Tuesday, August 4, 2009

Goldman's evil reputation

A new study shows that Goldman Sachs' reputation is something less than golden. The survey shows that while the reputations of most banks have deteriorated in the last year, Goldman's has fallen the farthest.

During the best of times Goldman was criticized for working "both sides of the deal." People grumbled, but still did business with the bank, sometimes out of necessity. These days, things are more sinister. Goldman is accused of owning the allegiance of top government officials, manipulating bank bailouts to favor itself, paying executives lavish bonuses at the expense of taxpayers, profiting from high-frequency trading, and reverting to its high-risk, high-leverage ways to generating revenue (aka multi-million dollar bonuses).

Much of this is sour grapes. Fact is Goldman weathered the financial crisis better than other banks, was forced by the government to accept TARP funding (recently refunded with interest) and just reported record quarterly earnings. People, especially during hard times, like to hate supremely-successful organizations. In that regard, Goldman Sachs is like the New England Patriots or New York Yankees of commerce. Goldman is not tone-deaf to what is going on and CEO Lloyd Blankfein is reported to have cautioned employees to keep a low profile and avoid conspicuous consumption.

Does that mean that Goldman has nothing to worry about? Not really. Pulling strings with Paulson, Geithner, Summers, et al is one thing, fending off congressmen hopped up on populist rage is another. Not many in Congress are willing to have an thoughtful discussion about the role of risk-taking and risk management in modern capital markets, but the nature of public concensus on those complex issues is the primary risk facing Goldman and why reputation matters to the firm.

Fueling negative sentiment about Goldman is an column from an unlikely source: Rolling Stone. Matt Taibbi's now famous column argues that Goldman manipulated the governement into doing its bidding during the height of the financial crisis. Even New York magazine has attempted to shed light on Goldman's dealings and its article suggests that Goldman itself was close to failure back in September.

The influence of Taibbi's article, in particular, demonstrates an important fact about media today. Because it is so easy to share news and opinion via email and the Web, where an article is published is less relevant today than in prior years. What influences people is who circulates the article to whom. In other words, while I might not think Rolling Stone is an authority on capital markets, if I am referred to Taibbi's article by someone I know and trust, I am likely to ascribe greater credibility to the piece (and, in turn, circulate the piece, furthering its influence).

This is both an opportunity and a threat to institutions large and small. On one hand, companies don't necessarily need the Wall Street Journal to get ideas into the marketplace. On the other hand, it is much more difficult to contain negative publicity because of the degree to which reputation-damaging opinion can be syndicated by individuals.

Regulation, driven by excesses on Wall Street, is coming, but I don't expect Goldman to be particularly affected. Goldman will jettison its bank charter and get back to the real work of printing money.

What do you think? Submit a comment via the link below and I'll update the blog with your views. If you'd like to remain anonymous, just indicate so.


Michael Gury said...

Gorillas like GS are always going to take arrows, but it depends on what "people" you are talking about. If it's "Main Street", GS is just as evil as any other financial institution but the average person has no idea what GS does. GS is not a retail outfit so it doesn't have real estate on Main Street that people can identify with. As for the financial professionals that have done business w/ GS for years, unless you are a huge player, things have always been bumpy with this imperial institution. In M&A at GS, you either get the "A Team" or a "Farm Team" and GS may be in the limelight now simply as part of the herd of wild boars but for years there have been legendary foul-ups and they've totally stayed under the general PR radar. But as you point out, things have been looking up, the stock is ok, and if they hold down the conspicuous consumption, perhaps their image will be on the mend.

RM said...

"Much of this is sour grapes. Fact is Goldman weathered the financial crisis better than other banks, was forced by the government to accept TARP funding (recently refunded with interest) and just reported record quarterly earnings."

GS is the top bank out there in a world where individuals feel they are the bad guy so this is a perfectly normal albeit wrong reaction. Michael Gury has it right, people on main street really don't know what it is.