Goldman Sachs: For Better or For Worse?

Saying that Goldman Sachs sparks controversy is an understatement. The debate rages on between those who admire the venerable firm for its professionalism, its talent and its way with rich and powerful clients, and those who consider it to be at the heart of a network that has created a practically invincible revenue-producing machine.

Unquestionably, there are elements of both that explain the success of the firm and its capacity to land the most prestigious assignments. And yet, the bulk of its activity happens for its own account and not as an agent for its clients.

I don’t think it hurts to have Peter Sutherland, the former Irish attorney general and European commissioner, as the head of Goldman Sachs International in Europe, or to have welcomed in Mario Draghi during his “interim” between the Italian treasury and the Bank of Italy or Mario Monti, the former European competition commissioner. And let’s not forget that the firm’s past two CEOs are now, respectively, the governor of New Jersey and the former treasury secretary. And, in a way, all the big financial institutions do the same all over the world, with a level of success that doesn’t hold a candle to Goldman Sach’s skill … and they’re jealous.

But today supplies us with a snapshot that captures the two faces of Goldman Sachs. Since an analyst yesterday predicted record profits for the firm, the market has risen more than two percent and rejoiced at this morning’s announcement of a 65 percent jump in earnings for the company. Because the firm has repaid its loans from the U.S. Treasury Department and is thus free to compensate its executives as it pleases, I know there are some who are rubbing their hands at the prospect of the billions that will be distributed as end-of-the-year bonuses.

All of this would be no big deal if the Financial Times hadn’t run a front-page headline in its American edition on the fact that, in the wake of the Lehman Brothers collapse, executives at Goldman Sachs sold off $700 million of their stock. That happened despite the fact that the firm had just benefited from a “support” of $10 billion from the American government’s Trouble Assets Relief Program (TARP), the very same funds that they recently repaid. These sales also coincided with efforts to raise capital. I wonder what the “Sage of Omaha,” Warren Buffet, who went in for several billion, thinks of all this.

The actions could have been motivated by “margin calls” on the debts of those executives who borrowed money to buy their shares. Goldman Sachs even had to pay out $60 million itself to finance the cash troubles of two of its executives in 2008.

Of course all this looks bad, and it’s hard to imagine how the Capitol will react to a situation that developed at the time of loans made in particular to Goldman Sachs … under the leadership of Hank Paulson, the former president of Goldman Sachs, as secretary of treasury. Some accuse him – falsely, in my opinion – of having saved AIG to prevent a “hole” of $12 billion for its main banker, Goldman Sachs.

All this is in bad style and will create turmoil in Washington at a moment when the FDIC is trying to salvage the balance of the $75 billion in consumer loans by CIT Group, the leading lender to individuals and small and medium-sized enterprises.

More than ever, the old adage holds: “People lend only to the rich.”