What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (38 page)

24
. A. D. Frank, “Goldman Boss Lloyd Blankfein’s Testimony Bolsters Case Against Rajat Gupta,”
Daily Beast
, June 5, 2012,
http://www.thedailybeast.com/articles/2012/06/05/goldman-boss-lloyd-blankfein-s-testimony-bolsters-case-against-rajat-gupta.html
.

25
. According to court testimony, ironically when then-Goldman board member Raj Gupta wanted to work out an arrangement by which he could stay associated with Goldman and at the same time be associated with the private equity firm Kohlberg Kravis Roberts (KKR), Blankfein said that Goldman had competed with KKR in certain areas and if Gupta worked with both companies it could create a situation of conflict and therefore was not possible. “Mr. Gupta told me he was considering or deciding to accept an offer from a large private-equity group,” Blankfein recalled, “to be on their advisory board.” The Goldman CEO continued: “I told him that presented certain conflicts for us … it created a problem and I did not think it was a good idea.” Gupta told Blankfein that he could manage any potential conflicts that might arise while he also consulted with KKR, the private-equity firm first made famous in 1988 by its $25 billion hostile takeover of RJR Nabisco. Blankfein said he decided that Gupta had to give up his Goldman board seat because KKR, while a big customer of Goldman’s, also competed with the investment bank, and the conflicts for a director would be too significant to overcome while honoring his “fiduciary duty.” So it seems Goldman had decided that Gupta could not “manage conflicts.” (See Frank, “Goldman Boss Lloyd Blankfein’s Testimony Bolsters Case Against Rajat Gupta.”)

26
. The conflict issues are often raised by boutique advisory firms as their competitive advantage over larger, full-service firms. Some of the executives I interviewed work at boutique investment advisory firms. They said that because they do not have large trading or financing businesses, they can offer more independent and less conflicted advice. Sorkin (
Too Big to Fail
, 463–464) describes boutique firms as resembling the Wall Street partnerships of the 1970s and 1980s, in that they present fewer opportunities for real or perceived potential conflicts. When Morgan Stanley’s independent board members, led by C. Robert Kidder, the lead director, decided to hire an independent adviser, they chose Roger Altman, former deputy secretary of the Treasury, who founded the boutique investment banking firm Evercore Partners. His role was to advise Morgan Stanley’s board on transactions, but within twenty-four hours of being hired, he was advising the board to think seriously about selling the firm. Some people I interviewed raised the concern that some of the boutique firms are publicly traded or have meaningful outside investors or private equity departments that might impact how the firms are managed.

27
. The “doomsday scenario” Altman painted during that board meeting had some people convinced that he was interested only in collecting a big fee by advising Morgan Stanley on selling. Others worried that he might pass on information about the company’s financial health to his government contacts. Some thought that any advice about selling the firm should come from Morgan Stanley’s own bankers. Another concern was Evercore’s partnership with Mizuho Financial Group of Japan, a rival of Mitsubishi, which was in negotiations with Morgan Stanley at the time. The main theme seemed to be, “I don’t know what this guy [Altman] is up to” (Sorkin,
Too Big to Fail
, 463–464). I mention this story because I find it interesting how banks view each other‘s conflicts and motivations.

28
. William Cohan, quoted at
http://www.efinancialnews.com/story/2011-04-14/qa-cohan-goldman-money-power
.

29. The categories in which members were grouped are subjective because members have various backgrounds as they have rotated, so although someone may be in one division at the time he/she is on the committee, I asked interviewees with which groups they were most affiliated. I also asked research analysts to independently look at the backgrounds of the various members and make independent judgments, which came out relatively close to my analysis and included information from interviewees.

Chapter 8

1
. Goldman’s NEOs are currently Lloyd Blankfein (CEO), Gary Cohn (president and COO), David Viniar (CFO), Michael Evans (a vice chairman, global head of growth markets, and chairman of Goldman Sachs Asia), and John S. Weinberg (a vice chairman and co-head of investment banking).

2
. “Without question, direct government support helped stabilize the financial system. We believe that the government action was critical, and we benefited from it.” Testimony by Lloyd Blankfein,
www.goldmansachs.com/media-relations/in-the-news/archive/1-13-testimony.html
.

3
. R. Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” in
Markets on Trial: The Economic Sociology of the U.S. Financial Crisis
, ed. M. Lounsbury and P. M. Hirsch (Bingley, UK: Emerald, 2010), 69–112.

4
. My analysis as a sociologist focusing on the organizational factors should not detract from serious questions and concerns raised by many people, such as the Senate Subcommittee on Investigations, chaired by Carl Levin (D.-Mich.), alongside Tom Coburn (R.-Okla.); and several authors including William Cohan, Bethany McLean, Matt Taibbi, and Gillian Tett.

5
. In
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves
(New York: Viking, 2009), A. R. Sorkin implies that Hank Paulson, in his role as Treasury secretary, grasped the true systemic risk at hand only after the Lehman bankruptcy and Bank of America deal for Merrill Lynch. Yet Goldman had been actively trying to de-risk for months.

6
. P. Jorion, “In Defense of VaR,”
Derivatives Strategy
, April 1997,
http://www.derivativesstrategy.com/magazine/archive/1997/0497fea2.asp
.

7
. J. Nocera, “Risk Mismanagement,”
New York Times
, January 4, 2009,
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1
.

8
. “Stark’s work, however, suggests an alternative conjecture: that it would have taken heterarchical organization to fuse together the two institutionally separate insights needed fully to grasp those dangers. The conjecture is plausible: in particular, Goldman Sachs, reported by several of my interviewees to be more heterarchical in its organization than most other major banks (it was a partnership, not a public company, until 1999), escaped financially almost unscathed. Unlike almost all other banks, Goldman hedged or liquidated its ABS and ABS CDO positions several months before the crisis. However, the systematic, comparative organizational research needed to test the conjecture is, for reasons of access, currently impossible.” (See D. MacKenzie, “The Credit Crisis as a Problem in the Sociology of Knowledge,”
American Journal of Sociology
116, no. 6 (2011): 1832.)

9
. One of the characteristics Weick ascribes to high-reliability organizations is the “mindfulness with which people in most HROs react to even very weak signs that some kind of change or danger is approaching.” He describes HROs as “fixated on failure” and refusing to “simplify reality.” See K. E. Weick and D. L. Coutu, “Sense and Reliability: A Conversation with Celebrated Psychologist Karl E. Weick,”
Harvard Business Review
, April 2003, 84–90, 123.

10
. E. Derman,
My Life as a Quant: Reflections on Physics and Finance
(Hoboken, NJ: Wiley, 2004), 257.

11
. J. Nocera, “Risk Mismanagement,”
New York Times
, January 4, 2009,
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1
.

12
. Sorkin,
Too Big to Fail
, chapter 7. But his actions would have unintended consequences.

13
. According to Goldman’s 2012 proxy statement, Goldman’s board held fifteen meetings. Its independent directors also met thirteen times in executive session without management. Goldman disclosed that its directors meet informally from time to time to receive updates from senior management, and the directors receive weekly informational packages that include updates on recent developments, press coverage, and current events related to its business. Some people I interviewed said that a board position could be almost a full-time position, with selected board members needing to sit in on risk management meetings.

14
. U.S. Senate Permanent Subcommittee on Investigations, “Wall Street and the Financial Crisis Anatomy of a Financial Collapse: Majority and Minority Staff Report,” 2011,
http://hsgac.senate.gov//files/02/76/80/f027680/public/_files/Financial_Crisis/FinancialCrisisReport.pdf
.

15
.
http://www.ft.com/intl/cms/s/80e2987a-2e50-11dc-821c-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F80e2987a-2e50-11dc-821c-0000779fd2ac.html&_i_referer=#axzz2Rrj0fwk

16
. L. Endlich,
Goldman Sachs—The Culture of Success
(New York: Simon & Schuster, 2000), 199.

17
. Ibid.

18
. Ibid.

19
. Endlich,
Goldman Sachs
, 225.

20
. William Cohan,
Money and Power: How Goldman Sachs Came to Rule the World
(New York: Doubleday, 2012), 529.

21
.
http://dealbook.nytimes.com/2012/10/01/the-j-aron-takeover-of-goldman-sachs/
.

22
. Cohan,
Money and Power
.

23
. W. D. Cohan, “Where Blankfein Came From,”
Fortune
, April 20, 2011,
http://management.fortune.cnn.com/2011/04/21/where-blankfein-came-from/
.

24
. C. D. Ellis,
The Partnership—The Making of Goldman Sachs
(New York: Penguin Press, (2008), 668.

25
. Ellis,
The Partnership
, 670–671.

26
. A 2011 review of Cohan’s
Money and Power
published in
The Economist
addresses clients’ confusion about whether Goldman is an agent or competitor: “Goldman has pushed this envelope further than any other investment banks, believing it had the skill to manage the resulting conflicts.” See “Goldman Sachs: Long on Chutzpah, Short on Friends,”
The Economist
, April 14, 2011,
http://www.economist.com/node/18557354
.

27
. Ellis,
The Partnership
, 670–671.

28
. Goldman had a tradition of mobility of people among departments, divisions, and geographies. Small steps that lead to new practices, and the normalization they entail, are seldom visible or seen as significant by those who work in a department or organization for a long time (see S. Dekker,
Drift into Failure: From Hunting Broken Components to Understanding Complex Systems
[Farnham, UK: Ashgate Publishing, 2011], 180). It helps to have people come in from other areas to bring fresh perspectives that help insiders recalibrate what they consider normal. It also forces insiders to articulate their ideas about running their system. This can be true culturally, as well as from a risk management perspective. In both, an environment that supports rotation of employees and discussion is important.

29
. Executives also need to overcome the structural secrecy inherent in the technical language of risk management.

30
. M. Taibbi, “The Great American Bubble Machine,”
Rolling Stone
, April 5, 2010,
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
.

31
. M. Taibbi, “The People vs. Goldman Sachs,”
Rolling Stone
, May 11, 2011,
http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511?page=3
.

32
. Taibbi, “The Great American Bubble Machine.”

33
. A
fiduciary
is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances that give rise to a relationship of trust and confidence. A fiduciary duty is the highest standard of care at either equity or law.

34
. Goldman is, however, a fiduciary to its shareholders and to the funds it manages for clients. Legislation was proposed (as part of the Dodd–Frank Act) that would impose a fiduciary standard rather than the current suitability standard for those selling products. The intent was to require brokers to put clients’ interests first or be held legally accountable. Within a week, that provision was dropped after intense lobbying by Wall Street.

35
. However, under the federal securities laws, investment advisers (banks that manage clients’ money, such as Goldman’s asset management business or private equity business) are bound to a fiduciary standard that requires them to put their client’s interests above their own. Conflicts of interest must be disclosed, and self-dealing is generally prohibited.

36
. Blankfein “basically [denied] it all” at the hearing. “The political environment we live in now is such that he would rather look like they were as dumb as the other firms on Wall Street. And yet the evidence is overwhelming. They didn’t do it nefariously. They did it because they thought they could make money. And they did. I think they made $13 billion pre-tax in 2007.” (See J. Pressler, “Goldman Chronicler William Cohan Is Doing God’s Work,”
New York Magazine
, April 17, 2011,
http://nymag.com/daily/intelligencer/2011/04/william_cohan_is_doing_gods_wo.html
.)

37
. Goldman did not have a fiduciary responsibility to BP or to Sara Lee (see chapter 1) but still accorded them essentially that level of care.

38
. I also heard echoes of the “higher purpose” rationalization (see chapter 9) in the fiduciary responsibility defense offered as an explanation of Goldman’s actions.

39
. A Goldman spokesman said that until AIG was rescued by the government, the insurer “was viewed as one of the most sophisticated financial counterparties in the world. It wasn’t until the government intervened in September 2008 that the full extent of AIG’s problems became apparent.” The interesting comment is the next one: “‘What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage,’ the Goldman spokesman added.” This is a key ethical issue and source of criticism, so why was Goldman selling it to them? (See S. Ng and C. Mollenkamp, “Goldman Fueled AIG Gambles,”
Wall Street Journal
, December 12, 2009,
http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html
; and
http://www.npr.org/blogs/money/2010/04/is_goldman_sorry_it_sold_a_sec.html
.)