Goldman’s need to change
Bloomberg’s Lisa Kassenaar and Christine Harper have written a good, long article about Goldman Sachs, how it dealt with crisis, and what led the venerated firm to the brink of collapse despite being the best run firm on Wall Street. Leverage and systemic risk were a large part of the problem.
The company, which was a private partnership as late as 1999, is going to have to transform itself in order to continue to thrive in the future. I am confident it will meet the challenge, but major changes are going to be necessary.
The contingency planning to become a commercial bank had been under way since March, after the collapse of Bear Stearns Cos. sent shivers through Wall Street. That’s when Federal Reserve inspectors set up camp at the firm’s 85 Broad St. headquarters, a sign of things to come.
Break the Glass
It wasn’t until that weekend in September that Blankfein, 54, decided to break the glass and sound the alarm. Goldman was going to need the stability of a large deposit base, he concluded, to compete with the likes of JPMorgan Chase & Co. and Bank of America Corp., the nation’s two largest commercial banks. It was no longer enough to be the biggest, most profitable securities firm–not when the investment banking model of relying on capital markets for funding was busted.
Goldman executives, fortified with Chinese takeout, gourmet pizza and burgers from Harry’s at Hanover Square, had spent the weekend debating the firm’s options. Lawyers were preparing the paperwork to transform the bank into an institution supervised by the Fed. Some slept in the office. Blankfein was in close contact with Timothy Geithner, president of the Federal Reserve Bank of New York, and with John Mack, chief executive of rival Morgan Stanley, the person said.
After the meeting in his office, Blankfein secured the consent of his board of directors on a conference call. By 10 p.m., as darkness engulfed Wall Street, Goldman and Morgan Stanley separately announced they would henceforth do business as deposit-taking institutions.
That was only the first step in rescuing Goldman from what would have been an unthinkable fate last year, when the firm earned $11.6 billion and its three top executives — Blankfein and Co-presidents Gary Cohn and Jon Winkelried — earned a total of $203 million.
Over the next days, the trio, stewards of Goldman since 2006, would call Warren Buffett for a $5 billion investment to shore up their balance sheet–and snag the billionaire’s platinum-plated endorsement. And they’d raise another $5 billion by selling public shares for $123 each. That price was 43 percent higher than the $85.88 the shares touched in New York trading on Sept. 18, their lowest level in four years.
Meanwhile, in Washington, Paulson, 62, was scrambling to sell his plan to relieve banks of toxic mortgage securities that had sucked more than $600 billion from their balance sheets and were now devouring investor confidence. The world’s rapidly unraveling financial web could trigger economic catastrophe, he told Congress. Paulson had already let Lehman go. The Fed had pledged $85 billion to keep American International Group Inc., the world’s biggest insurer, from the same destiny. The markets were screaming that such stopgaps were no longer enough.
On Oct. 3, President George W. Bush signed legislation establishing the Office of Financial Stability to oversee the U.S. purchase of soured securities and loans from scores of companies, including Goldman. Edward Forst, 47, a former head of Goldman’s asset management unit who now helps manage Harvard University’s $35 billion endowment, helped set it up. On Oct. 6, another Goldman alumnus, Neel Kashkari, a 35-year-old former technology banker who joined the Treasury in 2006, was named to lead it.
Then, a week later, Paulson reversed course and summoned Blankfein and eight other banking chiefs to Washington, where he told them the government would inject $250 billion into the banking system — including $10 billion for Goldman — and insure senior unsecured debt issued over the next three years. In exchange, the government would take stakes in their companies and control executive compensation.
Please read the full source article below. It is a great piece of journalism.
Goldman Sachs Paydays Suffer on Lost Leverage With Fed Scrutiny – Bloomberg