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Tenacious G

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Several high-profile executives have left the firm in recent months, including Byron Trott, the Chicago-based banker who had managed one of the firm’s most important relationships, namely Warren Buffett, who invested $5 billion in the company during last year’s tribulations. Trott was a major figure at the firm, and his departure signaled that he might actually do better without the Goldman brand.

What Goldman Sachs executives fear most is that the firm will go from a special institution to just another bank. Two managing directors at the company express regret over how the culture has changed recently. Infighting over business deals—and the financial rewards that go with them—is more prevalent now, say these people. In the past, “it was about we, not I,” complains one unhappy Goldman executive. “It was a place where we all got rewarded on the overall success of firm … It’s gradually becoming like everybody else.”

“They’re never going back to the old days,” says one Goldman alumnus. “They’re going to be under an increased level of scrutiny. People are going to look at their compensation.”

Indeed, Goldman’s return to massive profits has made it a natural target for arguments over new regulatory policies and whether Congress is serious about reforming the rules that govern the firm.

Blankfein has tried to mitigate the potential damage, calling members of Congress the week Goldman’s second-quarter profits were about to be posted to assure them that the firm would be responsible about how it compensated executives at the end of the year. The move echoed a long speech he gave in April arguing for Goldman’s responsible self-governance, acknowledging that executive pay looked “self-serving and greedy in hindsight” but also warning against an overly aggressive regulatory response “that is solely designed to protect us against the 100-year storm.” It was hard to forget, however, that Blankfein had recently rewarded himself with the highest payouts in Wall Street history, $53 million in 2006 and $68 million in 2007.

“There’s so much negative feeling toward what Lloyd got paid,” says a prominent Goldman Sachs alumnus. “Yes, it’s a good firm, but what does it do for society?”

That’s the question facing Congress, where Tim Geithner’s proposed financial reforms are currently facing Representative Barney Frank, of Massachusetts, the leader of the House Financial Services Committee. Frank has positioned himself as a populist ready to bring a firm like Goldman Sachs—“the poster boy for the bill”—to heel. Interestingly, Goldman Sachs has already prepared a prudent hedge against Frank, hiring a former top staffer from Frank’s office, Michael Paese, to run the firm’s government-affairs office. “Yes, I am well aware of that,” says Frank, mentioning that he has not met with Paese in his new role and was surprised that he took the job. “And I will be absolutely careful with my staff, that nobody thinks there’s the slightest bit of advantage to be gained by hiring them.”

Out of political necessity, all of Washington appears to be turning a cold shoulder toward Goldman. A senior Obama-administration official close to Tim Geithner declares that “Goldman has left the building.” Onetime Goldman lobbyist and now Treasury chief of staff Mark Patterson has taken a public beating for his connection to the firm. And John Thornton, a former president at Goldman Sachs, was passed over as ambassador to China because his relationship to the firm “concerned” the Obama administration, says a person familiar with the situation. “It used to be if you were a senior Goldman person and you were considered for a position, you’d have an advantage,” this person says. “Now it’s clearly a disadvantage.”

Of course, it will take a lot more than that to truly dampen Goldman’s influence in Washington. As financial writer Michael Lewis recently said, the Obama administration, led by Geithner and the White House’s National Economic Council director, Larry Summers, continues to operate from an economic worldview shaped by people who “believe that the world can’t function without Goldman Sachs.” Goldman also has a key ally in Obama’s chief of staff, Rahm Emanuel, a former investment banker and onetime adviser to Goldman Sachs who frequently solicited campaign funds from the firm while working with the Clintons. And in mid-July, the week Goldman Sachs announced its massive second-quarter profits, the administration quietly hired Robert Hormats, another Goldman executive, as an economic adviser to Secretary of State Hillary Clinton.

Ultimately, Goldman Sachs probably still has the nod and the wink it needs to continue to rake in profits with impunity. And even if tighter regulations do pinch the firm, it has a long history of figuring out how to prevail in any regulatory environment. “If [you] looked at the history of regulatory changes that have happened,” says Rogers, “they’ve improved the markets by and large, and Goldman Sachs actually benefited historically from all those changes.”


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