Goldman: Still Greedy, No Longer Patient

Once upon a time, Goldman Sachs’ raison d’etre was to serve the ongoing needs of its clients and be paid fees for helping them raise capital, trade blocks of stock or by providing merger and acquisition advice, a business strategy that made the firm for years the envy of Wall Street and immensely profitable. This strategy forced Goldman’s bankers to be “long-term greedy” — a shopworn phrase coined by a former senior partner, Gus Levy — and to do everything possible to stay in their clients’ good graces in order to have a legitimate shot at the next fee. While it was not exactly backbreaking — or the Lord’s — work, from one year to the next nothing was assured unless the Goldman partnership maintained that fragile bond of trust.

Nowadays — although the firm’s chief executive, Lloyd Blankfein, would never (and probably could never) concede the point — Goldman’s mission, along with its argot, have changed. This shift is not doing the firm or its boss any favors. As was made abundantly clear during Tuesday’s 11-hour Goldman Sachs-athon on Capitol Hill, the bank has eschewed its client-focused ethic in favor of “making markets” for its trading “counterparties.” It is no coincidence that not one of the seven current or former Goldman professionals grilled by senators in the hearing is, or ever was, a banker; most came from the trading floor. A generation ago, it would have been inconceivable that not one of its senior bankers — the people who actually meet with clients and help shape their long-term futures — would be representing the firm on such a critically important public stage.

A quick look at the economics of Goldman’s business explains why things have changed so dramatically. Bringing to a close a multibillion-dollar merger or underwriting a bond issue can take months, if not years, and might entitle the firm to a fee in the millions or tens of millions. By contrast, Goldman’s bet against the mortgage market — engineered in just two months at the end of 2006 and the beginning of 2007 — made the firm a profit of nearly $4 billion alone in 2007. No wonder Team Goldman spent so much time Tuesday speaking the language of traders.

To be sure, there was plenty of miscommunication during the hearing — it was almost as if the Goldman representatives were using one alphabet and the senators another — but at one point Sen. John Tester, the Montana Democrat, tried to dig into this fine distinction with Blankfein. Tester noted that when the four younger current and former Goldman traders who comprised the day’s first panel were asked whether they worked for the firm’s clients or for the firm, they said something about being “market-makers.”

A bemused Tester asked Blankfein to explain. This did not go particularly well. After a bit of fumbling, Blankfein conceded, “I wish I were better [able] to explain it.” He tried again. “There are parts of the business where you’re a money manager, where you owe a duty to the client,” Blankfein said. “There are parts of the business where you are a principal and you are giving the client what it wants and it’s understood — where you have to know that they’re suitable, you have to know that the product you do delivers what they expect to have. But the markets couldn’t work if you had to make sure it was good for them.” Come again?

It would be nearly impossible to imagine the patrician John Whitehead, the former Goldman banker and co-senior partner (until he retired in 1984), uttering these words. And he cannot be pleased by what he saw Tuesday. Indeed, he cannot be pleased by the continuous public flogging Goldman has been getting since March 2009, when the firm’s name appeared near the top of the list of A.I.G. counterparties that received 100 cents on the dollar in the taxpayer-sponsored $182-billion A.I.G. bailout.

Unsurprisingly, there is an insurrection of sorts brewing at Goldman — and has been for some time. It pits those longtime Goldman loyalists — mostly present and former investment bankers favoring the highly successful formula of being “long-term greedy” — against Blankfein and his acolytes, most of them traders, who seem to favor more of a “short-term greedy” approach to the business. The Securities and Exchange Commission’s lawsuit and the Senate hearings have exposed the growing rift, which has been simmering at the firm even before Blankfein took over in 2006 from Henry Paulson, who left Goldman to become secretary of the Treasury. The S.E.C., which two weeks ago filed a civil fraud suit against Goldman, referred its investigation to federal prosecutors. It was confirmed on Thursday that the Justice Department has now opened its own inquiry, raising the possibility of criminal charges against the firm.

The bankers argue that Goldman should never be involved with anything that puts the firm’s interests above those of its clients. If that means not participating in a lucrative trade or passing on a private-equity investment to, so be it, because a happy client is a long-term — fee-paying — client. An unhappy client takes his business to another firm and never returns. This ethic has been deteriorating at Goldman, and across much of Wall Street, for a long time.

The old Goldman Sachs, the traditionalists say, would never have put its once-considerable prestige on the line for the likes of Abacus 2007-AC1, the too-clever-by-half “synthetic” collateralized debt obligation at the heart of the S.E.C.’s case against Goldman. And certainly not for the (relatively) measly $15 million fee, given the headline risk associated with a deal where one side was destined to make $1 billion and the other side was destined to lose a $1 billion. (Indeed, Goldman says it ended up losing $100 million on Abacus in the end.) “Not so long ago,” one former senior Goldman partner told me recently, “if there was a choice between making a quick buck or protecting client relationships, we would side with the client every single time.”

The takeover by the traders became complete with the appointment of Blankfein as C.E.O. and the departure in March 2009 of Jon Winkelreid, a banker and co-president (a post shared with a trader, Gary Cohn). Now it is Blankfein and Cohn running the show, free of meaningful input from bankers and their way of thinking. That is a new phenomenon at Goldman, which has always tried to balance the banking and trading strands of its DNA. “There’s no diversity at the top of the firm now,” said the former partner. “Both Lloyd and Gary are valuable guys, but you also need other guys at the top with a different ethic. Then you debate decisions out and you have balance. That has been lost.”

“The guys who succeed in this industry are the guys who say, ‘I care about the reputation of the firm,” he continued. “I care about my reputation. I care about doing the right thing. I care about having a great firm. I care about attracting and retaining the best people. If I do all of these things and do good business, eventually I’ll be fine.’ But in this top five, there is nothing about making money. The guys for whom making money is in the top three almost always get themselves into trouble. And this is the essence of how Goldman has changed.”

The battle between bankers and traders is as old as Wall Street itself. In “Greed and Glory on Wall Street,” the writer Ken Auletta famously described the near-collapse of Lehman Brothers in the early 1980s because of a similar feud. Morgan Stanley had its own culture war in 2005, when the old guard at the firm grew dissatisfied with their C.E.O., Phil Purcell, and deposed him in favor of a former president, John Mack. Wall Street has never been for the faint of heart.

Goldman Sachs is at a critical juncture in its 141-year history. Whether the firm is able to eke out a technical victory against the S.E.C. in civil court or not is almost beside the point. What is at stake at the once-invincible bank is a way of doing business that for generations brought the firm’s partners untold wealth, the admiration and respect of clients and the envy of its peers: the firm’s soul.

That now seems in danger of being lost. Surely Lloyd Blankfein, a Horatio Alger (his father was a postal clerk) and a graduate of both Harvard and Harvard Law School, is clever enough to appreciate this, even if he may be reluctant to take the steps necessary — like bringing back a cadre of high-profile, former bankers — to restore the firm’s luster and diversity of thinking at the top.

There’s no question he pretends to get it. “We are keenly aware that our legacy of client service and performance, which every person at Goldman Sachs is charged with protecting and advancing, must be continually nurtured and passed on from one generation to the next,” Blankfein wrote in the firm’s 2009 annual report. Indeed, in the eight-page letter, he used the word “client” (or clients) 56 times, up from 17 mentions the year before.

If Blankfein wants to keep his job, though, he’ll stop the pretending, and do everything he can to make good on all his talk of the importance of taking care of his clients.