Battle-scarred Goldman CEO unveils safeguards to avoid mistakes
SALT LAKE City
SALT LAKE City May 23 (Reuters) - After dozens of meetings with executives and regulators, 100,000 hours of employee training and an immeasurable amount of public grief, Goldman Sachs CEO Lloyd Blankfein is claiming a victory in getting his bank, and his legacy, back on track.
At Goldman Sachs Group Inc's annual meeting on Thursday, Blankfein announced the culmination of a three-year review and overhaul of the bank's practices following high-profile missteps that tarnished its reputation in the aftermath of the financial crisis.
In the past, Goldman sales staff and bankers could sell clients almost anything they wanted to buy. Under the reforms, they must now run transactions through what the bank calls technological matrixes - and sometimes get top-level approval - to make sure deals are appropriate.
In a video to be released on Goldman's website on Thursday, Blankfein tells a group of employees not to be afraid to call him if a problem erupts, because the risk of reputational damage outweighs the cost of possibly wasting his time.
"Everyone has to have big eyes, big ears, know what's going on around them and be policemen for the organization," he says.
Goldman staffers are expected to be "looking around corners" to make sure deals that seem lucrative in the short term won't harm the bank down the road, the co-chairs of Goldman's Business Standards Committee told reporters on Wednesday. The panel, led by J. Michael Evans and Gerald Corrigan, performed the review and implemented changes.
"We had to influence and change behavior," said Corrigan. "That's not an easy thing to do."
Evans said many proposed deals will now encounter hurdles that didn't exist before. If they don't clear them, Goldman won't get involved.
Clients will have preapprovals for a certain "transaction class" - or matrix - along the lines of deals they have already done with Goldman. If a proposed transaction falls outside that matrix, it gets routed to a "suitability" matrix that determines whether the client's profile makes him eligible for the deal.
Transactions that don't pass muster in the matrixes are escalated to more senior Goldman personnel. First, a manager in the business unit examines the deal. If necessary, it then goes to a panel of managing directors, and then to a higher-level committee of top Goldman executives.
Transactions that reach the higher levels tend to be advisory deals that involve large derivatives or complicated financing schemes; complex structured derivative products; or products that involve tax, accounting or regulatory arbitrage, Evans said. New products proposed by Goldman staff also must run through a committee for approval, Corrigan said.
In the new system of Goldman approvals, it is possible for clients to appeal. A deal that is initially deemed unsuitable can be approved if changes are made, Evans said.
He gave examples of one unnamed IPO client that took its business elsewhere when Goldman rejected its plan, and another that "begrudgingly" made changes so that Goldman would advise on its offering.
Evans said crisis-era deals, like the Abacus and Timberwolf derivatives trades that were documented in a U.S. Senate subcommittee report and involved litigation, would likely not be approved in the same manner today.
"If Abacus came today, it would run through a totally different framework for approval than before," he said, adding that his team was "turning ourselves into a pretzel" to figure out ways to avoid such situations in the future.