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What Else Was Happening at Goldman Sachs?

Posted by Larry Doyle on April 23, 2010 9:08 AM |

Living life on the edge may be exhilarating and at times highly profitable, but in the process the risks can be enormous and the impact longstanding. So is the world of Goldman Sachs circa 2010.

Goldman’s pursuit of a highly proprietary business model since the late 1990s has now placed the firm squarely in the crosshairs as the master villain on Wall Street. The executives at Goldman may deem this view to be unfair, but they have nobody but themselves to blame. This blame goes far beyond current Goldman chief Lloyd Blankfein. The blame can be directed at former chiefs Jon Corzine and Hank Paulson, as well.

I raise this topic in light of the most recent bombshell to come out from Goldman Sachs, which is word that a board member, Rajat Gupta, is alleged to have provided inside information to former Galleon chief Raj Rajaratnam, who is the central figure in an insider trading scandal sweeping Wall Street.

The Wall Street Journal addresses this case in writing, Probe Turns to Buffett Deal:

A Goldman Sachs Group Inc. director tipped off a hedge-fund billionaire about a $5 billion investment in Goldman by Warren Buffett’s Berkshire Hathaway Inc. before a public announcement of the deal at the height of the 2008 financial crisis, a person close to the situation says.

The revelation marks a significant turn in the government’s case against Raj Rajaratnam, the hedge-fund titan at the center of the largest insider-trading case in a generation. Mr. Buffett’s investment in Goldman in September 2008 was a watershed moment in the financial crisis. One of the world’s savviest investors, Mr. Buffett helped allay fears about the instability of the financial system by backing America’s leading investment bank.

The new disclosure stems from a government examination into whether the Goldman director, Rajat Gupta, gave inside information to Mr. Rajaratnam. In a court filing March 22, the government alleged that Mr. Rajaratnam or “co-conspirators” traded on non-public information about Goldman. In a filing last week, the government provided more details about the information it alleges Mr. Rajaratnam received, including advance notice about the Buffett transaction with Goldman.

That information came from Mr. Gupta, a person familiar with the matter says. Federal prosecutors notified Mr. Gupta in a letter that they had intercepted phone conversations between him and Mr. Rajaratnam. Mr. Gupta told Goldman last month he wouldn’t seek re-election as a director.

The stench emanating from Goldman is really starting to overwhelm lower Manhattan and, in turn, America. Obviously, Gupta and Rajaratnam are entitled to due process, but given the number of other individuals implicated in this case who have already pled guilty, I would not bet money on Gupta or Rajaratnam right now. Will Gupta look to cut a deal? Might he be able to offer valuable information about other interesting activities going on within the Goldman board room?

From a junior level employee in Goldman’s structured finance department to now a director in the board room, one really starts to wonder just what the hell else was going on within the confines of 85 Broad Street.

If I were a regulator, I would aggressively be reviewing Goldman’s trading records, especially its high frequency trading, and its prime brokerage relationships. Why? Rule #1 for financial intrigue: follow the money.

Would the regulators have the courage to expose major problems within Goldman if they existed, given the current fragile state of our financial industry?

Think Lloyd is sleeping well these days?

LD






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