Some people in the Securities and Exchange Commission, I'm told authoritatively, want his scalp, given what they perceive as Goldman's shady practices.
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How the ongoing Goldman Sachs drama plays out after the revelation of a federal investigation is anybody's guess. But here's a fresh dimension to Wall Street's latest horror story--the strong likelihood that Goldman's 55-year-old chief, Lloyd Blankfein, will be booted out. Some people in the Securities and Exchange Commission, I'm told authoritatively, want his scalp, given what they perceive as Goldman's shady practices.

That's what I hear from some regulatory contacts with reasonably close ties to the commission, namely a former top SEC official in the enforcement division and a compliance officer of a major brokerage firm.

All of this stems from an SEC investigation of Goldman that the agency announced on April 16 in which it charged the firm with fraud in connection with the 2007 sale of subprime mortgages, which were packaged in a collateralized debt obligation.

The SEC suit alleges that Goldman permitted a hedge fund, Paulson & Co., to help choose the securities for the CDO, and failed to tell investors who bought it that Paulson was actually shorting the CDO (a bet its price would fall). The SEC further alleged that Paulson paid Goldman about $15 million for structuring and marketing the deal.

In turn, Goldman has characterized the SEC charges as completely unfounded and said it would fight them.

Regarding talk that the SEC might seek Blankfein's ouster from Goldman as part of an enforcement action, a Goldman spokesman wouldn't rule such a possibility, saying simply "We have no comment."

The view in some Wall Street quarters is that Blankfein now has less than a 50% chance of retaining his job; some say less than 25% and some say none. The view is also expressed that Blankfein would be wise to resign before he's forced to resign.

"If this mess is to be cleared up, Blankfein will have to step down," says online investment adviser Mark Leibovit of of Sedona, Ariz.

However, one Goldman analyst ridiculed the idea, observing "President Obama will likely leave office before Blankfein does." He also knocked the commission's suit, contending "the only reason it took the action against the firm was because of the heavy criticism it received for its incompetence in dealing with Ponzi scheme operators, mainly Bernard Madoff."

The SEC declined comment.

Meanwhile, imagine this scene. You're in a boxing ring and getting battered by your opponent--or in this case opponents--who are out for your hide.

That was the scene Tuesday at a Congressional hearing at which Goldman was unmercifully pounded by lawmakers who raised serious questions about its code of ethics, as well its commitment to its clients. A number of former and present Goldman officials, including Blankfein, testified at the hearing.

The general view is that the hearing was a standoff. From a public standpoint, it was a public relations nightmare as Goldman came across as a firm whose ethics were now suspect. As far as Wall Street is concerned, it was, as Shakespeare put it, much ado about nothing. The view there is that Goldman, which is widely thought to have the smartest and best compensated people on Wall Street, will ride out the crisis and it will be soon be business as usual again for them.

That is also the way Leibovit sees it. "I look for a slap on the wrist, a fine of something around $700 million and maybe Blankfein will have to step down," he says.

However, Leibovit also sees some potential danger arising from the SEC suit. "The more aggressive the government gets with Goldman, the greater the risk of another Wall Street crash because Goldman is Wall Street."

In general, some market pros and attorneys thought Blankfein handled himself well at the hearing in his efforts to present the Goldman case. In contrast, the other Goldman people who testified were viewed as ineffective, evasive, arrogant, and probably raised more questions than they answered. "Except for Blankfein, it was a study in corporate incompetence," remarked one attorney.

Surprisingly, former President Bill Clinton got into the act, noting that he's not at all sure Goldman violated the law. Tom Von Stein, a former SEC attorney, disagrees, commenting that he doesn't believe Clinton is familiar with securities laws. In time, Von Stein says, "Clinton will eat his words."

As for some in the media who argue the SEC's case against Goldman is weak, Von Stein retorts: "I don't think the SEC brings weak cases." He also believes Goldman will lose a good deal of business because, he says, "their honesty has been brought into attention and they're now permanently damaged." Asserting the firm is using their competence for their own purposes, not their clients, Von Stein says "if he were a Goldman client, he would stop using them because I don't see how anyone could trust them."

Tom Ajamie, a securities lawyer in Houston, contends Goldman now has a major image problem and its current difficulties will probably lead to more investigations both here and abroad. "I'm sure," he says, "that any institution which lost money on a Goldman deal is having an attorney re-examine it to see if there was any conflict of interest or any information hidden when the deal was done." Ajamie believes Goldman will have image damage for at least four and five years during which "it will lose business for sure."

As for the Goldman action that's the crux of the SEC case, Ajamie thinks the agency is in for rough going. "It's a very difficult case," he says.

Marc Howard, a former top Wall Street trader, has similar thoughts. Noting that politicians are up in arms over what Goldman did, Howard ridicules such furor, pointing out it has been standard on Wall Street for years. "The story here," he says, "is that it ain't new and it ain't news. Have you ever heard the expression. What's your edge?" Howard figures Goldman will likely be saddled with nasty headline for two years, but then after that, they'll be making as much money as they always have.

On the other hand, economist J.C. Spender, professor of economics at the Open University School of Business in Milton Keynes, U.K., takes a dim view of Goldman's actions and questions its integrity. Likening the current Goldman situation to the woes of Shoeless Joe Jackson (a former super baseball player who was caught up in the 1919 World Series scandal), Spender raises the question: "Why the upset over Jackson? Why do we go nuts when players threaten everything we believe in by engaging in betting and throwing games? This is what Goldman Sachs did--and they damn well knew it. Would we really stand for surgeons making a book on the outcome of their operations?"

My thoughts on Spender's tough comments: Say it ain't so, Lloyd.

Meanwhile, a few weeks ago the Goldman bulls were talking of a $200 price tag on the stock before year end. With the shares now around $145, down from a 52-week high of $193.60, there's now talk that a price break below $100 could be just around the corner.

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