Goldman's Empty Promises

Goldman Sachs has completed its first ever top to bottom review of its business practices, and boy, the internal committee headed by two of the most respected men at the firm, J. Michael Evans and E. Gerald Corrigan had a lot to work with.

Over the past year or so, Goldman Sachs, once known as the most prestigious investment banking firm in the world, became better known for its habit of selling "shitty" investments to clients, and then bragging about it in emails. But the firm's problems didn't end there. There was, of course, that wonderful Abacus deal, cobbled together by a short seller just as the housing market was exploding, but sold by Goldman to customers as if it were shares of Google -- or to use a more current example, Facebook (which should make anyone intent on buying this Facebook deal that Goldman has recently ginned up think twice.)

There was the hundreds of millions of dollars in penalties that Goldman had to fork over to appease regulators looking into these business practices, and, of course, the excruciating manner in which CEO Lloyd Blankfein tried to explain all this mayhem to Congressional committee and the press -- made even more excruciating by the fact that as Goldman's bankers were congratulating themselves on how to screw people, the firm was feasting off of a taxpayer bailouts and guarantees that were eventually converted into huge bonuses for its bankers and traders.

With all of this and more (I won't bore you with all the gory details), you would think the most profitable investment bank on Wall Street, the place where Harvard sends its best and brightest would produce a really profound statement about how a firm can best behave in a post-bailout financial world, as Blankfein promised when he announced the effort in the summer of 2010.

Well, the "much anticipated" report is out, and "profound" isn't the word I would use to describe the nonsense that fills its 63 pages, which begins ominously with the words "Our clients interests always comes first." (First off, never trust anyone who has to remind himself about putting clients first.) Because they don't, and they never will based on the dopey prescriptions Goldman says it has now adopted to deal with a corporate culture that openly embraced sleaze in recent years.

Of course, Blankfein, Evans and Corrigan, make a lot of promises. They promise, for example, enhanced "suitability" requirements; meaning they will no longer pitch shitty investments to clients that don't understand just how shitty they are. Nowhere does it say what happens to an investment banker who breaks that promise even if doing so brings the firm a lot of money.

There is some streamlining of operations, such as moving its mortgage-backed securities department -- where much of the firm's trouble originated from -- into another part of the firm, presumably where there will be more oversight. Sounds great, but it's hard to believe that the Goldman corporate ethos of "buyer beware" -- one that has become more pronounced since Blankfein took over as Chairman and CEO in 1996 -- isn't pervasive across reporting lines.

Maybe the biggest change will be in how Goldman will be disclosing the magic that makes it the most profitable firm on Wall Street. From now on, Goldman will break out how much it makes from trading, a key driver of its past profits. These revenues were in the past lumped in with other revenues so while you knew Goldman was making a lot of money taking risk, you never knew just how much so you had to rely on the double-talk from senior executives for the scant details.

Again, this is form over substance. The new financial reform regulations have sharply curtailed any firms' ability to trade using its own capital, also known as proprietary trading. So firms like Goldman are redeploying traders in areas of their business that deal with clients. It's an interesting sleight of hand, but it allows Goldman to evade the new reform rules simply by taking risk in the process of handling customer orders.

This growing part of the firm's trading business, of course, is exempt from the disclosure requirements; at least that's the way I read the new rules.

Goldman executives have told me they surveyed and interviewed at least 200 customers in coming to these meaningless conclusions. They haven't released those interviews, nor have they publicly released the questions that were asked, or maybe more importantly, weren't asked.

Because, I am told, the firm's questionnaire left out one really important question: Whether Blankfein, who presided over this mess, should remain in his job, or at the very least, be forced to give up some power by appointing someone else as company chairman.

It isn't a stretch to describe Blankfein's leadership of Goldman as schizophrenic; he produced out-sized earnings for investors as reflected in Goldman's stock price, and guided the firm through the 2008 financial crisis better than his competitors.

But he has also allowed Goldman's reputation for dealing fair and square (at least according by Wall Street standards) with clients to degenerate into a cruel joke, as bankers and traders routinely put the firm's interests over its clients, as evidenced by countless emails exposed over the past year of Congressional hearings and regulatory inquiries.

Having a separate chairman who reports directly to the board of directors and not the man responsible for churning out profits at the expense of ethics would certainly have more impact in changing Goldman's culture of sleaze than a bunch of empty promises.

Now you know why Blankfein & Co., didn't ask that question.