs CEO Lloyd Blankfein spent hours this weekend prepping for an expected grilling in Washington on Tuesday when the Senate holds hearings into alleged misconduct at what was once the world’s most prestigious investment bank. But Blankfein is facing troubles much closer to home: A revolt, albeit a very quiet one, among some Goldman partners who believe that the firm’s business model under Blankfein and his No. 2, Gary Cohn, has put the firm at odds with its clients.
If Blankfein gives an uneven performance at Tuesday’s hearings, as he has done in the past, the revolt will likely gain momentum.
This revolt from investment bankers inside the firm—and former banking partners who are no longer at Goldman but remain powerful because they own substantial sums of stock—may not be enough to doom Blankfein today, or even in the immediate future. But if Blankfein gives an uneven performance at Tuesday’s hearings, as he has done in the past, the revolt will likely gain momentum. If that happens, I am told, Blankfein, the most successful Wall Street CEO on paper, may be forced to give up some power, such as handing over the chairman’s job to someone who can stem the tide of negative publicity that has engulfed the firm. The quiet attacks against Blankfein go beyond internal competitors smelling blood and hoping for a chance to replace the CEO—who has steered the firm toward near record profits ($3.4 billion in the first quarter of 2010) amid accusations that it also screwed its clients.
The Goldman business model recently became the subject of intense debate on Wall Street following civil charges filed by the Securities and Exchange Commission that the firm sold a package of complex mortgage bonds known as collateralized debt obligations (or CDOs) to two of its clients without disclosing key details of the transaction. The SEC claimed the portfolio was created in part by an investor who was betting on the CDOs to decline in value—helping the short seller, John Paulson, make billions of dollars, but causing the investors, including Goldman, which was forced to hold a piece that it couldn’t sell, to lose big.
• John Carney: Goldman Girds for War• Jeffrey E. Garten: Wall Street Will Reform WashingtonGoldman has denied the charges and is vowing to fight them to the end. We’ll see about that. But over the weekend, as he prepped for Tuesday’s hearings, Blankfein and Goldman faced another dilemma: Emails released by the Senate Permanent Committee on Investigations show that Goldman also bet that such bonds would decline, thus the firm was shorting the same investments it was actively selling to people it considered friends.
The notion that a firm would seemingly double-cross its investors may seem odd to most of the general public, but it’s part of how the modern Wall Street has evolved, particularly Goldman Sachs. Goldman will tell you that it shorted those bonds because it believed the firm might lose money because of its long investment in the same security. Fair enough. But Goldman made huge money on its short, and Blankfein earned nearly $70 million in 2007 on the misery of others—something that Senate investigators, I am told, will likely bring up during the hearings and which Blankfein will no doubt be prepared to answer. Even so, Goldman was also once a firm that built its reputation as an aggressive trading house—buying and selling stocks and bonds and taking advantage of anyone who got in its way—and a place where blue-chip companies came for investment banking advice and got treated like real clients.
In other words, the firm’s relationship-driven investment banking business had more or less kept the traders who don’t care about relationships in line.
To be sure, client complaints about Goldman’s trading against them predated the reign of Blankfein and Gary Cohn, which began in 2006 when the two men, who made their fortunes trading and selling commodities, became CEO and president respectively. They replaced an investment banker Hank Paulson, who went on to become Treasury Secretary and bail out Goldman along with the rest of the banking system during the financial collapse of 2008.
Since Blankfein’s ascendance, rivals say, Goldman has become the most Darwinian firm on the Street. Clients aren’t there just to be given financial advice and generally helped, but rather they are seen as a source of information, the same information that Goldman uses on its trading desk to make lucrative bets often at odds with the clients’ own positions in the markets.
Since Blankfein’s ascendance, rivals say, Goldman has become the most Darwinian firm on the Street.
In recent weeks, Blankfein has been strenuously reassuring the investing world, including in the company’s recently released shareholder letter, that clients come first. Indeed, Goldman spokesman Lucas Van Praag went to great lengths to explain to me that Goldman is the most client-focused firm on Wall Street, and I am sure part of Blankfein’s prep work this weekend for the upcoming Senate hearings will be to underscore the kinder, gentler side of Goldman Sachs, at least as far as its customers are concerned.
The problem is, there are now a lot of people who need convincing, including Goldman’s current bankers and former partners who are concerned about the cultural shift at the firm. Being a banker at Goldman Sachs, of course, hasn’t been that easy in recent years. Before the financial collapse, Goldman’s traders pushed profits to record heights. After the collapse and subsequent bailouts, the traders again feasted off historic low interest rates and an improving bond market.
But times might be changing. Interest rates will have to rise again soon, and the bond markets won’t keep going up forever. Then Goldman Sachs will once again need its investment bankers and of course its clients. And they might not be there—unless of course, there’s a change at the top.
Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.