Goldman success brings unwanted attention

By Joseph A. Giannone - Analysis

NEW YORK (Reuters) - At Goldman Sachs Group (GS.N), success has become something of a liability.

For years the investment bank has inspired praise and more than a little envy for its perennial dominance of investment banking, exceptional profits and its Who's Who of influential alumni.

Lately, its financial wizardry has stood out even more as it thrived, even as most of its rivals were saddled with billions of dollars in write-downs and credit losses.

But fame and fortune have their price. Goldman has increasingly been attracting more attention than the secretive firm desires, including unwanted scrutiny from regulators and lawmakers.

"They're the top of the heap. Their success is eye-popping. Their latest record earnings in the face of big losses taken by most of the other investment banks is impressive in itself," said Harvard Business School professor Samuel Hayes. "It inspires a lot of envy. There's a lot of resentment."

Goldman is expected to report a record $11 billion of annual profit on Tuesday, including billions of gains from bets against the subprime mortgage market. Rivals, such as Morgan Stanley (MS.N) and Merrill Lynch & Co Inc MER.N, have ousted top executives and are expected to cap the year with money- losing quarters.

And while year-end bonuses are expected to be flat or smaller across Wall Street, Goldman payouts will rise to roughly $18 billion. On average, that is about $600,000 per employee, or double the average paid at other firms.

The disparity of results has some accusing Goldman of having an unfair edge or of hiding its mistakes. The appointment of former Goldman CEO Hank Paulson as U.S. Treasury secretary has one New York tabloid columnist convinced Goldman gets inside information on the bond market.

DRAWING ATTENTION

Earlier this month, economist Ben Stein caused a stir when he accused Goldman economist Jan Hatzius of issuing bearish reports on the housing and mortgage market to support the firm's traders betting on the market's decline. Others say Goldman may be understating problems.

"People believe they haven't done anything wrong. I don't think they are impervious," said Jon Fisher, who helps oversee about $22 billion at Fifth Third Asset Management. "Just because they say something doesn't mean you have to believe it."

Taking shots at Goldman is hardly new. In 1996, buyout firms and some companies complained its dual roles as investor and adviser created a conflict of interests. That storm passed, but Goldman took some lumps, such as being left off the list of lead underwriters for the Blackstone Group LP (BX.N) IPO.

Goldman declined to respond to the criticism, which many market sources and analysts call unfounded. The bank maintains its research and economists are completely independent.

Still, the questions are drawing attention from regulators and politicians -- poison for an ultra-secretive bank that sometimes acts as if it is still a private partnership.

The Securities and Exchange Commission is taking a closer look at how Goldman and other banks value assets, particularly illiquid securities that have fueled losses at hedge funds and rival banks.