Cold Man Sacks?

Goldman Sachs was and continues to be an organization that knows how to make money… for themselves. In 1999, senior management saw how they could multiply the cash that represented the firm’s profits by a simple step: going public. The partners held onto 60% of the stock and foisted 40% onto the public. They got the instant multiplier that they had dreamed of… and a whole lot more that they really hadn’t thought about. Like the kind of open operational and public scrutiny imposed by law on such corporate offerings. Over the years, lots of partners cashed out – public stock has the benefit of allowing that liquidity – and today 480 Goldman partners now own 10% of the company.

Perhaps one of the most publicly decried companies – a symbol of the Wall Street greed that many believe brought the world down into the worst financial crisis since the Great Depression – Goldman was totally unprepared to handle the rigors of operating under a public microscope. Their traditional command and control structures were constantly challenged in the press, and a company that was horribly understaffed in the public relations area (their standard response to press inquiries was often “no comment”) and led by seemingly uncaring and imperious leaders, seemed only to know how to taint its image even more. High on the list of missteps is the profoundly arrogant utterance, in November of 2009, by CEO Lloyd Blankfein that he was doing “God’s work.”

And of course, the law required Goldman to reveal what senior managers were being paid. Blankfein’s compensation was the stuff that editorial writers could have their way with. “Blankfein earned a total of $54.4 million in 2006 as one of the highest paid executives on Wall Street. His bonus reflected the performance of Goldman Sachs, which reported record net earnings of $9.5 billion. The compensation included a cash bonus of $27.3 million, with the rest paid in stock and options. While CEO of Goldman Sachs Group in 2007, Blankfein earned a total compensation of $53,965,418, which included a base salary of $600,000, a cash bonus of $26,985,474, stocks granted of $15,542,756 and options granted of $10,453,031.” Wikipedia. His exalted pay continued into the present: “Goldman Sachs Group Inc. awarded Chairman and Chief Executive Officer Lloyd C. Blankfein $19 million in compensation for 2010, almost double the prior year, and granted him the first cash bonus in three years… The total includes $5.4 million in cash, $12.6 million in restricted stock, a $600,000 salary and about $464,000 in other benefits, the New York-based firm’s proxy statement showed. Blankfein’s $9.8 million pay for 2009 included $9 million in restricted stock plus salary and other compensation.” Bloomberg Business.com, April 2, 2011. God seems to be paying Lloyd ver y well for doing His work.

But change is afoot, and the fact that every Goldman CEO since the company went public was part of the group that made the decision to go public tells you the company is still mired in its past. Clients who lost fortunes in the financial collapse could only look with anger at the earnings reports and executive pay as Goldman created financial instruments that covered their losses as prices fell by selling their clients on investment strategies based on a rising or a falling market… playing both sides of the street at the same time. The financial advisory aspects of Goldman – investment banking – began to account for a decreasing share of the company’s profits, and the down-and-dirty traders – personified by Blankfein – were raking it in as they sequentially made money by crafting new financial instruments – derivatives – that based investment decisions on computer-generated predictive market trends as opposed to simply investing in the stocks and bonds available on the market.

The May 16^th New York Times speaks to Goldman’s near-term future: “While the clubby culture remains, the tight-knit group has lost its vise-like grip on the company, as the wishes of the insular partnership have given way to the demands of the outside shareholders… Their power base may soon erode further. Senior Goldman executives are considering whether to cull partner-heavy divisions like investment banking, according to people with knowledge of the matter who were not authorized to speak on the record.

“The diminished influence of the partnership has forced Goldman, albeit begrudgingly, to shed some of its secretive corporate personality, especially in recent years as its opaque business model has come under scrutiny in Washington. Although a small cadre of executives still steers strategy and runs the day-to-day operations, the financial firm now must act more like other publicly traded companies, responding to criticism over pay, adjusting strategy to placate shareholders and dealing with outspoken activists at annual meetings — all of which was unheard of a decade ago….

“Partnership remains an elite club today. Roughly 100 new partners are tapped every two years in a seven-month process. Candidates are not interviewed and do not even know if they are under consideration. Instead the partnership committee vets potential members, discussing them only with other partners.” It may be time for Goldman to reach into the next generation of partners, those who were part of the 1999 group that went public, for its next set of leaders. They now have to react to shareholder demands, and when they are attacked in the press, they know actually know how to defend themselves… like other corporations.

But don’t think that Goldman’s footprint is diminished in any significant way. Their former partners are scattered all over the highest reaches of government and corporate America; their influence continues to move decision-makers at every level. But the new Goldman Sachs is no longer the impervious monolith that once seemed almost to embrace being the Darth Vader of Wall Street.

I’m Peter Dekom, and change is what I write about.