Bloomberg News

Goldman Flap Could Bolster Volcker Rule Case

March 16, 2012

Pedestrians walk past Goldman Sachs Group Inc. headquarters in New York. Photographer: Jin Lee/Bloomberg

Pedestrians walk past Goldman Sachs Group Inc. headquarters in New York. Photographer: Jin Lee/Bloomberg

The Goldman Sachs Group Inc. (GS) employee who criticized the company’s culture in a newspaper column bolsters the case for Wall Street restrictions like the Volcker rule, congressional Democrats said.

While the March 14 New York Times (NYT) opinion piece by former executive director Greg Smith drew no requests for hearings or investigations, lawmakers including Senators Carl Levin of Michigan and Jeff Merkley said the article showed why the U.S. needs tighter restrictions on Wall Street practices. The two Democrats authored the Volcker rule’s ban on proprietary trading and conflicts of interest in the Dodd-Frank Act.

Congress can’t “legislate the culture but I think the heart of this goes to why we needed the Merkley-Levin amendment,” Merkley, a member of the Senate Banking Committee, said in an interview.

Lawmakers on Capitol Hill yesterday said the piece, which has ricocheted through Wall Street firms, has had less of an impact in Washington, where New York-based Goldman Sachs’ business practices and Chief Executive Officer Lloyd C. Blankfein were the targets of congressional hearings in 2010.

‘A Little Research’

“Doing a little research before you call for hearings is important to understand the totality of the story,” Senator Robert Menendez, a New Jersey Democrat on the Banking Committee, said yesterday in an interview on Bloomberg Television.

Senator Jack Reed, a Rhode Island Democrat who sits on the Banking Committee, said Smith’s comments deserve greater scrutiny. He was skeptical there was much Congress could do.

“The biggest factor of change won’t be frankly because of a statute or an investigation,” Reed said in an interview. “It will be the clients will come in and say we want a better deal, we want assurances that our best interests are your sole thing.”

Smith’s column questioned the firm’s culture and said “the interests of clients continue to be sidelined in the way the firm operates and thinks about making money.”

Goldman Sachs has been concerned about reaction to the article from members of the House and Senate banking panels, as well as Levin, who led a Senate investigation that produced a 639-page report that blamed the firm’s trading practices for contributing to the financial crisis, according to a person familiar with the firm’s thinking.

Defending the Firm

The bank’s Washington office has been fielding calls about the op-ed from congressional staff, administration officials and other policy makers, the person said. In their conversations, the in-house lobbyists are relaying a defense of the firm that was included in a companywide memo from Blankfein and Gary Cohn, the president and chief operating officer.

David Wells, a spokesman for Goldman Sachs in New York, declined to comment. Goldman Sachs shares fell 13 cents to $122.93 at 4:15 p.m. in New York.

The investigation panel’s report came less than a year after Goldman Sachs paid $550 million to resolve Securities and Exchange Commission claims that it failed to disclose that hedge fund Paulson & Co. was betting against, and influenced the selection of, collateralized debt obligations the company was packaging and selling.

‘Ethical Depths’

Levin told reporters yesterday that Smith’s article was further confirmation of his subcommittee’s findings of “the ethical depths to which Goldman had fallen.”

No further hearings are warranted by the panel he leads, Levin said, because Goldman Sachs is “being scrutinized by a number of entities and institutions already.”

“There still is an ongoing review by New York law enforcement folks, I don’t think the Justice Department has finished its review,” Levin said.

Goldman Sachs said when Levin’s report was released that it didn’t mislead anyone about its activities and gave truthful and accurate testimony to the committee.

Blankfein and Cohn addressed Smith’s criticism in a memo to employees on March 14, noting that in a company of Goldman Sachs’s size, “it is not shocking that some people could feel disgruntled.”

Employee Survey

A recent survey of employees found that 89 percent believe the firm provides ‘exceptional service’ to clients and that a similar percentage of the firm’s 12,000 vice presidents, the rank held by Smith, felt that way, according to the memo.

Employees are allowed to express concerns anonymously, according to the memo. “We are not aware that the writer of the opinion piece expressed misgivings through this avenue, however, if an individual expresses issues, we examine them carefully and we will be doing so in this case,” Blankfein and Cohn said in the memo.

Morgan Stanley (MS) Chief Executive Officer James Gorman said he told his staff not to circulate Smith’s article. “There but for the grace of God go us,” Gorman said at an event in New York hosted by Fortune magazine.

Representative Barney Frank, the top Democrat on the House Financial Services Committee, said the column serves as a rebuttal to bank arguments that restrictions in trading activities would result in increased costs for market participants such as pension and mutual funds.

Who Benefits?

“What he does is to reinforce the notion that much of the benefit from what they do goes to them and not to the broader society,” Frank, who helped draft the law that bears his name, said in a telephone interview. “It doesn’t make it criminal, but it does remove one of the arguments against the new restrictions.”

U.S. banks, asset managers and mutual funds voiced concerns in February comment letters to regulators over the impact that rule barring proprietary trading may have on markets due to the decrease in liquidity it may cause. Similar concerns have been raised about some of the new rules being drafted to regulate the derivatives market.

For other lawmakers, in part because of the hearings held by Levin, the column had less impact than it had on Wall Street.

“This is not anything that we didn’t already know,” Representative Brad Miller, a North Carolina Democrat on the Financial Services panel, said in an telephone interview.

To contact the reporters on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; James Rowley in Washington at jarowley@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net; Gregory Mott at gmott1@bloomberg.net


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