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Doing Biz with Goldman Sachs = ‘Swimming with the Sharks’

Posted by Larry Doyle on April 16, 2010 12:03 PM |

Given the breaking news of Goldman Sachs being charged with fraud, I am bumping up this story from my original posting on April 14th.

If you are swimming with sharks, you had better be careful.

I have had an extraordinary number of people visit Sense on Cents as a result of searching for information on how Goldman Sachs operates.  Although many believe Goldman’s operations to be one massive conspiracy, I would not blindly and wantonly generalize about an entire organization. By the same token, Goldman is certainly not a pack of choir boys either. I described Goldman’s operations last July in writing, “How Does Goldman Sachs Operate?”:

….one needs to appreciate the fundamental nature of Goldman’s business model. If a firm is going to take large principal risk positions both within proprietary books and customer books (trading accounts used to trade with clients), two factors are of overwelming importance: information and relationships.

Were there instances when a senior Goldman executive shared information with a risk manager in confidence? Most likely. That would not be an uncommon occurrence on Wall Street.

On Wall Street, ‘Chinese walls’ are utilized to make sure that information is properly channeled. Has Goldman ever improperly ‘gone over the wall?’ I’m sure they have.

Against this backdrop, Goldman is a firm which many customers feel they need to talk to because they are so involved. Simultaneously, many customers are cautious in engaging Goldman because they are not sure how information is shared and processed. I see evidence of this cautious approach in reading a Bloomberg article this morning, WaMu Chief Killinger Didn’t Trust Goldman Sachs:

Washington Mutual Inc.’s former Chief Executive Officer, Kerry Killinger, didn’t trust Goldman Sachs Group Inc. to give the bank advice in 2007 as it slid toward collapse, according to e-mail released by congressional investigators.

“I don’t trust Goldy on this,” Killinger wrote in an Oct. 12, 2007, e-mail reply to Todd Baker, Washington Mutual’s executive vice president for corporate strategy and development. “They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving CfC advice,” he said, referring to Countrywide Financial Corp., the home lender that ran short of cash the same year.

The e-mail exchange shows that concern about conflicts between investment banking and trading may have hurt Goldman Sachs’s ability to win business. Seattle-based WaMu became the biggest lender to fail in U.S. history in September, 2008.

Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment. WaMu was among the biggest providers of subprime mortgages and option-ARMs, both ranked among the riskiest home loans, and faced an estimated $19 billion of losses when it closed.

The e-mail exchange recounts how Killinger, now 60, rejected a suggestion from Baker that they hire Goldman Sachs’s John Mahoney to find ways of transferring credit risk off of WaMu’s balance sheet. While Baker wrote that Mahoney was his “strong first choice” for the assignment, he said that he, too, had concerns.

“John himself is very discreet but we always need to worry a little about Goldman because we need them more than they need us and the firm is run by traders,” Baker wrote, according to the documents available on the Permanent Subcommittee of Investigations Web site.

I will repeat that Goldman likely does step over the line of appropriate behavior. Goldman likely knew from very early on that financial regulators were asleep at the wheel, and they took advantage of that reality. Is Goldman’s entire operation a den of thieves? No, it is not.

Goldman has had this exceptionally aggressive, bordering on highly questionable, business style for over a decade. At the time of the Long Term Capital Management debacle in 1998, many market participants believed Goldman’s bankers shared proprietary info with Goldman’s trading desks which allowed those traders to front run the LTCM positions.

Lloyd Blankfein and team at Goldman can whine about unfair characterizations, but they have the reputation which they deserve.


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