By Lauren Tara LaCapra
SALT LAKE City May 23 After dozens of meetings
with executives and regulators, 100,000 hours of employee
training and an immeasurable amount of public grief, Goldman
Sachs Group Inc's Lloyd Blankfein claimed success in
putting the bank and his legacy as CEO back on track.
At Goldman's annual meeting on Thursday, Blankfein unveiled
details of a three-year review and overhaul of the bank's
practices in dealing with clients, following high-profile
missteps that tarnished its reputation in the aftermath of the
financial crisis. The overhaul imposes checks, including through
elaborate computerized systems, to ensure that the bank is fair
to clients and avoids conflicts, such as being on different
sides of the same trade.
Goldman's changes do not appear to go beyond the kind of
committee reviews that other Wall Street firms now do,
executives at two rival banks said. But they added the use of
computerized analyses to detect unfair deals could make the
system more effective than rivals' at catching potential
pitfalls, even if it costs them some business.
"They want to get their reputation back," said Roy Smith, a
professor at New York University's Stern School of Business.
"They know that means giving up some business."
Goldman faced public outrage in the aftermath of the 2008
financial crisis over accusations, including a U.S. Securities
and Exchange Commission lawsuit, that it had treated clients
improperly. Blankfein and other executives also faced intense
grilling on Capitol Hill, which deeply embarrassed its CEO.
After serving as CEO since June 2006 and steering the bank
through the financial crisis, the 58-year-old Blankfein does not
want to leave his post until he feels the bank's reputation and
his own legacy are fully restored, people familiar with the
The month after the SEC's charges, Blankfein set up the
Business Standards Committee. He traveled around the world to
hold town-hall-style discussions with Goldman partners and
managing directors. In a video on Goldman's website on Thursday,
Blankfein tells a group of employees not to be afraid to call
him if a problem appears 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 said.
The venue of the annual meeting - in Salt Lake City, where
Goldman is heralded as an economic savior because of its recent
expansion there - provided a friendlier atmosphere than other
recent shareholder gatherings, where protestors drowned out talk
of the committee's progress.
The company won shareholder support for its 12 nominees to
the board and its positions on the seven other proposals on the
ballot. The lowest vote the company received was 68 percent
approval for its new stock compensation plan for executives.
Such plans tend to win support from around 85 percent of
shareholders, according to proxy solicitor Georgeson Inc.
CHECKS AND BALANCES
Under the reforms, 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 later, the co-chairs of
Goldman's Business Standards Committee told reporters at a
briefing on Wednesday. The panel, led by J. Michael Evans and
Gerald Corrigan, performed the review and implemented changes.
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.
In the past, Goldman salespeople and bankers could sell
clients almost anything they wanted to buy. Under the reforms,
they must now run transactions through computerized processes -
which the bank calls matrixes - and sometimes get top-level
approvals to make sure deals are appropriate.
Transaction that don't pass muster are taken to more senior
Goldman managers. Deals that reach the top executives tend to
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.
It will be possible for clients to appeal. Evans 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.
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.
Abacus, a synthetic collateralized debt obligation, was the
focus of the SEC case. The regulator had said that Goldman
allowed Paulson & Co to help pick residential mortgage-backed
securities underlying the CDO while the hedge fund was also
betting against the security, and failed to disclose that to
buyers of the CDO.
"If Abacus came today, it would run through a totally
different framework for approval than before," Evans said.