Goldman Sachs: Blood in the Water

By Bethany McLean, Vanity Fair

12 May 12

he op-ed heard round the world - Greg Smith's scathing New York Times attack on Goldman Sachs, his employer of nearly 12 years - dealt another blow to the firm's reeling reputation. Now the questions are louder than ever: Will C.E.O. Lloyd Blankfein have to go? Who might succeed him? And does it matter?

t was the op-ed heard round the world. "When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm's culture on their watch. I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival," wrote Goldman Sachs vice president Greg Smith in a March 14, 2012, piece published on the op-ed page of The New York Times on the day he was quitting the firm. He went on to accuse his employer of doing exactly the opposite of its No. 1 business principle, which famously trumpets that clients' interests come first.

Smith's indictment went viral, and with it came renewed speculation that Lloyd Blankfein, 57 - who rose through Goldman's dog-eat-dog commodity-trading business to become the firm's C.E.O. in 2006, when Henry "Hank" Paulson Jr. departed for the Treasury Department - will be forced to step down. Ever since Goldman's questionable behavior during the mortgage crisis became fodder for a 2010 congressional hearing, there's been a sporadic guessing game about who might succeed Blankfein and when. Right now, it's game on.

Inside Goldman the response to Smith's op-ed piece was consistent with how the firm has handled all the criticism it's gotten since the financial meltdown: denial. In a letter to employees sent out just hours after the piece hit, Blankfein and Cohn wrote, "I expect you find the words you read today foreign from your own day-to-day experiences." While Goldman offered up one sacrifice to public opinion - notoriously defensive chief P.R. man Lucas van Praag has left - the firm's leadership thinks the problem lies in the faulty perceptions of the public and press, rather than in reality. Goldman's defenders were quick to point out that Smith had held a relatively low-level title after nearly 12 years there, and they mocked his "Santa Claus doesn't exist!" shock at a business that everyone knows is cutthroat.

But, as several former senior Goldman people pointed out to me, such denial misses the larger point: Smith's op-ed is an issue in and of itself, especially for a firm that depends on its reputation. The current leadership seems simply unable to admit that and put the bad publicity behind them. As a former Goldman client, who happens to agree with Smith, puts it, "When so many people are rooting for you to fall on your face, it almost doesn't matter what causes it."

Even one Blankfein supporter, who lauds the C.E.O.'s work ethic, decency, and skills at managing financial risk, admits that Blankfein has failed to manage the other kind of risk that can kill a firm like Goldman: reputational risk.

ne reason Smith's op-ed resonated so powerfully is that Goldman's bad press has been ongoing and is not merely the result of an isolated incident. The trouble began in early 2010 with the headlines about how the firm had protected itself from the mortgage crisis at the expense of its customers. Then, in July of that year, there was the $550 million settlement with the Securities and Exchange Commission over allegations the firm misled investors in a mortgage product. After that, Goldman announced the conclusions of its new Business Standards Committee, which released a 63-page report in early 2011. That was supposed to result in more openness about the firm's potential conflicts and a re-commitment to the "primacy of client interests."

But since that time there's been the debacle with Facebook, in which Goldman's U.S. clients were left out of a proposed private offering, the arrest of former board member Rajat Gupta on insider-trading charges, the news that two other Goldman employees are being investigated as well, sharp criticism by a judge of Goldman's conflicts of interest for being on almost every conceivable side of a merger transaction between two energy companies (a situation that two former Goldman people told me exhibited a shocking degree of arrogance and blindness, given the scrutiny the firm is under), a $22 million fine to settle allegations that it did not have procedures in place to prevent the firm's traders and top clients from getting preferential access to stock-research tips, and even another New York Times story, that Goldman was a sizable investor in a Web site linked to prostitution.

The bigger reason the op-ed resonated is that Smith is not a lone voice from inside Goldman. He merely said publicly what many former employees - who in times past would never have criticized the firm - now say privately: Goldman has changed. Once, when promotions were decided, being a "culture carrier" - Goldman lingo for a person who is a positive force for the things the firm says it values - was at least as important as being "commercial," i.e., someone who excels at making money. Not anymore: being commercial, I'm told, is more of a deciding factor. "I could have written that letter almost verbatim," a former vice president tells me. "Every meeting I had at the firm for six years was ‘Where is the next dollar of revenue coming from?' "

A former Goldman senior banker says, "What really bugs me about G.S. today is not that it's immoral. It's amoral."

Rightly or wrongly, the change seems to be underscored by the retirement late last year of Kevin Kennedy, 63, a longtime Goldman partner who used to oversee human-capital management. While it's totally reasonable that Kennedy, who had been at the firm for almost four decades, would want to retire, he was viewed as old-school Goldman Sachs.

Also rumored is the retirement of John F. W. Rogers. While he is little known - deliberately so - outside of Goldman Sachs, Rogers, 56, has been a powerful presence at the firm for many years. He joined in 1994 not as a trader or a banker but as chief of staff to then C.E.O. Jon Corzine. When Corzine was forced out, in 1999, by Hank Paulson, Rogers became one of Paulson's closest advisers. Nowadays, his responsibilities include public relations and government affairs, and he is also the secretary to the board of directors and serves on the firm's 29-person management committee - which means he knows all (or at least most) of Goldman's secrets. In times past, his real title should probably have been consigliere to the C.E.O., but Rogers is not as close to Blankfein as he was to Paulson. On the one hand, Rogers's retirement, if it happens, could be seen as the loss of another guardian of Goldman's old culture. But Rogers also reportedly argued for the hard-line, defensive position that Goldman executives took when they were called in front of the Senate Permanent Subcommittee on Investigations over the firm's behavior in the mortgage crisis - a position that led to even more criticism. (A source close to Rogers disputes this account and says Rogers has no plans to retire.)

riticism from the former Goldman banker is instructive, because it shows why the firm's conflicts of interest - which, it must be admitted, are endemic to modern-day finance - are troubling. He says that when a company would call him, looking for confidential advice on how to sell itself, he'd run a "conflict [of interest] check." Almost immediately, someone from Goldman's financial-sponsors group, which works with private-equity firms, would say that the XYZ private-equity firm wanted to buy the company, and since XYZ paid a lot in fees, Goldman should work with it, not with the company which had called. This banker felt that it was too much of a coincidence for XYZ to have found out that the company was for sale unless someone at Goldman had told them.

"Anyone who understands how Goldman works would never share an ounce of confidential information with them," the former banker says. He says that bankers are also now pushed to lock up other derivatives-related business with clients when Goldman signs them to a banking engagement. The problem is that, while Goldman is obligated to provide an advisory client with the best advice it can, it doesn't owe that client the same duty on the trading business - yet the client by the terms of the engagement letter may have a limited ability to shop for a better deal in the way a normal trading partner would. And since there's no public market for these sorts of deals, clients may not see the huge sums Goldman is making off them. The very notion that Goldman can serve as both adviser and counter-party within one transaction "cannot work and be consistent with Business Principle No. 1, and Lloyd knows it," says the banker.

A Goldman spokesperson argues that the firm is seen as being far more protective of its clients' information than other firms are. If someone did leak information, he says, that would be a "fireable offense." Across Wall Street, he claims, all the big firms seek to tie up as much other business as they can in their advisory engagement letters. The spokesperson adds that Goldman's pricing is "fully transparent."

It has to be admitted that the firm still routinely ranks at the top in the mergers-and-acquisitions business - the best gauge of client loyalty. But there's an old saying that it takes 10 years to destroy an investment-banking franchise. In winning new business, the firm's aura matters as much as, if not more than, the talent of its bankers. Goldman's aura is dimming at a critical time, when the huge profits from the trading side of the business are under siege due to new regulations from Washington. Several people who know Goldman tell me that the firm is at a major crossroads strategically, which means it needs good leadership more than ever.

And yet, thus far the all-important question of succession is not being handled in traditional Goldman fashion - which is to say brutally, clandestinely, and discreetly. Instead, what looks suspiciously like internecine warfare is being aired in public. A recent story in Fortune said Blankfein may step down as early as summer, with Cohn replacing him; a March Wall Street Journal piece said there had been discussions about Cohn becoming C.E.O., with Blankfein remaining as chairman. While Blankfein can seem burned out, others say he would never want to leave on anything but his own terms, and a Goldman spokesperson denied the essence of the Journal story.

But the fact that such stories are appearing makes it look a lot like someone well placed inside Goldman is gunning for Blankfein. There is a rumor that Blankfein and Cohn are no longer as close as they once were, which wouldn't be surprising under the circumstances. An April New York Post story called their relationship "often chilly" and quoted a Goldman insider as saying, "Gary thinks it's his time [to lead]."

he stories about Cohn's succeeding Blankfein are odd, because, if what Goldman needs is a return to its old mores, Cohn is not seen by most people as the guy who will lead it there. Like Blankfein, whose father was a postal clerk, Cohn was not born with a silver spoon in his mouth. He has dyslexia so severe that he struggled to read until the eighth grade. "Years of being told you were going to fail makes you say, ‘I'll show you,' " he told me back in 2004. After graduating from American University's Kogod School of Business in 1982, he talked his way into a trading job at COMEX, the commodities exchange, and later joined Goldman's commodity-trading business, where Blankfein also worked. As rose Blankfein, so rose Cohn, and after Blankfein became C.E.O., in 2006, Cohn was appointed co-chief operating officer (along with Jon Winkelried, who left the firm during the financial crisis) and was named to the board.

In Goldman circles, you'll hear Cohn described as "Lloyd squared" or "Lloyd on steroids." If Blankfein is commercial, Cohn is more so, and he lacks Blankfein's disarming sense of humor. "Every day you are competing, and every day you are playing to win," he said in a 2009 speech at his alma mater. In recent years, he has become something of the public face of the firm, hosting a dinner at this year's World Economic Forum, in Davos, and being photographed with Gisele Bündchen in 2011 at the annual Robin Hood benefit gala, which is the see-and-be-seen event of the New York financial world. Such splashy publicity is unseemly to old-school Goldman types.

fter Cohn, it's not clear who Blankfein's successor might be. Solutions that seem obvious to those outside Goldman aren't so obvious to those who know the firm. Some say the board should choose an outsider - but Goldman has not done that in 80 years, and many believe it would be like introducing a foreign antigen into a host that would undoubtedly attack and kill it. It's also easy to say that the firm should choose a banker instead of a trader - but bankers aren't necessarily more sensitive to clients' needs than traders are, and a banker who doesn't have the respect of the traders would be useless as C.E.O.

One long-standing criticism of Blankfein's leadership (which he has adamantly denied) is that his inner circle consists of people who think and act the way he does, and when other names pop up in the succession game, there's some feeling among Goldman alums that they, like Cohn, don't represent change so much as more of the same. One such person is David Solomon, 50, whom Blankfein hired as a partner - a rare move - in 1999 from Bear Stearns. Solomon had worked in scrappy areas such as junk bonds at scrappy firms like Drexel Burnham Lambert and Bear Stearns, and he joined Goldman as a co-head of high-yield and leveraged finance. After Blankfein became C.E.O., he appointed Solomon as co-head of investment banking (Goldman rarely has a single head of anything) as part of what many saw as a move to put one of his own people in the banking division. A glowing profile in Reuters last June described Solomon as "a consummate dealmaker who plays well inside and outside the bank," but he doesn't have the lengthy Goldman pedigree of most of the firm's previous C.E.O.'s, and he is widely seen as part of Blankfein's crew. "He even has the same haircut," one skeptical former managing director says to me.

One who isn't part of the crew is J. Michael "Mike" Evans, 54, a former Olympic rowing champion who is now Goldman's vice-chairman in charge of its growth markets. (He also served as a co-chairman of the Business Standards Committee.) Evans has worked in both trading and banking - he was a co-head of the powerful securities division, which has represented most of Goldman's profits - and is known for taking difficult jobs and doing them well. "Mike Evans is one of the best bankers I've ever met," says a former Goldman banker. "He's incredibly talented."

Like Solomon, Evans was the subject of a favorable profile - this one in the Financial Times in 2010 - that cited rumors he was a C.E.O. candidate. Evidently that did not go over well inside the firm, which has traditionally frowned on self-promotion. Still, "Goldman is a league of gladiators," says a former partner. "People view Mike as the ultimate gladiator," because he has survived, even though he's not one of Lloyd's boys. But there are some in the firm who don't trust Evans, and Fortune recently reported that he did not have the support of the board, and that his position would be "very precarious" were Cohn to become C.E.O.

ther names in the rumor mill include Michael "Woody" Sherwood, 47, who is based in London as a vice-chairman and co-C.E.O. of Goldman's international operations, and Harvey Schwartz, 48, who, like Blankfein and Cohn, came up through the commodities division and is now a co-head of the securities division.

There's even some speculation that the firm might bring back someone who has left, such as Tom Montag, 55, a former Goldman co-head of global securities, now at Bank of America, or appoint someone unexpected, such as longtime C.F.O. David Viniar, 56, but that might be just wishful thinking. There are no outward signs that the board has lost confidence in Blankfein, but Smith's op-ed might be the final straw in forcing its hand. As a former partner remarked to me, it might be the first time in history that a Wall Street C.E.O. has lost his job not because shareholders or regulators demanded it but because the public and press did.