Will New Goldman Kill Old Goldman?

I’ve blogged repeatedly about the excesses of this Wall Street financial institution. TARP money ($10 billion), near zero interest Fed funds (approx. $52 billion), insurance proceeds for credit failures supported by the government’s bailout of AIG ($12.9 billion). Sure when Goldman repaid the TARP money to get out from executive pay ceiling caps, the taxpayers got 23% return on their investment, but the rest is pure government subsidy. And yeah, Goldman created a great “show” by swapping the in-cash bonus structure to their top 30, already wildly-wealthy, senior executives by giving them special stock benefits instead, but they might make even more money in the near term.

The simple fact is that Goldman is not going “God’s work” as CEO Lloyd Blankfein recently claimed and looks a lot more like the greedy “fat cat bankers” as described by President Obama. And the harsh fact is that most Americans really resent this arrogant institution and would love to see some major changes… voluntarily or not. A recent law suit by one pension fund challenged the basis for Goldman’s claims that they cannot retain the “best and the brightest” without the current bonus structure; the suit questions where there is the slightest empirical evidence for this assumption.

Short term, Goldman’s newfound emphasis on quick-turnaround profits has produced a cash bonanza, and in American corporate suites everywhere, that’s the bottom line. But this apparently obvious success carries some not-so-obvious risks. First, Goldman is begging for government regulation and greater government oversight over its activities. Second, their actions make result in a wider and deeper array of new laws aimed at curbing such inglorious excess. Third, such “profits above all” values are provoking their employees to trade and take risks… risks that won’t always generate good result and may someday place Goldman back at the government’s door (Sam! Don’t open it!)… sooner or later, trends change. Fourth, the underlying structure of Goldman is entirely focused on the short term; long term strategies and genuine value-creation are seemingly gone from Goldman’s values.

Is this shift from doing what’s right in the overall long term versus “profits at all costs” a change in traditional Goldman? Is the new Goldman “ethically impaired” under its new value system? And if Goldman has place ethics as a distant second place value to profitability, does this seeming alteration in ethical mandate require an extrinsic ethical force to be imposed upon this bank? In my opinion, the answer to all three questions is a resounding yes.

In the past, Goldman was famous for its huge-fee-generating corporate advisory services (investment banking); its strategic advice to American business was legendary. Goldman was run by investment bankers who guide corporate America through short, near and long-term strategies, forging long relationships to endure for long-term success.

But CEO Blankfein is not an investment banker; he comes from the world of trading… and traders, not investment bankers, run Goldman today. The December 16^th New York Times: “Interviews with nearly 20 current and former Goldman partners paint a portrait of a bank driven by hard-charging traders like Mr. Blankfein, who wager vast sums in world markets in hopes of quick profits. Discreet bankers who give advice to corporate clients and help them raise capital — once a major source of earnings for Goldman — have been eclipsed, these people said… Mr. Blankfein has surrounded himself with a tight circle of executives drawn from Goldman’s trading operation. Many of these executives, like Mr. Blankfein, cut their teeth in the commodities division, J. Aron & Company. Gary D. Cohn, Goldman’s president, as well as the heads of the bank’s asset management division, are J. Aron alumni. So is the head of human resources.”

Blankfein did pull Goldman back from the brink during the early stages of the economic meltdown. But different leaders are needed for different times, and now that Goldman is back in solid financial shape, I believe it is time to bring in new leadership that even from Goldman’s perspective, will take the company away from its current position of “lightening rod” for the wrath of economically impaired Americans looking at the riches their tax dollars generated for “fat cats.” “After first guiding Goldman through the near collapse of the nation’s financial system and then deftly extricating his bank from a federal bailout, Mr. Blankfein is now presiding over one of the richest periods in the bank’s 140-year history. Mr. Blankfein has accelerated a decade-long decline of Goldman’s old partnership ethos, which was built around the principle that its bankers and traders can do well — indeed, very well — while putting their customers first, former partners said.” The Times.

Or Goldman can become just one more financial institution, like so many others, where the bank – not the customers – comes first. And that is exactly what government regulation is all about. No Lloyd, “Let them eat cake” is not a funny line!

I’m Peter Dekom, and I wish you a very happy holiday season…