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Why Bad Publicity Never Hurts Goldman Sachs

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My last posting focused on the widely-publicized research conducted by Stéphane Côté, PhD, Associate Professor of Organizational Behavior at the University of Toronto’s Rotman School of Management, who worked with a team of four psychologists from the University of California at Berkeley to conduct seven studies on a rather timely subject.  Their article, “Higher social class predicts increased unethical behavior” was published in the February 27 issue of the Proceedings of the National Academy of Sciences (PNAS).  The following excerpt from the abstract of their paper provides the general theme of what their efforts revealed:

.   .   .  investigation revealed upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.

I began my discussion of that paper by looking back at a Washington Post opinion piece entitled, “Angry about inequality?  Don’t blame the rich”.  The essay was written last January by James Q. Wilson (who passed away on March 2).  On March 4, William K. Black took a deeper look at the legacy of James Q. Wilson, which provided a better understanding of why Wilson would champion the “Don’t blame the rich” rationale.  As Bill Black pointed out, Wilson was a political scientist, known best for his theory called “broken windows” – a metaphor based on a vacant building with a few broken windows, which quickly has all of its windows broken because petty criminals feel emboldened to damage a building so neglected by its owners.  Bill Black emphasized that Wilson was exclusively preoccupied with minor, “blue collar” crimes.  Black noted that in a book entitled, Thinking About Crime, Wilson expressed tolerance for “some forms of civic corruption” while presenting an argument that criminology “should focus overwhelmingly on low-status blue collar criminals”.  Bill Black went on to explain how Wilson’s blindness to the relevance of the “broken windows” concept, as it related to “white collar” crime, resulted in a missed opportunity to attenuate the criminogenic milieu which led to the 2008 financial crisis:

Wilson emphasized that it was the willingness of society to tolerate relatively minor blue collar crimes that led to social disintegration and epidemics of severe blue collar crimes, but he engaged in the same willingness to tolerate and excuse less severe white collar crimes.  He predicted in his work on “broken windows” that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints.  The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point.  Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of “a few deals.”  Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we “tolera[te]” it.

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Taking Wilson’s “broken windows” reasoning seriously in the elite white collar crime context would require us to take a series of prophylactic measures to restore integrity and strengthen peer pressures against misconduct.  Indeed, we have implicitly tested the applicability of “broken windows” reasoning in that context by adopting policies that acted directly contrary to Wilson’s reasoning.  We have adopted executive and professional compensation systems that are exceptionally criminogenic.

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Fiduciary duties are critical means of preventing broken windows from occurring and making it likely that any broken windows in corporate governance will soon be remedied, yet we have steadily weakened fiduciary duties.  For example, Delaware now allows the elimination of the fiduciary duty of care as long as the shareholders approve.  Court decisions have increasingly weakened the fiduciary duties of loyalty and care.  The Chamber of Commerce’s most recent priorities have been to weaken Sarbanes-Oxley and the Foreign Corrupt Practices Act.  We have made it exceptionally difficult for shareholders who are victims of securities fraud to bring civil suits against the officers and entities that led or aided and abetted the securities fraud.

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In the elite white collar crime context we have been following the opposite strategy of that recommended under “broken windows” theory.  We have been breaking windows. We have excused those who break the windows.  Indeed, we have praised them and their misconduct.  The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context.

To find a “poster child” example for the type of errant fiduciary behavior which owes its existence to Wilson’s misapplication of the “broken windows” doctrine, one need look no further than Matt Taibbi’s favorite “vampire squid”:  Goldman Sachs.  One would think that after Taibbi’s groundbreaking, 2009 tour de force about Goldman’s involvement in the events which led to the financial crisis . . .  and after the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman’s “Fab Four” testified about selling their customers the Abacus CDO and that “shitty” Timberwolf deal, the firm would at least try to keep a lower profile these days.  Naaaaw!

Goldman Sachs has now found itself in the crosshairs of a man, formerly accused of carrying water for the firm – Andrew Ross Sorkin.  Sorkin’s March 5 DealBook article for The New York Times upbraided Goldman for its flagrant conflict of interest in a deal where the firm served as an adviser to an oil (and natural gas) pipeline company, El Paso, which was being sold to Houston-based Kinder Morgan for $21.1 billion.  Goldman owned a 19.1 percent stake in Kinder Morgan at the time.  Andrew Ross Sorkin quoted from the script which Goldman CEO, Lloyd Blankfein read to El Paso’s CEO, Douglas Foshee, wherein Blankfein confirmed that Foshee was aware of Goldman’s investment in Kinder Morgan.  It was refreshing to see a bit of righteous indignation in Sorkin’s discussion of the dirty details behind this transaction:

When the deal was announced, buried at the end of the news release was a list of Wall Street banks that had advised on the deal, including Goldman Sachs.  Goldman received a $20 million fee for playing matchmaker for El Paso.  The fee, of course, was not disclosed, nor was the Kinder Morgan stake owned by Goldman Sachs’s private equity arm, worth some $4 billion.  Nor did the release disclose that the Goldman banker who advised El Paso to accept Kinder Morgan’s bid owned $340,000 worth of Kinder Morgan stock.

Now, however, a court ruling in a shareholder lawsuit has laid bare the truth:  Goldman was on every conceivable side of the deal.  As a result, El Paso may have unwittingly sold itself far too cheaply.  Mr. Blankfein may have said he was “very sensitive to the appearance of conflict,” but the judge’s order ruling “reluctantly” against a motion to block the merger made it clear that Goldman’s conflicts went far beyond mere appearances.

Here’s just one example:  In an effort to help mitigate its clear conflict, Goldman Sachs recommended that El Paso hire an additional adviser so that El Paso would be able to say that it had received completely impartial advice.  Goldman did not say it would step down, and lose its fee, it simply suggested that El Paso hire one more bank – in this case, Morgan Stanley.

After explaining that Goldman included a provision in the deal that Morgan Stanley would get paid only if El Paso agreed to the sale to Kinder Morgan, Sorkin expressed this reaction:

Goldman’s brazenness in this deal is nothing short of breathtaking.

Goldman’s conflict of interest in the El Paso deal was also the subject of an article by Matthew Philips of Bloomberg BusinessWeek.  Mr. Philips reminded us of whom we have to thank for “helping Greece dupe regulators by disguising billions of dollars’ worth of sovereign debt”:

New details have also emerged about Goldman’s role in helping Greece hide its debt so it could qualify for membership in the European Union.  In a Bloomberg News story out this week, Greek officials talk about how they didn’t truly understand the complex swaps contracts they were buying from Goldman bankers from 2001 to 2005, and that each time Goldman restructured the deal, things got worse for Greece.

The story reads like a cautionary tale of a homeowner who keeps returning to the same contractor to repair the damage done by the previous fix-it job.  At one point, Goldman prohibited Greece’s debt manager, Christoforos Sardelis, from seeking outside price quotes on the complicated derivatives Goldman was selling to Greece.

*   *   *

Yet Goldman’s sullied reputation doesn’t appear to be negatively impacting its business.  In fact, Goldman is outpacing its Wall Street competition recently in key areas of business.  In 2011, Goldman was the top adviser for both global M&A and equity IPOs.  A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business.

In other words:  Goldman Sachs keeps breaking windows and nobody cares.  Thanks for nothing, James Q. Wilson!


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More Dirty Laundry

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Will an Independent candidate please step into the 2012 Presidential campaign?

On November 6, 2012 a good number of citizens who voted for Barack Obama in 2008 will realize that they are faced with the choice of voting for either Black Romney or White Romney.  As a result, those former Obama supporters won’t bother to vote at all.  Barack Obama won’t be seen as a significantly dissimilar alternative to Romney.  The indiscernible difference between those candidates would not justify the effort of standing in line at the polls.

Voter disappointment with the President is now being overshadowed by the rising pile of dirty laundry he has accumulated during his tenure in the White House.  The burgeoning Solyndra scandal is being mishandled by the President himself.  You would think he had learned a lesson from Weinergate, to the effect that fallacious denials about scandal allegations can create more trouble for a politician than the scandal itself.  FactCheck.org recently caught Obama in a lie about the loan guarantee program exploited by Solyndra:

Obama referred to Solyndra’s loan at an Oct. 6 press conference as “a loan guarantee program that predates me.”  That’s not accurate. It’s true that the Energy Policy Act of 2005 created a loan guarantee program for clean-energy companies developing “innovative technologies.”  But Solyndra’s loan guarantee came under another program created by the president’s 2009 stimulus for companies developing “commercially available technologies.”

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In a March 2009 press release announcing a $535 million loan guarantee for Solyndra, the Energy Department said:  “This loan guarantee will be supported through the President’s American Recovery and Reinvestment Act, which provides tens of billions of dollars in loan guarantee authority to build a new green energy economy.”  Damien LaVera, an Energy Department spokesman, confirmed that Solyndra’s funding came solely from section 1705.

That revelation is simply the first layer of frosting on a cake with some noxious ingredients baked into the recipe.  ABC News provided this report:

An elite Obama fundraiser hired to help oversee the administration’s energy loan program pushed and prodded career Department of Energy officials to move faster in approving a loan guarantee for Solyndra, even as his wife’s law firm was representing the California solar company, according to internal emails made public late Friday.

“How hard is this? What is he waiting for?” wrote Steven J. Spinner, a high-tech consultant and energy investor who raised at least $500,000 for the candidate before being appointed to a key job helping oversee the energy loan guarantee program.  “I have OVP [the Office of the Vice President] and WH [the White House] breathing down my neck on this.”

Many of the emails were written just days after Spinner accepted a three-page ethics agreement in which he pledged he would “not participate in any discussion regarding any application involving [his wife’s law firm] Wilson [Sonsini Goodrich & Rosati].”

*   *   *

Recovery Act records show Allison Spinner’s law firm, Wilson Sonsini, received $2.4 million in federal funds for legal fees related to the $535 million Energy Department loan guarantee to Solyndra.  That ethics agreement said his wife would forgo pay “earned as a result of its representation of applicants in programs within your official duties.”

Although many Obama apologists have characterized the Solyndra scandal a nothing more than a “Republican smear campaign”, Ryan Reilly of the non-Republican Talking Points Memo offered this analysis of the allegations:

Solyndra was raided by the FBI earlier this month.  The Government Accountability Office had raised concerns that the Energy Department agreed to back five companies — including Solyndra — with loans without properly assessing their risk of failure.  All this from a company that Obama described as a company with a “true engine of economic growth.”

And the details that are emerging from the investigators at the Republican-controlled House Energy and Commerce Committee are making things look worse for the administration.

Nine days before the administration formally announced the loan, a White House budget analyst wrote an email calling the deal “NOT ready for prime time,” according to documents given to ABC News by the House Energy and Commerce Committee investigators.

Despite the ongoing Occupy Wall Street protest, President Obama has seen fit to launch an assault on the Sarbanes-Oxley Act, which was created after the Enron scandal.  Sarbanes-Oxley most notably assigned responsibility to corporate officers for the accuracy and validity of corporate financial reports and established criminal penalties for destruction or alteration of financial records, interference with investigations, as well as providing protection for whistle-blowers.  The Business Insider reports that President Obama is advancing the recommendations of his jobs council which call for attenuating the Sarbanes-Oxley regulations, in order to make it easier for small companies to go public, by way of initial public offerings (IPOs):

The jobs council, headed by GE CEO Jeff Immelt and including Sheryl Sandberg and Steve Case, found that the Sarbanes-Oxley was a key factor in reducing the number of IPOs smaller than $50 million from 80 percent of all IPOs in the 1990s to 20 percent in the 2000s.

Obama also said the “Spitzer Decree,” which bans investment banks from using banking revenues to pay for research and expert analysis of publicly-traded companies, deserves reconsideration as well.  The council said the rule shares the blame for the decline in IPOs among small companies.

Yves Smith of Naked Capitalism reacted to the news with this remark:

This is ridiculous.  Do you know what happens with small stocks?  Pump and dump (and I’ve seen this at closer range than I would like.  I had a former client get involved by having his private company merged into a public company controlled by small stock low lifes.  They ran it from $1 to about $12 twice, and then it went back to under $2 and stayed there).

We were reminded of Obama’s hypocrisy on the subject of financial reform by a fantastic article written by Suzanna Andrews for Vanity Fair, which detailed how Elizabeth Warren was thrown under the bus by Obama, who shocked his supporters with his refusal to nominate Warren as chair of the Consumer Financial Protection Bureau (which she created).

Another disillusioned 2008 Obama supporter, Bill McKibben, wrote an essay for Tom’s Dispatch about how the President has sold out to Big Oil:

Here’s an example:  by year’s end the president has said he will make a decision on the Keystone XL pipeline, which would carry crude oil from the tar sands of northern Alberta to the Gulf of Mexico.  The nation’s top climate scientists sent the administration a letter indicating that such a development would be disastrous for the climate.  NASA’s James Hansen, the government’s top climate researcher, said heavily tapping tar-sands oil, a particularly “dirty” form of fossil fuel, would mean “game over for the climate.” Ten of the president’s fellow recent Nobel Peace Prize laureates pointed out in a letter that blocking the prospective pipeline would offer him a real leadership moment, a “tremendous opportunity to begin transition away from our dependence on oil, coal, and gas.”

But every indication from this administration suggests that it is prepared to grant the necessary permission for a project that has the enthusiastic backing of the Chamber of Commerce, and in which the Koch Brothers have a “direct and substantial interest.”  And not just backing.  To use the words of a recent New York Times story, they are willing to “flout the intent of federal law” to get it done.  Check this out as well:  the State Department, at the recommendation of Keystone XL pipeline builder TransCanada, hired a second company to carry out the environmental review.  That company already considered itself a “major client” of TransCanada.  This is simply corrupt, potentially the biggest scandal of the Obama years.  And here’s the thing:  it’s a crime still in progress.  Watching the president do nothing to stop it is endlessly depressing.

We shouldn’t be too surprised to learn that Obama’s dirty laundry has a few oil stains.  The BIG surprise would be Obama’s reelection.


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