Goldman: The Mystique of Indispensability

Clients are standing by the investment bank even though the SEC says it deceived a customer

• "There is no firm that can step in and replace them," says bank analyst Richard Bove

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 perform."

Goldman announced that first-quarter earnings jumped 91%, to $3.46 billion, surpassing most analysts' expectations. Investors, after dumping shares and knocking $12.8 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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