On Wall Street, there are two interpretations of this business model: Either the firm is so brilliant at making near-riskless bets that it continually attracts more clients, who don’t mind being used for the golden database if it means more profits for them—or it’s a giant casino in which the house has gamed the system by knowing every hand at the table and using that information to enrich itself at the expense of others.
“If you’re able to use information and share it, you have a huge advantage over anybody but the energy companies themselves in their own trading businesses,” observes Frank Suozzo, a Wall Street analyst who spent ten years covering Goldman Sachs for AllianceBernstein. “That is Goldman’s advantage. Basically, it is legal card-counting, which most clients accept as a necessary evil to deal with the company with the most information.”
Goldman claims that there is a Chinese Wall between the advisory business and the trading business. “There are rules and laws regarding information sharing, and we scrupulously follow them,” says a company spokesman.
But two former clients told me they had observed firsthand how Goldman traded against their interests to improve its own bottom line—one who didn’t like it, the other accepting it with a shrug and saying, admiringly, that Goldman’s ability to convince the world that it is a “client-oriented” business was its most masterful PR coup.
Goldman’s profiting from this ethical gray area was exemplified by the real-estate market and the subprime-mortgage collapse: Goldman Sachs sold subprime-mortgage investments to its clients for years, but then in 2006 began trading against subprime on its own balance sheet without informing its clients, a hedge that ultimately let it profit when the real-estate market cratered. For some, this was a prescient call; for others, a glaring conflict of interest and inherently dishonest, since the firm let its clients take the fall.
Goldman’s penchant for playing all sides has been business as usual for years, but no one really paid much attention—partly because the economy was booming and there seemed to be plenty of profit to go around. But what once seemed like ruthless laissez-faire capitalism now looks like a rigged market in which Goldman Sachs has far too much control. Earlier this month, Goldman had an ex-employee arrested for allegedly stealing computer codes that could be used, as the prosecutor noted, “to manipulate markets in unfair ways.” Some hedge-fund traders and financial bloggers have speculated that Goldman itself could have been using the codes for the same purpose.
“The god is Goldman. You subjugate yourself to that god, and in return we will make you a gazillionaire.”
Now attention is turning to Goldman’s dominance of trading on the New York Stock Exchange—as the exchange’s biggest high-speed program trader as well as a provider of liquidity to other traders—and whether that ubiquity has afforded the firm undue advantage. If Goldman’s database knows nearly every trade that is about to be made, sophisticated computer codes could, theoretically, instantly execute fail-safe trades on Goldman’s behalf milliseconds beforehand. This, some are insisting, is where the company is manipulating the markets and making hundreds of millions of dollars a day.
Goldman executives characterize such theories as “distortions” by paranoid people who see “black helicopters” hovering over the company’s every move, those who subscribe to the “witches’ brew of conspiracy,” as van Praag puts it. The company’s sensitivity to its negative press is extraordinarily high: When an investor in Florida named Mike Morgan built a tiny website called goldmansachs666.com, a clearinghouse for negative Goldman Sachs news, the company threatened to sue him for trademark infringement. (Morgan has since sued Goldman Sachs.) And when Matt Taibbi of Rolling Stone called the company the root of all evil, Goldman executives actually seemed hurt. “We are painfully conscious,” van Praag told the New York Post, “of the importance in being a force for good.”
It’s possible that the jig is up for Goldman Sachs. The increased scrutiny, the damaged reputation, the populist outrage—the events of the past year could put a crimp in how the firm does business.
Historically, Goldman has been able to translate its reputation into financial leverage. “It’s the difference between charging 3 percent on a deal and 4 percent on a deal,” says a person who has dealt with the firm. Over time, that difference has added up to the edge Goldman has over its rivals. It also helped the firm attract the best talent—the “chosen ones,” as one former staffer put it, who thought of Goldman as a higher calling and had an eye toward a future Treasury post.
Now that the firm is viewed as a virtual rogue state with interests contrary to the greater good, Goldman might attract a different breed of recruit—less Robert Rubin, more Gordon Gekko. Or fewer recruits in general: A human-resources executive at Goldman Sachs, Edith Cooper, says she counted about 20 percent fewer people at recent on-campus recruitment seminars. A Wharton graduate who interned at Goldman Sachs says many fellow finance majors are looking elsewhere. “Before, it had this aura: finance, Goldman,” he says. “[Now] it seems to be a little less the case.”