The Death of Goldman Sachs

Criminal behavior. No trust. Reputation destroyed. No customers. I expect Goldman Sachs to be out of business by the end of this year and maybe before the November election. That's just my opinion, of course.
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See 8:30pm Eastern Tuesday and 1:00 am and 9:45am Eastern Wednesday and 1:45am Thursday and 2:15pm Eastern Friday Updates Below:

I saw something die today. It didn't die accidentally either. It was killed.

This was a very painful event to watch, not just because death is tragic and not because this death was intentional rather than accidental.

It was very painful to watch because the thing being killed didn't even know it was dying... and it didn't know it was actually participating in its own death. It didn't know it was helping the hangman not just put the noose around its neck but helping the hangman open the trap door under its feet.

What died today was Goldman Sachs. It has existed for 140 years. But today all that ended, as the head of Goldman Sachs, Lloyd Blankfein, in his prepared remarks before the Senate Governmental Affairs Subcommittee on Investigations, said "We have been a client-centered firm for 140 years and if our clients believe that we don't deserve their trust, we cannot survive."

That was Lloyd Blankfein putting the noose around Goldman Sachs' neck.

And then - in his opening exchange with Subcommittee chair Senator Carl Levin - Lloyd Blankfein proved that Goldman Sachs absolutely, positively does not deserve the trust of its clients.

That was Lloyd Blankfein helping open the door under Goldman Sachs' feet.

In his Senate appearance, Lloyd Blankfein participated in the death of his own company. It was really a stunning thing to watch.

I expect Goldman Sachs to be out of business by the end of this year and maybe before the November election. That's just my opinion, of course. But I'll justify it in a moment.

I will post C-Span's coverage of this testimony as soon as it's available. I predict it will be viewed for years to come by students of business ethics but also by students of famous moments in the civic life of America. I believe this moment will be seen on par with the famous incident in which Senator McCarthy was brought down with the simple question "Have you no sense of decency?"

Senator Carl Levin's simple question - the one that killed Goldman Sachs - was "Do you think it's proper for Goldman Sachs to bet against the security it is selling to a client without telling that client that it is making that bet?"

(I will check the transcript later, to make sure I have the wording of this question correct.)

Mr. Blankfein said over and over again that it was proper for Goldman Sachs to do what they had done. He even said at one point that the minute Goldman Sachs sells something to its customer, it no longer owns that security and has "the opposite interest" to its client regarding that security. This was just one of many breathtaking moments, as I could tell that Mr. Blankfein had no idea what he was doing to his firm.

In late 2001, the collapse of ENRON led to the death of the legendary accounting firm Arthur Andersen.

Arthur Anderson's reputation was unmatched in the field; but, in 2002, Arthur Andersen was found guilty of criminal charges related to its auditing of ENRON and gave up its license to practice accounting.

Criminal behavior. No trust. Reputation destroyed. No customers. Firm dead

Welcome to the Arthur Andersen reality, Goldman Sachs.

Civil charges of fraud brought, and there may be more coming. No trust. Reputation destroyed. No customers. Firm dead.

What a fascinating time we are living in. If things really do play out the way they did with ENRON and Arthur Andersen - and I think they will - I guess we'll be able to say that there is such a thing as white-collar justice in America.

2:15pm Eastern on Friday -

The NY Times has published "Goldman's Shares Plunge on Inquiries and Downgrades" today. In it, The Times reports:

Already facing investigations on two fronts into its practices in the mortgage market, Goldman Sachs came under pressure from investors as well on Friday.

After reports on Thursday evening that federal prosecutors had opened an investigation into trading at Goldman, raising the possibility of criminal charges against the Wall Street giant, the firm's stock was downgraded on Friday by two analysts. Standard & Poor's lowered its rating from hold to sell, and Bank of America Merrill Lynch dropped its rating from buy to neutral, citing the mounting investigations.

Investors responded by sending the stock down 9 percent in midday trading, to $145.89, contributing to an overall decline in financial shares on Wall Street.

The financial impact of Goldman's troubles continues to mount. Since the Securities and Exchange Commission announced on April 16 that it had filed a civil fraud suit against the firm, its stock is down 20 percent, removing about $20 billion from its market capitalization. The drop is all the more striking given that Goldman delivered a blockbuster quarterly report last week, with first-quarter earnings doubling from last year.

1:45am Eastern on Thursday -

The NY Times has just published an article titled "Goldman and Its Lobbyists Spurned in Finance Fight" which demonstrates how toxic Goldman Sachs has become in the halls of Congress. This evidence supports my thesis that Goldman's business - in this case in a political context - is disappearing. A sample quote from the article:

And the events of recent weeks are clearly hurting the access of a company once renowned in Washington for sending its executives to senior posts at the Treasury Department. For instance, Senator Blanche Lincoln, the Arkansas Democrat who wrote the provision that would ban banks like Goldman Sachs from trading in derivatives, had discussed having a fund-raiser at the firm's New York offices this month, but she scuttled the possible event after the S.E.C. filed its lawsuit.

Ms. Lincoln said she would no longer take political contributions from the firm, which has been one of the most prolific contributors to campaigns.

9:45am Eastern on Wednesday -

Reuters reports on Mr. Blankfein's testimony here. In their report, they suggest Goldman's reputation has taken a big hit. Remember, a company can go down if its reputation falls to junk status. It would be a fitting "final act" if the company that had no problem selling "crap" (the term Sen. Levin used) were to go out of business because its reputation was now seen as "crap" as well. From the Reuters report:

Blankfein was frequently interrupted, told to answer the question and stick to the point. He often squinted as if puzzled by the questions and sometimes gave hesitant answers.

He said, as a market maker, it was not Goldman's responsibility to tell customers how to trade or invest.

Clients "are not coming to us to represent what our views are, they probably wouldn't care what our views are. They shouldn't care."

The hearing came less than two weeks after the U.S. Securities and Exchange Commission filed a civil fraud suit against Goldman, charging that it hid vital information from investors about a mortgage-related security.

Edward Rogers, CEO of Tokyo-based hedge fund advisor Rogers Investment Advisors said Goldman's difficulties could hurt its ability to retain talent.

"The government hates you. Your friends throw tomatoes at you. You are evil now. You are not the smart guy in the room -- you are the evil, twisted greedy crook guy," said Rogers.

1:00 am Eastern on Wednesday -

Lloyd Blankfein's testimony is now available on C-Span's video page. Go to that page to read the transcript, which you can scroll through. For now, it is a somewhat incomplete transcript, because C-Span took if off of the closed captioning that was done in real time during the testimony. The NY Times has a "live blog" partial transcript / partial analysis I recommend you read to get an additional take on how Mr. Blankfein's testimony went.

Assuming I can find a really complete transcript, I will add it as another update.

Here is the video:

Senator Levin's questioning starts after Mr. Blankfein's opening testimony. But there is additional questioning by Senator Levin towards the end as well. (That is where the issue of Mr. Blankfein never thinking about whether Goldman Sachs might have clients that require especially conservative, AAA rated investments to protect assets that help them serve a public interest.)

8:30pm Eastern on Tuesday -

Lloyd Blankfein just admitted to Sen. Levin that he never thought about the fact that there are certain investors (such as Universities and other institutions) that can only invest in Triple A Rated securities. This is in a discussion of Goldman's desire for rating agencies to make sure more securities are rated Triple A than any other rating. By creating a Triple A rating where such a rating is not deserved, the rating agencies - and Goldman by then selling them - put those institutions that must invest conservatively (because their investments go to supporting things like education) at risk.

This is further proof that clients cannot trust Goldman Sachs. The head of Goldman Sachs has admitted that he never knew that some of his company's clients have to be protected from investing in risky investments. As a result, he did not make sure that Goldman Sachs did not sell risky investments that look like Triple A rated investments without actually being Triple A.

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