Goldman opens books to scrutiny, no wider shake-up
NEW YORK |
NEW YORK (Reuters) - Goldman Sachs Group Inc pledged to be more open about how it makes money and to put the interests of clients ahead of its own in an effort to rebut criticism it acted more like a hedge fund than a bank during the credit boom and misled investors.
Goldman revealed for the first time how much it made from trading and investing on its own behalf, which many investors have suspected is a key source of the bank's profits, during the first three quarters of the year.
The bank also made structural changes to its divisions, but there was no major management shake-up, leaving in place Chief Executive Lloyd Blankfein.
Blankfein and his firm came under siege last April after U.S. securities regulators sued Goldman and bond trader Fabrice Tourre for selling repackaged mortgage bonds to investors without disclosing key information about the securities.
Tourre referred to himself as "fabulous Fab" and to a collateralized debt obligation product he helped create as "a little like Frankenstein turning against his own inventor." To many critics of Goldman, he embodied the firm's willingness to put its own interests ahead of clients.
Soon after the SEC lawsuit, Goldman commissioned a report to determine how it should change the way it does business.
The report, released on Tuesday, recommends creating at least three internal committees and focuses mainly on disclosure and oversight. It makes few recommendations for how Goldman will change the way it does business day to day and some observers questioned how much will change.
"I'm not terribly convinced it produces a new culture," said Cornelius Hurley, a professor and director of Boston University's Morin Center for Banking and Financial Law. "It seems to be part of their concerted public relations effort."
Still, Goldman did shed new light on the heretofore murky realm of proprietary trading profits, revealing that its investment and lending group -- which includes the bank's bets with its own money -- accounted for nearly 30 percent of pre-tax earnings in the first three quarters of 2010.
And Goldman's disclosure overhaul could boost pressure on rivals to follow suit, especially after the sweeping Dodd Frank financial reform bill shone a spotlight on the propensity of big Wall Street firms to make risky bets with their own capital.
"I think other banks will follow Goldman on this," said Brad Hintz, investment banking analyst at Sanford C. Bernstein in New York. "They may not want to admit it, but this kind of disclosure puts pressure on other boards to act."
The report came even as other major banks express eagerness to put the financial meltdown of 2008 behind them. Barclays Plc's new boss, Bob Diamond, said on Tuesday that banks should stop apologizing for the mistakes that helped cause the crisis.
The 63-page report prepared by a committee led by executive and former Federal Reserve Bank of New York president Gerald Corrigan and by Michael Evans, a vice chairman of the company, details 39 plans for how it will change after years of investor accusations its financial statements are opaque and client complaints about conflicts of interest.
Goldman agreed in July to pay $550 million to settle the SEC lawsuit. The SEC accused the bank of creating and selling collateralized debt obligations linked to subprime mortgages without telling investors hedge fund Paulson & Co helped choose and bet against the debt. The settlement was one of the biggest arising from the U.S. housing and credit crises.
As part of Goldman's settlement, the investment bank agreed to require two internal committees to review mortgage bond deals to make sure marketing materials describe necessary facts to investors.
The report is emblematic of a more humble tone from a firm long lambasted by critics for arrogance. Blankfein told a Senate hearing last April that Goldman was undergoing a "big soul search" in the wake of the SEC complaint and other allegations.
Goldman shares fell 40 cents to close at $169.36. The shares have partially recovered from a steep drop that followed the disclosure of the SEC suit last April, rising about 6 percent.
Goldman Sachs earned a record $13.39 billion in 2009. The bank's results have been on a roller-coaster ride over the last five years, rising to an eye-popping $11.6 billion in 2007 before dropping to $2.32 billion in 2008, only to reach a record high the following year.
Goldman's 2010 results are on track to be down from 2009. The bank earned just $5.49 billion in the first nine months of the year. The bank is scheduled to report fourth-quarter results on January 19 under its new disclosure framework.
Goldman said it would set up one committee to ensure clients are treated fairly, another to scrutinize each potential new business activity and a third to examine the suitability of products for investors.
"We act in many capacities, including as an adviser, fiduciary, market maker and underwriter," the report said in one of several references to potential conflicts of interest. "We must be clear to ourselves and to our clients about the capacity in which we are acting and the responsibilities we have assumed."
Goldman said bolstering the firm's reputation was a key objective of the report. Goldman was once famously described in a Rolling Stone magazine article as "a great vampire squid ... jamming its blood funnel into anything that smells like money."
But the modest suggestions in the report are unlikely to put an end to such criticism.
An influential Senate report into the financial crisis due out later in January is expected to highlight alleged conflicts of interest in Goldman's dealings with its clients, the Financial Times reported on Tuesday.
(Additional reporting by Maria Aspan; writing by Christian Plumb; editing by John Wallace and Andre Grenon)
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