Goldman and the Mystique of Indispensability

By Paul M. Barrett
     April 22 (Bloomberg BusinessWeek) -- ? "There is no firm
that can step in and replace them," says bank analyst Richard
     On Apr. 16 the Securities & Exchange Commission sued Goldman
Sachs (GS) for misleading a client about an esoteric investment
tied to home mortgages. In denying the allegations, Goldman was
defiant, insisting it had told its customer, the German bank IKB,
all it needed to know. IKB could fend for itself, according to
the most profitable Wall Street firm in history.
     You might think other Goldman clients would find that stance
distressing. Not so. A lot of them say they're not going
anywhere. "We have had a long relationship with Goldman Sachs and
expect it to continue," Mark Truby, a spokesman for Ford (F),
tells Bloomberg News. Goldman took Ford public in 1956, and a
former Goldman executive, John Thornton, sits on Ford's board.
     "Everything's business as usual with Goldman," says LuAnn
Jenkins, a spokeswoman for National Semiconductor (NSM). Macy's
(M) likewise is pleased with the advisory services Goldman
provides and doesn't plan any changes, Jim Sluzewski, a spokesman
for the retailer said via e-mail. Rite Aid (RAD), the drug store
chain, is standing pat, too. Managers of hedge funds say in
interviews that they have no reason to abandon Wall Street's
foremost trading firm.
     Goldman, naturally, feels gratified. "We have spent an
enormous amount of time talking to our clients," David Viniar,
the firm's chief financial officer, told reporters on a
conference call on Apr. 20. "We found that largely our clients
are supportive of us, and the most important thing is to
     Goldman announced that first-quarter earnings jumped 91%, to
$3.46 billion, surpassing most analysts' expectations. Investors,
after dumping shares and knocking $12.8Â billion off Goldman's
market value on the Friday the SEC filed its suit, have calmed
down. On Apr. 21, Goldman stock closed at $158.93 down 1.1% from
the Friday closing price.

  Government Clients

     Depending on what the government and potential piggy-backing
private litigants can show, Goldman may yet face client
defections, especially in the public sector. German Chancellor
Angela Merkel's administration may avoid awarding new business to
Goldman if the SEC allegations are proven, a government official
tells Bloomberg.
     British Prime Minister Gordon Brown decried the "moral
bankruptcy" he perceived in the SEC's claims against Goldman, and
the British Financial Services Authority said it will begin a
formal investigation. Yet the government wasn't talking about a
boycott. "I don't think you can stop doing business with a firm
because an individual is accused of doing something," Alistair
Darling, the U.K. Chancellor of the Exchequer, said on Apr. 20.
The British are disappointed, in other words, in Fabrice "The
Fabulous Fab" Tourre, a French banker, 31, who structured and
marketed the now-notorious CDO deal for Goldman. Tourre's
employer, at least for now, will retain its relationship with the
U.K. government.
     The customer loyalty is touching, and perhaps a bit
puzzling. Under CEO Lloyd Blankfein, old-school investment
banking has taken a back seat as profits from risk-juggling
trading operations make the firm seem more like a supercharged
hedge fund. Goldman's list of business principles still says that
"clients' interests always come first." That noble assertion of
Wall Street chivalry must inevitably give way when Goldman acts
as a broker. The best it can offer is neutrality as it finds
someone to buy what you're selling, or vice versa. When you
transact with Goldman in its dealer role, it is explicitly on the
other side of the trade. Even clients of other parts of the firm
must recognize that in such instances they are up against Goldman
as adversaries.
     Goldman's mystique of indispensability appears likely to
survive, according to Richard Bove, an analyst at Rochdale
Securities. "The argument that Goldman takes positions in
opposition to its clients has always been there, yet people
continue to do business with Goldman Sachs," Bove said in an
interview on Bloomberg TV. "The reason is they aren't playing the
clients; they are benefiting the clients. There is no firm that
can step in and replace them." One way or the other, the thinking
goes, Goldman gets the job done. Not coincidentally, Bove
recommends buying Goldman shares.
     Recognizing that its unabashed PR strategy might play
differently depending on cultural sensitivities, Goldman hasn't
offered the "buyer beware" defense in all situations. The firm is
telling customers in Japan, for example, that it didn't push the
type of CDO there that is at the center of the SEC suit. "We are
explaining to our clients in Japan that the synthetic CDO in
question was not sold in Japan," Hiroko Matsumoto, a Goldman
spokeswoman in Tokyo, tells Bloomberg. She won't comment on the
responses received from Japanese clients.
      The bottom line For now, at least, many of its customers
don't seem troubled by the claims against Goldman.
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