What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (31 page)

2005:
Lloyd Blankfein argues that principal investing represents a momentous strategic opportunity for Goldman (C). Goldman represents both sides in the $9 billion merger between the NYSE and Archipelago holdings, earning a $100 million fee. Goldman promotes the person responsible for business selection and conflict clearance to the management committee. No other firm has someone this senior serving in this kind of position.

The SEC fines Goldman $40 million for allegedly trying to pump up the prices of IPOs. Goldman pays the fine without admitting or denying wrongdoing. Peter Weinberg, son of Jimmy Weinberg and nephew of John L. Weinberg, leaves Goldman and cofounds a competing firm the next year. In a push to pool knowledge across asset classes, Goldman merges its corporate bond and credit area with its equity counterparts (O). Goldman reportedly changes its compensation policy in sales and trading areas to be more quantitative and transparent (O, C).

2006:
Invited, along with four other investment banks, to make a pitch to defend BAA against a possible take-over, Goldman proposes buying a chunk of BAA itself, in what sounds to BAA like another take-over bid. After Goldman pursues a few other unsolicited bids, it receives a “spank from Hank,” as it is dubbed in the press—a rebuke from Paulson reminding bankers that they should not be pursuing unsolicited or unfriendly bids for listed companies, acknowledging the thin line between an unsolicited approach and a hostile take-over (O, C). Paulson leaves to become secretary of the Treasury in the Bush administration (O). Blankfein becomes Goldman’s chairman and CEO. Goldman is the only Wall Street firm to make
Fortune
’s list of America’s most admired companies (ranking eighteenth). Two former Goldman employees are charged with having run an international insider trading ring during their years at Goldman. Both men are eventually convicted and jailed. Goldman’s Alternative Mortgage Products (GSAMP), its mortgage bond division, issues eighty-three home-loan-backed bonds, valued at $44.5 billion. The
Washington Post
states that one of Goldman’s 2006 mortgage deals, the GSAMP Trust 2006-S3, may actually be “the worst deal … floated by a top-tier firm.”
²
(One in every six of the 8,274 mortgages bundled in GSAMP Trust 2006-S3 would be in default eighteen months later. People who bought the S3 bonds either had to take a 100 percent loss or sell it at a heavy discount.) In December, anticipating a housing crisis, Goldman takes a negative stance on the mortgage market but does not announce this publicly. Head of the Special Situations proprietary trading area in FICC, who reportedly was paid a $70 million bonus (larger than the CEO’s reported $53 million), leaves Goldman—supposedly because he was frustrated by the bureaucracy at Goldman and because the group was not compensated like a hedge fund or private equity firm for the reported $4 billion in profits the group generated (O). John L. Weinberg passes away.

2007:
The credit and housing booms help Goldman post a profit of $11.6 billion on $45.99 billion in revenues, setting a firm record. Goldman’s 31.6 percent return on equity is exceptional on Wall Street. The top five Goldman executives split $322 million in compensation, a Wall Street record. An article reports that Goldman is hedging its mortgage exposure by building short positions to offset “long” positions elsewhere in the bank and thereby profit from the collapse in subprime mortgage bonds in the summer.
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Media reports ask how Goldman fared so well in avoiding the mistakes made by other Wall Street firms that lost money from mortgages.

It is rumored that Goldman is not quite as careful with its clients’ money as with its own; GSAM’s Global Alpha hedge fund, which at one time had more than $10 billion in assets from clients, tumbles significantly, as do similar hedge funds. Half of the members of the Principal Strategies proprietary trading team in the equities division create a fund called GSIP in GSAM. Blackstone, an alternative asset manager and financial advisory firm, goes public, adding to the pressure for talent. Other alternative asset managers follow (C). A Goldman subsidiary settles with the SEC for $2 million over allegations that faulty oversight allowed customers to make illegal trades (R).

2008:
Goldman becomes a bank holding company, giving it greater government protection as the nation’s financial crisis worsens. (Morgan Stanley, the only other remaining independent investment bank, takes the same step.) Just before Thanksgiving, Goldman stock reaches an all-time low of $47.41 per share after trading at about $165 per share in early September. The Federal Reserve Bank of New York agrees to pay Goldman 100 cents on the dollar for its trading position with American International Group (AIG). Warren Buffet invests $5 billion in Goldman, roughly a 10 percent stake, an action that gives a vote of confidence in the firm. Through the Troubled Asset Relief Program (TARP), the US government buys $10 billion in preferred shares from Goldman. Goldman is questioned about paying 953 employees bonuses over $1 million each after taking TARP funds. CEO Lloyd Blankfein and six other senior executives opted to forgo bonuses. It is later reported that Goldman was the company from which Obama raised the most money in 2008 and that its CEO Lloyd Blankfein had visited the White House ten times.

2009:
A Senate panel, led by Senator Carl Levin (D.-Mich.) and Senator Tom Coburn (R.-Okla.), convenes under the auspices of the Permanent Subcommittee on Investigations to investigate the causes of the credit crisis. The investigation will continue for the next two years. By October, Goldman’s stock price has more than fully recovered, selling at about $194 per share. In June 2009, Goldman Sachs repaid the US Treasury’s TARP investment, with 23% interest (in the form of $318 million preferred dividend payments and $1.418 billion in warrant redemptions). Blankfein sends letter to Financial Services Committee members of the US House of Representatives thanking the government for its extraordinary efforts and the taxpayers’ patience; stating that it regrets that it participated in the market euphoria and didn’t raise a responsible voice; and stating that it has obligations to the public interest. Lloyd Blankfein is named CEO of the Year by
Directorship
magazine. Matt Taibbi publishes a scathing article on Goldman in
Rolling Stone
, which includes the often-quoted “vampire squid” analogy.
⁴
A Goldman subsidiary settles with the SEC for $1.2 million over improper proprietary trading by employees. The SEC charges a former Goldman trader and his brother with insider trading based on information the trader obtained while at Goldman (R). The Massachusetts attorney general announces a $60 million settlement with Goldman over the alleged role the investment bank played in the subprime mortgage crisis (R). Goldman, among others, created a credit default swap index to cover the high risk of Greece’s national debt. The firm is reported to have systematically helped the Greek government disguise the true facts concerning its national debt between 1998 and 2009.

2010:
Goldman reports a record profit of $13.39 billion for 2009. The SEC charges Goldman with deception for selling clients mortgage securities secretly designed by a hedge fund being run by John Paulson. A number of civil lawsuits are filed against the firm. Blankfein and other Goldman employees are called to testify before the Levin–Coburn panel about the financial crisis. Rumors about Goldman’s behavior abound. Warren Buffet, Goldman’s largest individual shareholder, and other major clients defend Goldman’s ethical character and behavior. The Dodd–Frank Wall Street Reform and Consumer Protection Act is signed, implementing broad changes to the regulation of the US financial system. After several months of studying Goldman’s business standards and practices, the internal business standards committee issues its report, calling for a recommitment to the firm’s business principles. Goldman agrees to pay $553 million, the largest fine ever paid to the SEC, to settle fraud claims related to disclosure about the design of the mortgage security called Abacus 2007-AC1. Fabrice Tourre, an employee at Goldman, who is also charged, is not included in the settlement and categorically denies the charges against him, seeking dismissal of the case. Tourre and Goldman acknowledge that the marketing for the Abacus deal contained incomplete information and that it was a mistake not to inform investors that a prominent hedge fund manager had helped design the deal. Tourre says that he and Goldman did not have a duty to give investors details that the SEC says they should have disclosed and that the SEC did not show that he acted with the intention of defrauding investors. Goldman starts to shut down several proprietary trading groups, and many proprietary traders begin to leave as the SEC fines Goldman $225,000 for violating a rule aimed at regulating short selling (R). The Financial Industry Regulatory Authority (FINRA) says it is fining Goldman $650,000 for failing to disclose that the government was investigating two of its brokers. One of the brokers was Goldman vice president Fabrice Tourre. FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made (R).

2011:
In March, former Goldman board member Rajat Gupta is charged by the SEC with insider trading for passing information to the hedge fund Galleon Group that he learned in his capacity as a board member. Six months later he is arrested on criminal charges, soon after the SEC charges another Goldman employee with insider trading. In April, Senator Carl Levin (D.-Mich.) releases the 650-page report of the Senate investigation into the credit crisis (R). It concludes that Goldman misled clients and Congress about the collateralized debt obligations that helped cause the financial crisis. The report urges regulators to identify any violations of law in the activities of Goldman leading up to the financial crisis. The report asserts that conflicts of interest led Goldman to place its financial interests before those of its clients. The report is the result of a two-year probe by the Permanent Subcommittee on Investigations. In May, the report is referred to the Department of Justice and the SEC. In early June, Goldman begins fighting back against the Senate report, emphasizing inconsistencies in it. Blankfein hires a high-profile Washington defense attorney to represent him personally as the Department of Justice continues to investigate the bank (O). Goldman is the top-ranked M&A adviser worldwide based on total value of deals announced, according to Thomson Reuters.
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KKR, a private equity firm, starts to get into the capital markets and lending businesses, competing with the investment banks (C). The SEC charges a Goldman employee and his father with insider trading based on information the employee gained in his position at Goldman (R). Goldman pays state regulators in Massachusetts a $10 million fine to resolve the allegations of “research huddles” (R).

2012:
The SEC notifies Goldman that it may face charges related to mortgage-backed securities. In February, the board agrees to appoint an independent board member as lead director to avoid a shareholder vote on splitting Blankfein’s chairman and CEO roles. As a reaction, the American Federation of State, County & Municipal Employees Pension Fund withdraws its shareholder resolution for investors to vote on at the annual shareholder meeting. Greg Smith, a London-based Goldman employee, delivers his resignation in a
New York Times
op-ed piece.
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He attributes his resignation to the negative changes in Goldman’s culture in the past decade or so, decrying the lack of focus on client interests. The op-ed sparks a flurry of responses in the media (O). The Volcker Rule, a section of the Dodd–Frank Wall Street Reform and Consumer Protection Act, is slated to go into effect in August (R). It mandates proprietary trading restrictions, with the goal of preventing US banks from exposing customers to excessive risk through speculative investments. The rule would bar banks from trading for their own accounts and from market making and places limits on how much banks can invest in hedge funds and private equity funds. Within weeks of its approval, Goldman decides to shut down the principal strategies group, which managed about $11 billion. As of this writing, Goldman and other firms are lobbying to delay implementation of the Volcker Rule pending further revision. A Delaware judge rules in a suit brought by the shareholders of El Paso Energy Corporation contesting Kinder Morgan’s purchase of the company and sharply criticizes Goldman for conflict of interest in advising El Paso, because Goldman owned 19 percent of Kinder Morgan and controlled two seats on Kinder Morgan’s board (R). El Paso was aware that there was a conflict of interest but asked Goldman’s advice anyway when Kinder Morgan launched its take-over attempt. A Goldman banker on the deal allegedly owned shares in one of the companies and did not disclose it. In response, Goldman launches a review of conflict management, and many competitors and law firms do the same. Goldman agrees to pay $22 million to settle civil charges arising from company procedures that created the risk that select clients would receive market-sensitive information, such as changes to Goldman’s recommendation lists and its ratings of stocks (R). The SEC says that the settlement includes violations of the same law that was at issue in the 2003 Treasury bond settlement. Blackrock, the world’s largest money manager, announces that it is setting up an electronic bond-trading platform that will allow it to make transactions directly with other investors and bypass investment banks (C). In August, the Justice Department announces that its investigation is closed and that it will not seek criminal charges against Goldman. Goldman eliminates most two-year contracts programs for most analysts hired out of college (C). CFO David Viniar announces that he will retire in January 2013. Goldman named 70 employees to its partnership, which are down from 110 in 2010 and 94 in 2008 (C, O). Around 14 percent of the new partners in 2012 are women (the highest percentage since at least 2006), and 59 percent are based in the Americas. The total partners represent 1.7 percent of the total employees.