Goldman reviews practices, almost comes clean on bets

McClatchy NewspapersJanuary 11, 2011 

WASHINGTON — Goldman Sachs is implementing dozens of internal changes aimed at restoring its reputation, which has been battered by the firm's $550 million payout to settle a federal civil fraud suit and disclosures of its secret bets against its mortgage bond investors.

Goldman Tuesday unveiled 63 pages of recommendations from its Business Standards Committee overseen by outside experts and, in its most visible response, restated corporate earnings for the past three years to improve transparency.

However, the new filing with the Securities and Exchange Commission failed to fully divulge how much money Goldman earned on exotic bets related to the subprime mortgage meltdown, a subject that's been a focus of government inquiries.

Goldman's report, perhaps not coincidentally, was timed two to three weeks before the expected release of reports on the financial crisis by the Senate Permanent Investigations Subcommittee and the congressionally appointed Financial Crisis Inquiry Commission. The Senate report is likely to strongly criticize Goldman's dealings.

The changes also include heightening internal scrutiny of complex bonds like the risky mortgage securities that crashed when the U.S. housing market sank, minimizing investment conflicts of interest and creating a global program to ensure that the firm's 31,000 employees understand their duties to clients. The document is laced with references to considering "reputational consequences" and "reputational risk."

"For Goldman Sachs, this has been a challenging period," Chief Executive Officer Lloyd Blankfein said in a video posted on the firm's Internet homepage. "Our industry, and our firm in particular, have been subjected to considerable scrutiny."

The recommendations, he said, "represent a fundamental recommitment to our clients."

Critics, however, dismissed Goldman's latest attempt to polish its tarnished image as cosmetic.

"I think it's mostly just for show," said Christopher Whalen, the managing director of Institutional Risk Analytics and a Wall Street watchdog. "When you're accused of fraud, you have to respond."

Sylvain Raynes, a onetime Goldman employee and bond expert who's been a frequent critic of the investment bank, called it "largely window dressing."

"But it's at least in the right direction," he said. "This will not change their culture and their actions in a significant way, but it will add a little bit more transparency, and it's a sign of welcome contrition — that something needed to change."

Goldman, which earned some $26 billion over the last three years, is a proud, 141-year-old firm, two of whose former chairmen served as treasury secretaries under Presidents Bill Clinton and George W. Bush. Since the financial crisis hit in 2008, however, it's been barraged with criticism and investigative scrutiny stemming from its role in the subprime mortgage meltdown, its receipt of tens of billions of dollars in federal aid and its alleged misrepresentations to clients.

McClatchy, in a four-part series in November 2009, reported that Goldman had sold off more than $40 billion in securities backed by risky home mortgages in 2006 and 2007 while secretly betting that a sharp downturn in the U.S. housing market would depress their value.

In April, the SEC filed civil fraud charges against Goldman, alleging that it allowed a major client to rig an offshore pool of mortgage securities in which investors lost $1 billion. The suit accused Goldman of concealing from the investors that its client, the hedge fund Paulson & Co., planned to bet that the underlying bonds would default.

Last July, Goldman paid $550 million and admitted to mistakes to settle with the SEC, but some investors in the deal, known as Abacus 2007-AC1, are suing Goldman. The firm also faces an array of other suits over its sales of mortgage securities.

Goldman also drew headlines with disclosures that it helped Greece conceal the extent of its national debt in 2001 with a sophisticated currency swap. Last week, it stirred up a tempest by reportedly buying a block of stock in the social networking site Facebook, putting the shares into a trust and then offering them to wealthy clients, thus circumventing a cap on the number of investors in the privately held firm.

Goldman has taken numerous steps to quell the controversies. Blankfein announced last year that Goldman would institute an incentive system to tie bonuses to the firm's future performance.

In recent months, Goldman sold off its proprietary trading unit whose dealings had immersed the firm in controversy, partly because some of its bets created internal conflicts of interest with products the firm was selling.

As part of Tuesday's disclosures, Goldman restated earnings since 2008 to eliminate the broad category of Trading and Principal Investments, substituting a narrower category, Investing and Lending, which includes most, but not all of the proprietary trades in which the firm wagers its own money. Under "other" in the new category, Goldman reported $2.8 billion in profits in 2008 and 2009, though it lost nearly $16 billion in that category in those two years.

Whalen said that that the Facebook deal shows how hard it would be to change the culture at Goldman.

"I say to myself, 'Is there going to be any change in behavior on the part of the boys?'" he said. "Come on."


SEC charges Goldman Sachs with civil fraud in subprime deal

Goldman to pay $550 million to settle SEC fraud charges

Goldman secretly bet on the U.S. housing crash

Goldman's offshore deals deepened global financial crisis

Goldman Sachs: Low road to high finance

McClatchy Newspapers 2010

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