REUTERS/NATALIE BEHRING saving the firm’s top bosses are deploying charm, sushi and face time to mend relationships

june 2010 goldman charm june 2010

goldman execs working overtime to protect franchise special report

• Some clients wary of doing business with tarnished firm • Controversy costs Goldman a spot on Booz Allen IPO • Calpers says won’t use Goldman as real estate adviser GOOD AS GOLD: Lloyd Blankfein on Capital Hill. REUTERS/jim young by steve eder and matthew goldstein NEW YORK - Four days after U.S. securities regulators charged “I was very pleased,” said Williams, executive director of the Florida Goldman Sachs Group with civil fraud, Ash Williams, the top State Board of Administration. “If it were me in that same situation, administrator for Florida’s $138 billion in public investments, wanted that is what I would have done. It is a good policy, when times are to talk to someone at the firm. tough, to talk to your clients.” And he didn’t want to speak to just anyone. He asked specifically for Ever since the Securities and Exchange Commission charged Goldman , Goldman’s president and Chief Executive Officer Lloyd with civil fraud over the packaging and sale of a subprime-mortgage Blankfein’s top lieutenant. linked security, Blankfein and Cohn have been working overtime to save the storied franchise from the worst blow to its reputation in decades. Williams got his wish. Cohn, whose firm manages $2.7 billion of Florida’s investments, called soon after. Goldman’s top brass, along with other executives, are scurrying around the globe to meet with jittery corporate clients. They are A former hedge fund manager, Williams would not discuss the holding phone calls with anxious customers and taking hedge fund substance of the call. But he said the conversation eased any trading partners out to sushi lunches, all in a bid to prevent business lingering concerns he had over the lawsuit filed by the U.S. Securities from going to one of its competitors. and Exchange Commission on April 16. The firm has already taken some hits. Goldman didn’t make the cut as a lead underwriter on a $300 million initial public offering for consulting firm Booz Allen Hamilton, said people familiar with the situation. The Carlyle Group, the private equity firm which acquired Booz Allen in a $2.54 billion buyout, was worried about the public perception of Goldman leading an IPO for a company with close ties to the U.S. Department of Defense. Instead, Carlyle, whose vice chairman of global buyouts is a Goldman alum, went with Morgan Stanley and Barclays to lead the IPO. Goldman declined to comment for this story. A Carlyle spokesman said the private equity firm had no comment on the IPO. Rightly or wrongly, Goldman Sachs has become a symbol of a pernicious Wall Street, a firm that helped create -- and then profited from -- the subprime meltdown. For more than a year, it has been trying to fend off populist outrage, but the tin ear of its leaders MAIN STREET’S VERDICT: Chris Despopoulos, 54, and his wife Leslie, 51, protest outside Goldman Sachs to the pain the financial crisis has caused on Main headquarters building in the financial district of NewY ork, Jan. 21, 2010. REUTERS/JESSICA RINALDI Street has often made matters worse.

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Goldman is also facing a spate of shareholder lawsuits stemming from the big plunge in its stock in the wake of the SEC lawsuit over the Abacus 2007 collateralized debt obligation. The firm has lost $25 billion in market value since regulators charged Goldman with failing to disclose that a hedge fund client had helped package the Abacus CDO and was betting on the security’s collapse. Meanwhile, an Australian hedge fund that lost money on another controversial subprime-mortgage linked security called Timberwolf -- which Goldman arranged and was betting against -- is suing the firm for $1 billion in damages. A now defunct hedge fund sponsored by Carlyle also lost money in the Timberwolf CDO, said people familiar with the situation.

THE RED CARPET Even so, Goldman continues to be among the most profitable financial companies in the world. Determining just how big an impact SWEET NOTHINGS: Lloyd Blankfein (R) and Gary Cohn (L) at a speech by U.S. President Goldman’s political and regulatory woes are having on clients, in New York April 22, 2010. REUTERS/natalie behring particularly corporate ones, is difficult. And since the SEC filed its lawsuit, the average IPO underwritten by One investment banker with another big Wall Street firm said he is Goldman has shrunk even more. The three offerings that Goldman working on an upcoming IPO for a company that likely would have has brought to market in June have raised on average $189 million. tapped Goldman to manage the deal if not for the SEC lawsuit. The dwindling size of IPOs is no doubt a reflection of diminished appetite for stock offerings in the aftermath of the financial crisis. “it is a good policy, when times But for Goldman to go scraping for small deals is not what one are tough, to talk to your would expect for a firm that in the past routinely turned away clients.” business from mid-market clients. FULL COURT PRESS Any lost advising or underwriting work comes at an inopportune The full court press Blankfein, Cohn & Co. are putting on clients time for Goldman. The financial crisis has forced it and other big Wall and customers to stick with the firm appears for the most part to be Street banks to look further down market for deals in a quest for fees working. Even with its down market moves, Goldman continues to and to remain near the top of all-important league rankings. rank at the top of the charts when it comes to advising on corporate Goldman, for instance, is underwriting far smaller stock offerings mergers or stock and bond offerings. than it has in the past. So far this year, the average Goldman-led IPO And the thousands of hedge funds that rely on Goldman’s prime has raised $218 million, compared with $685 million a decade ago, brokerage operation for loans and executing trades are showing few according to data complied by Thomson Reuters. signs they will bolt to other firms. For Goldman, the toughest sells have been public pension funds or companies with strong ties to the government that don’t want to be seen to be in bed with the firm. Reuters has learned that the California Public Employees’ Retirement System, the largest U.S. public pension fund, has decided not to use Goldman as a real estate investment adviser after the Wall Street firm did not disclose that it was facing potential SEC charges when bidding for the contract in March. The run-in with the SEC is reinforcing the perception that Goldman -- despite claims to the contrary -- sometimes puts its own interests ahead of its clients. Even supporters say the allegation merely confirms what they’ve long suspected -- that Goldman is no more or less self-interested than any other Wall Street investment bank.

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MEDIA DANCE: Goldman Sachs CEO Lloyd Blankfein (centre L) and President and COO Gary Cohn (centre R) are questioned by the media at U.S. President Barack Obama’s speech about financial regulation at Cooper Union in New York April 22, 2010. Obama scolded Wall Street for its “furious efforts” to fight tighter regulation, saying the was doomed to another financial crisis if reforms were not implemented. REUTERS/natalie behring

The allegations have caused some to question whether Goldman’s SUSHI LUNCHES clients still come first, as the firm’s vaunted 14 guiding business One hedge fund trader whose firm uses Goldman as a prime broker principles suggest they should. said a Goldman executive called a few days after the SEC lawsuit “Goldman is the smartest guy out there, but it doesn’t seem to be and offered to treat some of the fund’s trading team to a sushi lunch. bound by any ethical guidelines, at least that we can see,” said Other fund customers have been similarly feted, sources said. Michael Vogelzang, the chief investment officer at Boston Advisors, Besides wining and dining, Goldman’s prime brokerage teams are a $1.7 billion money manager, which owns shares of Goldman. “The sending out regular updates on the firm’s response to the SEC lawsuit. individuals there are great. We love working with our contacts. But it is very frustrating.” Another hedge fund that a year ago turned down Goldman for a prime brokerage assignment was recently contacted again by the That’s a sentiment that more than a dozen clients and customers Wall Street firm to see if it would reconsider. A person close to the expressed in recent conversations, although none would comment on hedge fund, who declined to be identified, said the incident was the record. And it’s one reason Goldman finds itself on the defensive not surprising since Goldman rarely comes back begging for business. only with regulators but with some of its most valued clients as well. GOLDMAN TLC “goldman is the smartest guy out For instance, soon after the SEC charged Goldman, the firm quickly there, but it doesn’t seem to be moved to patch things up with Paulson & Co. Goldman had arranged the now controversial Abacus 2007 CDO that is at the center of the SEC’s bound by any ethical guidelines, fraud case for the benefit of that giant hedge fund, run by John Paulson. at least that we can see.” While Paulson’s $30 billion fund hasn’t been charged by regulators, its name has been somewhat muddied. A person close to Paulson Since the SEC announced its charges, Blankfein and Cohn also have said a Goldman official called within days of the SEC lawsuit to make participated in conference calls with wealthy clients, reassuring them it clear that the firm didn’t have any problem with the hedge fund and about the direction of the firm. Cohn, for instance, took part in a June would like to continue doing business with it. 16 call with Goldman’s wealth management customers. Hedge funds in general have been the recipients of the extra personal A former Goldman partner, who left the firm more than a decade ago touch Goldman executives have been demonstrating lately. Traders but still advises a number of Goldman clients, said the firm’s sudden said they’ve noticed that Goldman’s prime brokerage operation, TLC is a clear response to the SEC lawsuit and the pounding the firm which provides loans to hedge funds and executes trades for funds, is suffered during an especially harsh hearing on Capitol Hill in April. going out of its way of late to show clients the firm cares.

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”THEY WILL PROBABLY BE A LITTLE BETTER BEHAVED FOR THE NEXT FEW YEARS.”

The long-standing relationship between the insurer and Goldman now appears strained. AIG CEO Robert Benmosche said last month that AIG was reviewing its dealings with Goldman. And the firm recently canceled a plan to hire Goldman for restructuring advice, instead turning to Citigroup Inc and Bank of America. Brad Hintz, a former Morgan Stanley treasurer and an analyst with Sanford C. Bernstein, said Goldman’s battered name is making it easier for vulnerable clients -- ones facing political pressure -- to take a pass. “As a decision maker for any client, if you are under pressure, your response will be to pull away to the extent you can without hurting yourself,” Hintz said.

INTERNATIONAL AFFAIR Soon after the news spread that Goldman was facing fraud charges, rivals across the world seized on it as an opportunity to move in on some of the firm’s prestigious clients. A PUBLIC FLOGGING: Chairman questions Lloyd Blankfein during testimony before the Senate Homeland Security and Governmental Affairs Investigations Subcommittee hearing on “Wall Street and the In China, investment bankers lobbied executives Financial Crisis: The Role of Investment Banks” on Capitol Hill, April 27, 2010, REUTERS/jason reed at state-owned Agricultural Bank of China to drop Goldman as an underwriter for its more than $20 “Everything Goldman is doing now is related to the lawsuit,” the former billion IPO. But the Chinese bank rebuffed those efforts and decided partner said. “It is about brand identity and preserving the brand.” to keep Goldman as part of the underwriting team. “BETTER BEHAVED” “On the advisory side, I suppose it is conceivable for someone to say A constant refrain from Goldman clients, even ones who are more wary they are bunch of bad guys because the SEC is suing them, but I don’t of the firm now, is that to stop doing business with the Goldman out of think it is hurting their franchise,” said one corporate attorney. principle or fear of getting taken advantage of would be foolish. The clients Clients in places like are fully aware of what Goldman is said the firm’s ability to get deals done, even in the most difficult of market facing, but say they are continuing to do business with the firm environments, makes it hard to put Goldman on any do-not-call list. because they know what to expect. “What you get when you work That’s why one European hedge fund manager, despite having with Goldman is a well-oiled process,” Novexel SA Chief Executive qualms about how Goldman treats its clients, said he’s still giving Iain Buchanan told Reuters in a telephone interview. “That brings serious consideration to hiring the firm as a prime broker for a new comfort not just to management but also to investors.” fund. The manager said it’s hard to overlook Goldman’s unrivaled ability to bring quality deals and trading opportunities to the mix. Plus, he figures the SEC suit should serve to humble the firm a bit. “Well, they will probably be a little better behaved for the next few years as a result of everything,” the manager said. “And they still have the best capital introduction in the world.”

POLITICAL HOT POTATO But for some, the cost of doing business with Goldman, at least right now, is simply too high. Firms that got billions of dollars in the U.S. government’s bailout of the banking industry have been among the corporate clients that are steering clear of Goldman. In 2008, Goldman itself got a $10 billion bailout, which it repaid in 2009. But it’s been criticized for profiting from the massive taxpayer TOMORROW THE WORLD: Gary Cohn at the in Davos, Jan. 29, 2009 assistance to American International Group Inc. REUTERS/CHRISTIAN HARTMANN

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Jefferies Chief Executive Richard Handler, in an interview, said it is often difficult to tell why clients pick one firm over another for advising work. “This is a very competitive business,” Handler said. “Even larger competitors that are even slightly wounded, given what’s going on, are still formidable competitors.”

GOVERNMENT TIES For government and other public clients, there are political ramifications for doing business with Goldman that now come into play. Perhaps that’s why Cohn, Goldman’s president, was so quick to respond to Ash Williams and the Florida system. Williams said Cohn asserted that Goldman had done nothing wrong and was trying to be as “transparent” as possible with its clients about the SEC case. After talking to Cohn, Williams said he saw no need for the state to look elsewhere for a Wall Street money manager. Disclosure concerns, however, have already landed Goldman in hot water with one major pension fund. On June 16, Calpers notified Goldman that it would not use the firm in its pool of real estate investment consultants, according to a document obtained by Reuters. The pension fund’s decision came after officials there said they planned to question Goldman about its failure to disclose that it was facing an investigation from the SEC when bidding for the contract in March. The SEC served Goldman with a so-called Wells Notice last September, signaling potential charges, which the firm did not mention in its March bid for the Calpers contract. Goldman has MOVING ON: A pedestrian passes offices of Goldman Sachs in London April 20, 2010, REUTERS/TOBY MELVILLE maintained that it was not required to publicly disclose the notice it received from the SEC. Goldman recently advised Novexel on its sale to British drugmaker AstraZeneca Plc, a 352 million euro deal that closed in March. Based Calpers also has a brokerage relationship with Goldman and there is in a Paris suburb, the firm develops antibiotics to combat treatment- no indication that will change. resistant bacteria. “EVEN LARGER COMPETITORS THAT Buchanan said bankers from Goldman, which had previously helped Novexel evaluate an initial public offering, were available “24-7”. ARE EVEN SLIGHTLY WOUNDED, “You have a team of people who can do a lot of heavy lifting in a GIVEN WHAT’S GOING ON, ARE STILL short space of time. It didn’t matter whether it was 3, 4 o’clock in the morning -- there was a Goldman BlackBerry whizzing in the night,” FORMIDABLE COMPETITORS.” Buchanan said.

“SLIGHTLY WOUNDED” Other pension funds are keeping a closing eye on Goldman. On the surface, Goldman’s woes should be a boon to competitors. The Oklahoma Teachers Retirement System voted in April to put But it is not so simple. Goldman Sachs Asset Management “on alert” for 90 days as it Wall Street also has a what goes around, comes around culture, reviewed the fraud allegations against the firm. an etiquette that deters big firms from poaching clients when the And in May, the New York Metropolitan Transportation Authority cut going gets tough. As a result, chief rivals like Morgan Stanley and its ties with Goldman, which had served as its financial adviser. JPMorgan Chase & Co are unlikely to raise Goldman’s problems when they are making sales pitches to clients. “OUR CLIENTS” But, of course, clients often raise Goldman’s issues unprompted, Evolving from its partnership culture, Goldman has always been seen especially when they are considering using them on a deal. as secretive, so the disclosure concerns were less surprising to some in the industry. Last week, bankers from Goldman and Jefferies Group, a mid- sized investment bank, advised Valeant on its $3.3 billion sale to What has been harder to swallow for some former Goldman drugmaker Biovail. executives is a shift in culture that shortchanges clients.

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MONEY MACHINE: Even as Goldman has weathered a public relations storm over the past year, its performance has been strong. In 2009, Goldman recovered from the financial crisis to report a record profit. The firm also got off to a strong start in 2010, but top executives behind the scenes have been working to tend to clients uneasy about U.S. regulators accusing the firm of fraud.

When Goldman became public, employees often would keep a copy “Their efforts to make sure that whatever questions we have get of the firm’s 14 business principals near their desks. The principles answered, have to be speeded up a little bit these days,” said Howard include items like “Our clients’ interests always come first” and Bicker, executive director of the Minnesota State Board of Investment. “Integrity and honesty are at the heart of our business.” Bicker, who oversees $50 billion in state pension money, said he “Over the last ten years that fell by the wayside,” said a former always found Goldman to be responsive in the past. But now it just Goldman managing director with more than 20 years experience with seems the firm is more eager to please, he said. the firm. If nothing else, it seems the SEC has managed to bring a bit of The cultural changes have come as the firm has rapidly grown as humility to Goldman. a public company. It has also coincided with the evolution of more (Additional reporting by George Chen and Fiona Lau in Hong Kong and complex products. Quentin Webb in London; editing by Jim Impoco and Claudia Parsons) Now, with outsiders questioning the firm’s integrity, Goldman is finding it can’t take any clients for granted. And many of the firm’s clients expect nothing else.

COVER PHOTO: Goldman Sachs CEO Lloyd Blankfein and Gary Cohn (L), president and COO, attend a speech by U.S. President Barack Obama about new financial regulation atC ooper Union in New York April 22, 2010, REUTERS/natalie behring

For more information contact: Jim Impoco, Enterprise Editor, Americas Matthew Goldstein Steve Eder +1 646 223 8923 +1 646 223 5773 +1 646 223 6069 [email protected] [email protected] [email protected]

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