Goldman Sachs - genius or hubris?

http://www.thisislondon.co.uk/markets/article-23826673-goldman-sachs---genius-or-hubris.do

When I last met Lucas van Praag, Goldman Sachs' head of PR, he told me a story about his family and against himself and his employer that was witty, warm and perceptive.

The last time I saw Michael Sherwood, the co-head of Goldman in Europe, he talked about his charity work. Richard Gnodde, the other co-head, always likes to talk politics, priding himself on being close to the action.

Jim O'Neill, the bank's chief economist, was the first to spot the potential of the emerging nations of Brazil, Russia, India and China. A lifelong Red, he's the leader of the bid to return ownership of Manchester United to its fans.

It's possible to go right through the hierarchy of Goldman, here and in New York, and find executives who ooze intelligence. Go down the layers of management and the same applies: it's fair to say that no commercial organisation is possessed of so much brain-power and none works harder and puts in such long hours. Certainly, no company anywhere or at any juncture in history has produced so many multimillionaires.

And yet Goldman has displayed an uncanny knack for getting it wrong, for misreading the public and political mood. Goldman is one of the banks that was rescued by the US taxpayer but continues to pay its people vast bonuses (an average of £109,000 for the first three months of this year alone). The gap between rich and poor gets ever wider and causes widespread consternation, yet Goldman carries on blithely handing out enormous sums.

It could do far more for good causes and repair its image but chooses not to. Worse than that, the bank now stands accused of blatant fraud, of climbing into bed with a client who wanted it to create some financial instruments that the bank could sell to other institutions and he could bet against, in the expectation that they would fail.

The US Securities and Exchange Commission has charged Goldman; the UK's Financial Services Authority is also investigating.

The client made close to $1 billion; the buyers lost close to $1 billion. As wheezes go, it was shocking. And for what? For a measly $15 million, Goldman's arrangement fee. This from a bank that yesterday announced profits of $3.5 billion for the first quarter of this year.

Did the bank not think that the clients might complain, that the authorities would wonder how it was that the instigator, hedge fund boss John Paulson, had pocketed so much?

What does it say about the hierarchy of the bank that they declare to the world they hire only the brightest and the best and put them through 50 testing interviews, only for their staff to engage in such socially useless activity?

When Lord Turner, the chairman of the FSA, used that phrase, "socially useless", in the aftermath of the near banking meltdown, to describe what investment bankers did, he was mocked by many in the City, including those within Goldman.

But it was this sort of arrangement with Paulson that he had in mind. Here we have a bank conniving with a hedge fund manager to load up investors with rubbish that he could exploit for his own ends. What could be more socially useless than that?

After details of the Paulson plot emerged, the Prime Minister, Gordon Brown, accused Goldman of engaging in "moral bankruptcy". Faced with that stinging criticism, many organisations and individuals would display contrition and beg for understanding.

Not Goldman. At the bank they've retreated into their bunker, confident that the crisis will pass and that their dominant position in banking and the capital markets will see them through, that clients will not desert them.

In this respect, they've become the Millwall FC of high finance, adopting a "nobody likes us but we don't care" attitude, believing entirely in their own brilliance and power. As one of their senior executives once said to me: "You have to understand we're a bank. We're not a charity. We don't do politics. We make money for our clients." And, he could have added, "for ourselves".

The Goldman vice-president Fabrice Tourre ("Fabulous Fab", as he calls himself), who masterminded the bank's participation in the alleged fraud and boasted of his prowess in emails, has not been fired or even suspended, but, we're informed, was cleared by an internal inquiry and is on paid leave, although he has been deregistered with the FSA.

Greg Palm, Goldman's general counsel, has gone on the offensive, supporting Tourre and taking an uncompromising aggressive stance towards the SEC. Nowhere is there any hint from the bank that even if it manages to overturn the SEC accusation its action was morally questionable.

But then this is a bank likened in Rolling Stone magazine, in its own US backyard, to "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".

That description last year prompted a deluge of similar attacks around the world - and sneers from the bank's stung management. In their sealed tank where they were masters of all they surveyed, and were treated as such by grateful clients, they just didn't get it. The assaults prompted the astonishing claim from Lloyd Blankfein, Goldman's ultimate head, that his organisation did "God's work". Astonishing to the rest of the world, but not to Goldman.

In the end, no matter how good their numbers, businesses are destroyed by people. They build them up and they knock them down. It's human nature - it's the failings of arrogance, greed, hubris and lust.

Already, the comparison is being made with Arthur Andersen, the auditor to Enron that collapsed as soon as that same SEC pursued it in the wake of Enron's demise. Clients ditched Arthur Andersen rather than be tarnished with the same fraudulent brush.

Goldman does not certify accounts the same as Andersen did. But it's an adviser and, right now, who do you want on your team: the bank that causes your critics to ask questions of you or one that provokes no untoward response?

Governments are coming under pressure to withdraw their Goldman business. Once that occurs, major corporations, especially those that value their ties with those same governments, may follow suit.

As Goldman attempts to reassure clients it really has got their best interests at heart, and to calm investors and staff, there's no doubt the bank's judgment has gone awry.

Goldman prides itself on being different. From its over-the-top recruitment process to its alumni network, it cloaks itself in an ethos of superiority.

Like most Wall Street firms it started off as a partnership, but while the others long since gave up that structure, preferring to become listed companies the same as everybody else, it clung to the old structure, managing to combine it with going public. So when Goldman floated in 1999, those who were partners received shares worth £150 million each at today's prices.

Many of them remained, a tribute to the bank's chemistry. When questioned why, they would often answer that they couldn't imagine working anywhere else.

So, each year, the annual addition to the partners' remuneration pool is a major event, here and in New York and the other places where Goldman has large offices. Some employees make it, most don't. Whatever - it all adds to the Goldman mystique.

Its workers are encouraged to think on the front foot, to come up with smart solutions - which is why Goldman's clients value their involvement so much and one of the reasons why it is able to produce earnings that leave its rivals gasping.

There is, however, a fine line between being creative and being aggressive. When BAA, the British airports operator, faced a bid from Ferrovial of Spain, Marcus Agius, the chairman (he now chairs Barclays), called in the company's advisers, Goldman. To his anger and astonishment, they turned up in his office and said they had a solution: they would buy BAA.

Agius threw them out. At pub company Mitchells & Butlers, Roger Carr, its chairman (he went on to chair Cadbury), experienced the same treatment.

The bank was an adviser but when Mitchells faced the prospect of a takeover said it was willing to form a consortium to take the business over itself. A staggered Carr told the Goldman advisers they couldn't be both adviser and bidder and had to choose. Eventually, they were shown the door, the same as at BAA.

At RBS, Fred Goodwin wanted to undertake what was a record £12 billion rights issue to shore up the Scottish bank's capital base. Three banks - Goldman, Merrill Lynch and UBS - were asked if they would underwrite or guarantee the mammoth share offering in return for success fees. Merrill and UBS bought RBS shares to hedge their risk and show confidence in their client.

Goldman refused, didn't purchase the rights and laid off its exposure in the market - causing the market to question whether the bank had faith in RBS at all. Goodwin was livid, believing he had a verbal agreement with Goldman, and cut its fee. Goldman argued it was well within its rights to do what it did.

When Northern Rock went down, the Treasury turned to Goldman. It was to be paid £5 million. The plan was to see if the beleaguered bank could be sold. In the end there was no alternative and it was nationalised - at which point, to the fury of the Treasury, Goldman asked for a further £4 million for achieving a successful outcome.

Last year, Goldman became embroiled in a row with China. Several of its state-owned companies were sold packages of complex derivatives by Western banks, with Goldman central among them, which lost money and led to accusations by the Chinese that they had been duped into buying the financial instruments.

This year, Goldman was revealed as having helped Greece hide the true level of that country's indebtedness in a secret deal said to have earned the bank as much as £192 million. Again, Goldman stresses it did nothing wrong.

Gerald Corrigan, chairman of Goldman Sachs Bank USA, the bank's holding company, said it was "consistent" with the regulations of the time. However, Corrigan admitted that "with hindsight" the bank should have been more transparent.

There's a pattern here. It's also easier to see why "Fabulous Fab" perhaps believed in his own genius and why Goldman has backed him rather than disowned him.

It's in the culture, in the DNA. It's about being a bank and making money. In that regard, PR is an expense, it doesn't add directly to the bottom line. If the bank is going to survive and continue to prosper it is going to have to change. The question is whether it is too late. Nothing lasts for ever. Not even Goldman Sachs.

Well, he has the qualification and the grammar . I don't know whether he has the ACTION (I can't forget Soludo in a hurry ).

Yeah! i believe he has what it takes but based on Goldman Sach's current perception of being problems than solution i was just wondering if he is not going to sell us out