Goldman Sachs Group Inc. (GS), whose exceptional cachet and clout have been enhanced by its role in public policy, suddenly is a pariah in government and political circles.
Let’s assume, for a moment, that the company prevails in the fraud suit brought by the Securities and Exchange Commission, that no one was misled about the content of the product it sold, only about the background.
Also assume that, as Goldman Sachs executives insisted last week, most of their customers are supportive of the firm, and any short-term losses will be negligible.
Still, the Goldman Sachs brand, one of the most prestigious in the world, corporate or otherwise, is tarnished, perhaps indelibly. If the company believes it can tough its way through this, it’s as insular as critics charge.
For starters, the fraud suit, which Goldman Sachs says is without merit, may not be the only problem facing the company. The Germans and British are already piling on, and reportedly Goldman Sachs is nervous about the full-scale inquiry into the Wall Street fiasco by the U.S. Senate Permanent Subcommittee on Investigations. Getting in the cross hairs of the panel’s Democratic chairman, Michigan’s Carl Levin, one of the toughest, straightest shooters in Congress, is cause for concern.
For context, professionally I’ve known a half-dozen top former Goldman Sachs executives; they’re all able and thoughtful. The one I know well has stellar values.
Also, despite working for two of the great financial news organizations in the world for more than four decades, I’ve never covered Wall Street; I cover politics, a proud journalistic hack.
In this case, the prism of politics is illuminating. The global Goldman Sachs mystique has been enhanced by the number of executives tapped for leading government jobs. Treasury Secretaries Robert Rubin in the Clinton administration and Henry Paulson in the George W. Bush administration were former Goldman Sachs chairmen, as was Stephen Friedman, the top White House economic adviser during the Bush presidency. There is a plethora of Goldman alums sprinkled throughout the Obama administration.
Until recently there was no better credential for government service than a Goldman Sachs background; now the G is more like the forbidden A in Nathaniel Hawthorne’s “The Scarlet Letter.”
If there were an opening today for a Federal Reserve governor or a deputy Treasury secretary or for a prominent White House economic role, a Goldman Sachs background, administration officials privately admit, would be lethal.
“Clearly, they’ve become a toxic asset,” says Simon Johnson, a former International Monetary Fund economist who is now a finance professor at the Massachusetts Institute of Technology’s Sloan School of Management.
The fraud charges were the final straw in the building resentment against Goldman Sachs; synthetic collateralized debt obligations aren’t the stuff of backyard barbecue chatter or debates at a bar. The public and political resentment, as one crisis manager put it, grows out of the sense that Goldman Sachs not only hasn’t “shared the pain” experienced by the rest of America, but has “profited from it.” (Goldman Sachs, which reported record profit last week, did take a government handout in 2008 and repaid it in full with interest).
In this environment, a firm’s political standing dissipates. Goldman Sachs’s political-action committee gave $290,500 to congressional candidates last month as the legislature weighed the financial-regulation overhaul. President Barack Obama shook the Goldman Sachs money tree for almost $1 million in the last presidential campaign.
There is now a bipartisan scramble to strike distance from the Wall Street powerhouse. Mark Kirk, Republican candidate for an Illinois U.S. Senate seat, says he’ll refund any contributions from Goldman Sachs employees. His Democratic opponents say that isn’t sufficient.
In the Arkansas Senate Democratic primary, Lieutenant Governor Bill Halter assailed incumbent Senator Blanche Lincoln for getting money from Goldman Sachs’s PAC. Lincoln just canceled a plan to hold a fundraising lunch at Goldman. In the California gubernatorial race, opponents are assailing former EBay Inc. (EBAY) Chairwoman Meg Whitman for being an ex-Goldman Sachs director. The Whitman camp’s response: Her critics have Goldman ties, too.
Keeping the Money
Although Obama may be capitalizing on the anti-Wall Street wave with his regulatory overhaul bill, Republicans such as South Carolina Senator Jim DeMint are demanding he give back the big bucks he got from Goldman Sachs in the last campaign; he won’t. White House Chief of Staff Rahm Emanuel, the guest of honor at a private Park Avenue cocktails soiree for wealthy Obama supporters last weekend, surely wasn’t pleased it was reported that a Goldman Sachs partner was present.
Whatever the legalities of the fraud charge, it looks awful, more like the doings in a Las Vegas casino than on Wall Street, and more like Gordon Gekko greed than the legitimate economic interest to hedge against risk. Goldman Sachs contends the SEC’s case boils down to the actions of Fabrice Tourre, then a 28-year-old vice president, who while putting together the multibillion-dollar deal was writing e-mails, according to the SEC, exclaiming that the “whole building is about to collapse,” and that it’s “surreal” that no one understands these instruments.
If he was the culprit, who was the enabler?
With no inside knowledge, but based on years of watching politicians and political institutions respond to such crises, there are two certainties about what’s going on in the corporate suites of Goldman Sachs. There is likely near- universal consensus that much of this is unfair and the company is being made a scapegoat by pandering politicians.
The established order says we’re going to fight this with all our considerable resources, while continuing to flourish financially because we’re better.
Deeper, however, there is another, more profound debate. Others, perhaps privately, realize this is a fantasy. If there is a way to settle the fraud case without risking huge financial exposure, it has to be considered. Someone with Paul Volcker-like credibility has to be enlisted to review the company’s culture and practices; contrition and change at the top are unavoidable.
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