Goldman Gets It (?)

April 20, 2010 at 10:05 am 3 comments

Goldman Sachs CEO Lloyd Blankfein. Profits are up. Stock price and public perception are down.

Goldman Sachs has reached a new destination in its world vilification tour: a civil suit by the U.S. Securities and Exchange Commission that charges the firm with defrauding investors in the sale of mortgage bonds. The crux of the case: Abacus 2007-AC1, the investment vehicle, contained components handpicked by hedge fund manager John Paulson as likely to lose value. Paulson bet against the portfolio and earned $1 billion. According to the suit, Goldman Sachs did not tell other investors that Abacus was a deliberate compilation of risky bonds. Goldman claims that it made all legally required disclosures. Indeed, I’m sure there’s no boilerplate saying “a guy behind the scenes will clean up if you take the bullish side of this bet.”

The SEC’s suit and resultant media avalanche are demystifying what Goldman Sachs “does” and how the mortgage meltdown brought the global economy to its knees. Note that the government has not won its case, nor is Abacus the “smoking gun” of the Great Recession. But clear explanations and analogies are emerging in the news, the blogosphere and politicians’ speeches, all of which further decimate Goldman Sachs’ image, filling the howling communications vacuum the company itself created.

Short selling is a bet against a sucker. A credit-default swap is insurance an arsonist takes out before torching his own business. A collateralized debt obligation is part of a pyramid scheme where the last one to buy in loses. Are these statements simplistic? Absolutely. Are they accurate? Depends on your financial and political point of view. Are they prevalent? Yes. To explain the SEC suit, major media are relying on familiar images and plain language.

The Wall Street Journal on the government’s case: “Regulators say Goldman allowed Mr. Paulson’s firm, Paulson & Co., to help design a financial investment known as a CDO, or collateralized debt obligation, built out of a specific set of risky mortgage assets—essentially setting up the CDO for failure. Paulson then bet against it, while investors in the CDO weren’t told of Paulson’s role or intentions.”

The New York Times on credit-default swaps: “Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against the bonds while clients on the other side of the trade wagered that they would make money.”

Goldman’s attempts to tell its story have been limited and often self-wounding. I have blogged about CEO Lloyd Blankfein’s infamous quip that the company was “doing God’s work” and communications chief Lucas Van Praag’s inflammatory retorts to the media, both well-documented PR fails. The company attempted image rehabilitation by giving BusinessWeek inside access. The resulting cover story, “Goldman Sachs: Don’t Blame Us,” did little to help the cause. Substantiating the snarky title, the article reveals indignation and exasperation among the quoted executives. If I had coached the Goldman team, I would have used a cattle prod to deter any eye-rolling, sighing or voice raising. (Note to my current and future clients–I will use a cattle prod only if receiving a Goldman-sized fee. Otherwise you’ll have to make do with more conventional media coaching techniques.)

Subsequently, BusinessWeek gave Goldman a left-handed compliment in a commentary that says the firm is still loved by its most important audiences: big corporations and job-seeking business school grads. John Q. Public’s feelings are unimportant. The piece forgets one major player that will act on popular perception: the United States government. The SEC suit and the Obama administration’s financial reform movement have a major effect on Goldman Sachs, both driven by parties determined to show “the people” how they will bring Wall Street to heel.

As the government flexes its muscle, GOP lawmakers are complaining that the SEC’s announcement was calculated to boost the financial reform bill. My advice to my fellow Republicans: “be quiet.” Any sniping about the SEC suit turns you into a Goldman Sachs sympathizer while Dems sit back and smile. If nothing else, take a cue from rising GOP star US Senator Scott Brown of Massachusetts who said on Face the Nation: “We want banks to be banks, we don’t want them to be casinos. And I’m glad the SEC is doing their job.”

The “T” in a SWOT analysis stands for “Threats.” Unfavorable legal and regulatory action have been known threats to Goldman Sachs since January 20, 2009. The company’s horrid PR has emboldened its adversaries and hammered its recent stock price. The SEC suit will encourage actions by other governments and investor suits. Goldman Sachs’ most notable announcement in the past few days: a 91% increase in profits. We’ll see if Goldman gets it.

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Entry filed under: Crisis Communications, Leadership, Public Affairs. Tags: , , , , , , .

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3 Comments Add your own

  • 1. Dan Rice  |  April 20, 2010 at 10:34 pm

    Jason,
    A wonderful piece on Goldman. There is one more threat to consider, and that is trust. Knowing now what Abacus is, will future customers be as willing to take what GS says about their products at face value? What PR strategy could a company such as GS employ to make sure that that trust does not get lost completely, possibly irrevocably?

    Cheers,
    Dan

    Reply
    • 2. jasonkarpf  |  April 21, 2010 at 6:04 am

      That’s it in a nutshell: trust. It still must exist, even between the biggest (and some might say, baddest) companies. Wall Street has been through this before with the analyst scandals when firms misled investors to buy stocks in order to boost their underwriting and M&A activities. There were huge settlement payments (but little admission of guilt). That may be the outcome in this case.

      Reply
  • 3. J.P. Morgan Chase’s Gift to the Opposition |  |  May 12, 2012 at 1:23 pm

    […] unlikely. Jamie Dimond may still be held in higher regard than other industry CEOs such as Goldman Sachs’ Lloyd Blankfein and Bank of America’s Brian Moynihan, but he has lost his unique ability to push back against […]

    Reply

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